UNIVERSITY OF NEWCASTLE UPON TYNE The Relation between Policies and Growth in Transition Countries DEPARTMENT OF

This paper analyses the determinants of growth in 25 transition countries from Central and Eastern Europe and the Former Soviet Union. This paper’s results regarding the factors that influence the behaviour of output are consistent with other studies of growth. Causation tests suggest that liberalisation causes growth in a Granger sense but higher growth leads to a slowdown in reforms. The analysis also confirms that threshold effects of inflation are present, although this paper differs from other studies in certain respects. Results support the idea that there is a marked fall in growth once inflation exceeds a certain threshold, but there is no evidence of a linear relationship between inflation and growth. Threshold effects are also present in the relation between reform and liberalisation. There is an upward shift once liberalisation exceeds a certain level but the additional gains in terms of growth from more liberalisation seem to decline at higher levels of liberalisation. Fiscal policy does not appear to have any influence of growth. The paper also suggests that government policies have had different effects on rich compared to poor countries and in the Former Soviet Union countries relative to Central Europe, the Balkans and the Baltics. Also, there is evidence of differences in the influence of reforms on growth between the beginning of transition and the later period. Work in progress, not to be quoted without written permission from the authors