Starting Positions, Reform Speed, and Economic Outcomes in Transitioning Economies

At the end of the 1980s and beginning of the 1990s 26 countries in Eastern Europe, the former Soviet Union and Mongolia initiated market reform policies. During the 1980's the average annual growth in real GDP for these countries was about 2.9%, while for the period 1990-1997, the average growth rate was -5.7%. During the same period China was implementing a relatively slow and gradual policy of economic reform and their economy responded with very high real GDP growth. From these experiences it was commonly concluded that rapid economic reform led to (at least) a short-term economic decline and that the more gradual implementation of reforms is more appropriate for countries starting with a long legacy of central planning. However, the above statistics and analysis ignore some interesting variations among the 26 CEE/FSU/Mongolian economies. The reform experience within this sample varies considerably from the rapid implementation observed in Slovenia and Poland to the very slow reforms observed in Belarus and Ukraine. And the results have varied as well. Average real annual GDP growth (1990/1997) for Slovenia was 1.4%, for Poland 4.1% while for Belarus it was -6.1% and for Ukraine it was -13.1%. The World Bank has constructed indices of reform speed for these 26 transitioning economies and the relation between reform speed and economic growth rates, as shown in the above figure, is positive. The conclusion drawn is that these countries all started with unfavorable "starting positions", were about to suffer economic decline even with no change in economic policy, and those countries implementing more rapid market reforms suffered from less of a decline. One could point to the economic declines in Cuba and North Korea during this period as "control cases" of what would have happened if no economic reforms had been implemented.