By Oleh Havrylyshyn
All transition countries experienced a sharp decline in output in the early 1990s. Central Europe and the Baltics began to recover around 1993–95, while GDP decline continued elsewhere. Econometric analysis of growth determinants explained this by the fact of earlier inflation stabilization, market liberalization, and institutional development, though there was disagreement in the literature as to the effect of initial conditions and the sequencing regarding liberalization and institutions. Since 2000 there has been not just a recovery but a growth surge in the Commonwealth of Independent States, even though it still lags behind on the three key policy determinants of growth. The energy boom in the region can explain only part of the growth in the region and is more relevant to energy exporters such as Russia. The post-transition recovery is best explained by a threshold model: recovery starts when a certain threshold level of stabilization, liberalization, and institutional development is reached. The levels reached by CIS countries around 1999–2000 were in fact very similar to those that the early reformers of Central Europe and the Baltics had attained just before their GDP growth restarted. The empirical comparisons reveal two important facts that are relevant to debates on the role of institutions and liberalization. The level of institutional development needed to restart growth is not only similar but surprisingly low for all the countries. Also, the sequencing was in all cases exactly the same, with liberalization moving much more quickly than institutions in both rapid and lagging reformers. Not a single instance exists of liberalization being delayed to allow faster introduction of institutions.
