The Investement Decline in Transition Economies: Policy Versus Non-Policy Factors

Vladimir Popov

No 295355, WIDER Working Papers from United Nations University, World Institute for Development Economic Research (UNU-WIDER)

Abstract: All centrally planned economies suffered from over-investment. Due to low capital productivity, reasonable growth rates in output could be maintained only with high investment/GDP ratios. Nevertheless, the sharp reduction in investment during transformational recession and its slow growth during subsequent recovery are viewed as negative phenomena, since transition economies offer numerous opportunities to increase output with relatively small targeted investment.This paper seeks to develop the hypothesis that the performance of aggregate investment during transition is a result of the impact of initial conditions, the external environment and policy-related factors. Strong evidence is found for the argument that the reduction of output and investment observed in most post-communist countries is associated with the supply-side recession, which in turn is linked mostly to the initial conditions, such as the level of development (GDP per capita) and pre-transition disproportions in industrial structure and trade patterns.However, declines in investment/GDP ratios, i.e more pronounced declines in investment as compared to GDP, may be only partially explained by the initial distortions in trade and in industrial structure. Equally important are such factors as the unfavourable external environment, as measured by changes in the current account balance, and macroeconomic policy developments, as measured by changes in government budget deficits. Predictably, progress in liberalisation does not have any impact on patterns of change in investment. The unexpected result is that investment changes do not seem to depend on rates of inflation.

Keywords: International; Development (search for similar items in EconPapers)
Pages: 41
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Persistent link: https://EconPapers.repec.org/RePEc:ags:widerw:295355

DOI: 10.22004/ag.econ.295355

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