the relationship between policies and growth in transition countries

Economics of TransitionVolume 10 (3) 2002, 719–745

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2.1�Theoretical background

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Table 1. Explanatory variables for growth in transition countries

Variable name Notation

Liberalization index plus three lags LIit, LIi,t–1, LIi,t–2, LIi,t–3

Logarithm of inflation plus three lags LDCPit, LDCPi,t–1, LDCPi,t–2, LDCPi,t–3

Three lags of government balance* BSURPLUSi,t–1, BSURPLUSi,t–2, BSURPLUSi,t–3

Initial conditions IC1i, IC2i

Dummy for 1992 Y92Time and time squared TIMEt, TIMESQt

Exchange rate policy dummy FIXEDWar dummy WAR

Notes: i and t index the country and time, respectively.*The current level of the government balance was omitted to avoid endogeneity.

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Table 2. Extreme bounds

Variable Lower bound (EE–2VV) Upper bound (EE+2VV)

Model (V.1)LIit –2.11 +0.71LIi,t–1 –1.43 +2.15LDCPi,t–1 –8.51 –0.18IC1i –3.21 +0.31Model (V.2)BSURPLUSi,t–1 –0.57 +0.25LDCPit –7.68 –1.99FIXED –1.74 +5.69

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Table 3. Liberalization components

Dependent variable DGDPit Coefficients t-ratios F(2,180)Intercept 14.49 1.44LI_LSPit –1.23 –0.96 2.54*LI_LSPi,t–1 –1.20 –1.09LI_SSPit –1.06 –0.70 1.96LI_SSPi,t–1 2.77 1.86*LI_RESit –1.41 –0.81 2.78*LI_RESi,t–1 4.55 2.35**LI_PLit –4.85 –2.18** 4.14**LI_PLi,t–1 5.33 2.75***LI_TRAit 0.95 0.83 0.37LI_TRAi,t–1 0.18 0.18LI_COit –1.30 –0.89 0.50LI_COi,t–1 0.21 0.15LI_BKit –0.23 –0.16 1.10LI_BKi,t–1 –2.32 –1.37LI_SECit 0.56 0.29 0.04LI_SECi,t–1 –0.27 –0.19LDCPit –3.34 –3.60***IC1i –0.27 –0.37Y92 –6.26 –3.26***No. of obs. 200R-squared 0.5646RESET F(3,177)=1.12DW 1.64

Note: Results are corrected for heteroscedasticity and serial correlation. DGDP = GDPgrowth rate, LI_SSP = small-scale privatization, LI_LSP = large-scale privatization, LI_RES= governance and enterprise restructuring, LI_PL = price liberalization, LI_TRA = tradeand foreign exchange liberalization, LI_CO = competition policy, LI_BK = banking reformand interest rate liberalization, LI_SEC = securities markets and non-bank financialinstitutions reform, LDCP = log of consumer price inflation, IC1 = initial conditions, Y92 =dummy for 1992. Significance at 1, 5 and 10 percent is indicated by ***, ** and *respectively.

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Table 4. Robustness tests, model (V.1).

OLS estimates1

using LI*DOLS

Estimates2OLS estimates

1991–951OLS estimates

1996–991

(1) (2) (3) (4)Intercept 23.01***

(2.75)30.55***(3.98)

16.32(1.44)

24.36**(2.13)

LIit

* –6.83***(–3.24)

–1.09(–0.74)

–2.34**(–2.48)

–0.92(–0.84)

LIi,t–1

* 6.63***(3.63)

2.19***(2.68)

0.74(0.65)

LDCPit –4.15***(–4.39)

–5.26***(–4.66)

–2.99**(–2.41)

–4.18***(–2.82)

IC1i –1.39**(–2.23)

–1.41**(–2.50)

–3.87***(–3.52)

0.076(0.09)

Y92 –8.01***(–4.24)

–8.24***(–3.99)

No. of obs. 200 150 100 100R-squared 0.5050 0.4776 0.5376 0.1170RESET F(3,191)=0.32 F(3,139)=11.92*** F(3,91)=1.24 F(3,92)=1.02DW 1.66 1.11 1.46 1.53

Notes: DGDP = GDP growth rate, LI* = average of the large-scale privatization, restructuring and priceliberalization indices, LDCP = log of consumer price inflation, IC1 = initial conditions, Y92 = dummy for1992. Numbers in parentheses are t-statistics. Significance at 1, 5 and 10 percent is indicated by ***, ** and *respectively.1. Results are corrected for heteroscedasticity and serial correlation.2. Estimation with one lead and one lag of the first difference of LI* and LDCP. The first lag of LI* wasomitted as the DOLS is a more general version of an Error Correction Model, defining a co-integratingrelationship. The DOLS was also estimated using the first difference of LI* (DLI*) instead of LI*. In this casealso, inflation is the most important determinant of growth (negative still). DLI* is significant at 1 percentwith a negative sign and IC1 is significant at 5 percent with a negative sign. Results available on request.

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Table 5. Threshold results

(1)Basic model with

DLI*

(2)Liberalization

threshold

(3)Inflation threshold

Coeff. t-ratios Coeff. t-ratios Coeff. t-ratiosIntercept 22.20 6.23*** 21.79 6.06*** 34.79 5.93***DLIit

* –6.70 –3.81*** –17.72 –3.35*** –4.38 –2.37**LDCPit –4.09 –5.89*** –4.08 –5.80*** –6.66 –5.53***IC1i –1.35 –2.39** –1.43 –2.47** –0.84 –1.52Y92 –7.92 –4.71*** –7.94 –4.66*** –6.09 –3.53***DLIC*

(DLI*>0)0.72 0.59

DLIS*

(DLI**DLIC*)10.60 1.74*

LDCPC(LDCP>6.921)

–55.07 –3.17***

LDCPS(LDCP*LDCPC)

8.02 3.30***

No. of obs. 200 200 200No. of obs. above thethreshold

188 30

R-squared 0.5044 0.5112 0.5381RESET F(3,192)=0.69 F(3,190)=0.41 F(3,190)=5.32***DW 1.66 1.65 1.65

Note: Results are corrected for heteroscedasticity and serial correlation. DGDP = GDP growth rate, DLI* =first difference of LI*, LDCP = log of consumer price inflation, IC1 = initial conditions, Y92 = dummy for1992, DLIC* = reform dummy equal to one if LI* higher than the threshold and zero otherwise, DLIS* =DLIC**DLI*, LDCPC = inflation dummy equal to one if LDCP higher than the threshold and zero otherwise,LDCPS = LDCPC*LDCP. Significance at 1, 5 and 10 percent is indicated by ***, ** and * respectively.�� /'&3 �� FRUUHVSRQGV WR D UDWH RI LQIODWLRQ RI DERXW �� SHUFHQW SHU \HDU�

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the relationship between policies and growth in transition countries

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