Privatization and Growth: Natural Experiments of European Economies in Transition

Abstract

We examine the relationship between privatization and growth of transition countries in Europe by using relative income and grouping them by ex-ante factors and by ex-post associations. For transition countries with comparable pre-1991 data also - Bulgaria, Hungary, Poland, and Romania or BHPR countries - privatization/regime change to market economy increased their annual catching-up-to-Germany from 0.90% to 1.50% but the increase was not due to higher TFP. It entirely occurred after they joined the EU, and is entirely due to higher contribution of human capital. Privatization did not impose short run costs on all countries while making CIS countries fell-behind very sharply. The greatly divergent post-transition growth both in the short and the long term cannot be explained by differing emphasis on external versus domestic liberalization. Catching-up of “new” ex-socialist SBCS countries (Slovenia, Baltic countries, the Czech republic and Slovakia) occurred only after they joined the EU. Human capital and TFP explain their growth while for Croatia and Serbia it is physical capital and TFP. Negative contribution of human capital is the sole reason underlying falling-behind of the CIS countries. Based on 1991-2013 catching-up/falling-behind, CIS countries have no prospect of ever equaling German income, pre-2004 EU Western-Europe will reach income equality with Germany in 70 years, BHPR countries in 72; SBCS countries in 104, and Croatia and Serbia in 193 years.

Keywords: Command Economy; Market Economy; 'Old' Ex-Socialist Countries; 'New' Ex-Socialist Countries; Accession to EU; Factors Behind Differing Post-Socialist Growth/Catching-Up; Years for Full Convergence

JEL Classification: O10; O47