Macroeconomic Stability, Governance and Growth: Empirical Lessons from the Post-Communist Transition

Abstract

Using panel data for the period 1989-2006 we revisit the empirics of economic growth in the context of the post-communist transition. We pay particular attention to the mechanisms of causation and to the potential endogeneity of the macroeconomic stability indicators considered to be important in the existing literature. Carefully employing a variety of econometric techniques we consistently find that macroeconomic instability is bad for economic growth. We find some evidence that institutions of governance are important for economic growth through their influence on the macroeconomic environment. That is, good institutions are conducive to macroeconomic stability which in turn positively impacts upon economic growth. We also find, in contrast with other work, that investments in education have had a strong positive impact on growth in transition while other 'standard' economic growth determinants remain less important. These findings are shown to be robust to a variety of econometric approaches, specifications and time spans