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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 21, No. 3, pp.427-452
ISSN: 1225-0279 (Print)
Print publication date 31 Aug 2008
Received 18 Jan 2008 Revised 02 Jul 2008

Money Can’t Buy Me Growth: Making Change Happen in Post-communist Countries?

Jan Fidrmuc
Senior Lecturer, Department of Economics and Finance, and Centre for Economic Development and Institutions (CEDI), Brunel University, Uxbridge, UB8 3PH, United Kingdom, Tel: +44-1895-266-528, Fax: +44-1895-203-384 Jan.Fidrmuc@brunel.ac.ukjan@fidrmuc.net

JEL Classificaion: H87, O19, O47, P27

Abstract

The European Bank for Reconstruction and Development (EBRD) was set up in 1991 with the aim to foster private sector development and to encourage the creation of the market economy in the post-communist countries of Central and Eastern Europe and the former Soviet Union. Between 1994 and 2004, the EBRD has spent over 20 billion euros on loans and equity stakes in private and public investment projects in the target countries. This paper assesses the return on this investment in terms of economic growth in transition economies. The main finding is that Western money can’t buy us growth in post-communist countries ― although money does seem to buy market-oriented reform and democratization. Hence, the EBRD has only an indirect effect (if any) on economic growth during transition: EBRD investment encourages economic reforms which in turn translate into faster growth.

Keywords:

Reform, Growth, Transition, Solow model

Acknowledgments

This paper was prepared for the conference on “Transition Experience in Eastern Europe and Implications for North Korea” organized by Seoul National University and Korea Institute for International Economic Policy, Seoul, January 18th, 2008. I benefited greatly from comments and suggestions received from conference participants in Seoul, seminar participants at Brunel, EBRD, Tartu and ETH Zurich as well as from two anonymous referees. I am grateful to the European Bank for Reconstruction and Development for supplying the data used in this paper.

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