The Role of Initial Conditions and Policies in Transition Economies 1866. Initial conditions and economic policy jointly determine the large differences in economic performance among transition economies in Asia, Central and Eastern Europe, and the former Soviet Union. Initial contions dominate in explaining inflation, but economic liberalization is the most important factor determining differences in growth. But reform policy choices are not exogenous.
Liberalization depends, in turn, on both initial conditions and political reform.
The experience of countries in transition from a planned to a market-oriented economy has varied greatly. China and Vietnam have contained inflation and benefited from continued high growth in GDP since the beginning of their reforms, while all CEE and FSU countries have experienced large declines in output, and most have experienced hyperinflation. But even in CEE and the FSU, differences are marked. Some countries have lost over half of their GDP, and growth performance in a number of countries is still poor, while others are growing strongly. Some are still suffering from high inflation while others have successfully reduced annual inflation.