variables may be classified under three broad groupings: (i) measures of macroeconomic stabilization; (ii) market liberalization and structural reform; and (iii) initial conditions. In addition to the remarkable consensus around the key drivers of growth, there is also a striking consensus on what are _not_ determinants of growth, in contrast to the broader literature on economic growth. For example, “traditional factor inputs” have not been found to explain growth in transition economies (Havrylyshyn 2001). Furthermore, two variables have _not_ been found to have a statistically significant link with economic growth, unlike the rest of the literature: exports and foreign direct investment (FDI).

Despite this consensus, a number of issues are left unresolved in the empirical literature on growth in transition economies, particularly with respect to the role of fiscal policy. These issues are outlined below.

_Does fiscal stability matter for growth?_ The impact of macroeconomic stabilization on economic growth is generally uncontroversial. Stabilization is typically measured using the natural log of inflation and its negative impact on growth and its statistical significance have been generally unambiguous. However, the results with respect to fiscal balance (in percent of GDP)—a complementary measure of stabilization—have been mixed (e.g., Fischer and Sahay 2000; Havrylyshyn 2001; Purfield 2003), at least in the literature on transition economies. In the literature on advanced and developing economies, there have been stronger evidence in support of the growth-enhancing effects of fiscal stability. Gupta and others (2002), for example, find that strong budgetary positions as well as fiscal consolidation are associated with higher economic growth in both the short-term and the long-term.

_The role of public investments or “productive” expenditures_ . The broader literature on economic growth, drawing from developing country as well as developed country experiences, yields a mixed record for the impact of public investment on economic growth. In an effort to estimate how the structure of taxation and the composition of public expenditures affect growth rates of a country, Kneller (1999) uses data for 22 OECD countries (1970-1995) to expenditures with a substantial (physical or human) capital component are classified as “productive” while social security and other expenditures were considered “unproductive” Not surprisingly, the paper concludes that productive government expenditure promotes economic growth, while non-productive expenditure does not.<sup>3</sup> While not explicitly classifying expenditures productive or unproductive, Gupta and others (2002) use a panel of 39 low-income countries between 1990 and 2000 and find that the composition of public outlays is important: Where spending is disproportionately allocated to wages, countries have tended to experience lower growth, while countries that allocate higher shares of spending to capital and non-wage goods and services have experienced more rapid economic expansion. In particular, the results suggest that a one percent increase in the allocation of public spending to capital outlays can raise the growth rate by 0.1 percentage point in the long term and by almost 0.5 of

> 3 Interestingly, the analysis shows, that magnitude of the estimated impacts of (productive) expenditures and (distortionary) taxation are sensitive to the process of (5-year) averaging of the data.

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