literature on transition economies is not an exception. We extend the baseline model to add a measure of public investment (capital spending in percent of GDP) and confirm the previous findings (Table 7). The OLS results suggest a statistically significant, but weak, link between public investment and growth in countries where the government is relatively more effective; this link however is not confirmed by the other estimation methods.

Table 7. Determinants of Economic Growth 1992-2004 Does Public Investment Matter?

|||All Countri|es|Relativ|elyMore Effectiv|e Government|Relativ|elyLess Effecti|ve Government|
|---|---|---|---|---|---|---|---|---|---|
||OLS<br>(1)|Fixed Effects<br>(2)|Random Effects<br>(3)|OLS<br>(1)|Fixed Effects<br>(2)|Random Effects<br>(3)|OLS<br>(1)|Fixed Effects<br>(2)|Random Effects<br>(3)|
|War dummy|-1.42|-1.42|-1.54|-1.14|-0.93|-1.08|0.99|-1.5|-0.94|
||(0.45)|(0.66)|(0.72)|(0.60)|(0.49)|(0.59)|(0.16)|(0.37)|(0.24)|
|Ln(inflation) (IMF)|-1.75***|-1.23***|-1.49***|-0.85**|-1.05***|-1.02***|-2.02***|-1.58**|-1.72***|
||(5.19)|(3.75)|(4.89)|(2.39)|(3.79)|(3.82)|(3.67)|(2.37)|(2.95)|
|Fiscal balance (%GDP) (IMF)|0.64***|0.83***|0.80***|0.79***|0.88***|0.87***|0.67***|0.74***|0.72***|
||(6.12)|(7.54)|(7.93)|(8.44)|(8.01)|(8.19)|(5.04)|(3.74)|(4.28)|
|EDRD Index of small-scale privatization|0.81|4.63***|2.82***|0.89|2.67**|1.85*|3.90***|5.07***|4.62***|
||(1.08)|(4.10)|(3.17)|(1.00)|(2.17)|(1.80)|(2.77)|(2.67)|(3.04)|
|EDRD Index of price liberalization|-1.55|-3.79***|-3.08**|2.66*|-0.47|0.67|-4.17|-4.79**|-4.53**|
||(0.65)|(2.86)|(2.48)|(1.85)|(0.28)|(0.45)|(1.31)|(2.33)|(2.41)|
|Public investment|-0.04|0.00|0.03|0.33*|0.12|0.19|-0.05|-0.01|-0.02|
||(0.17)|(0.02)|(0.17)|(1.73)|(0.46)|(0.81)|(0.16)|(0.03)|(0.07)|
|Constant|13.7|7.7|12.06**|-8.28|-1.04|-2.85|16.03|13.46|14.31|
||(1.43)|(1.21)|(2.15)|(1.24)|(0.16)|(0.44)|(1.34)|(1.25)|(1.56)|
|Observations|236|236|236|127|127|127|109|109|109|
|R-squared|0.43|0.52||0.52|0.55||0.51|0.53||
|Number of countries||24|24||12|12||12|12|

Robust t statistics in parentheses * significant at 10%; ** significant at 5%; *** significant at 1%

# F. Model Uncertainty

Up until now we have been using as a baseline model a parsimonious specification based on Fischer and Sahay (2000). This of course raises a few difficult questions: (i) are the fundamental determinants of growth themselves changing over time? (see Brock and Durlauf 2003 on model uncertainty); and (ii) are the determinants of growth the same across countries? We make a preliminary effort to account for model uncertainty in the last section using recently developed methods in Bayesian Model Averaging (see Raftery 1995; Raftery and others 1997; Fernandez and others 2001; Salai-Martin and others 2003). In brief, these methods average all possible models given a set of regressors and test for the likelihood that a variable is included in a model, using Bayesian Information Criterion (BIC)-based tests. Given _k_ number of regressors, the number of possible models (including the null model) is 2<sup>k</sup> (e.g., given 15 regressors, the total number of possible models is 32,768). This is computationally very intensive and routines have been developed only recently. Nonetheless, accounting for model uncertainty using Bayesian techniques (not shown), our preliminary analysis suggests that fiscal balance and inflation are still statistically significant determinants of growth.<sup>15</sup>

> 15 We use the _bicdrop_ procedure in Stata developed by Paul Millar.

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