Technology choices and growth: testing New Structural Economics in Transition Economies

We explore the relationship between development policies, finance and growth as approached by New Structural Economics (NSE) with special reference to Transition Economies (TEs). On a sample of 164 economies for 1963–2009, our analysis confirms NSE propositions that the type of development policies, as captured by the Technology Choice Index (TCI), has a significant effect on long-term growth. However, this differs for TEs as a whole and its subgroups. Further to this, using a sample of 94 countries for 1985–2009, we provide a first empirical test of the relationship between growth, TCI and financial structure distortions and we show that there is a negative relationship between financial distortions and TCI on the one hand and medium-term growth on the other hand. We also find that the negative effect of a higher ratio of TCI on medium-term growth is partly mitigated, although not eliminated, by moderate level of financial sector distortions. This points towards some positive externalities of simultaneous financial and industrial sector distortions, at least in the medium run. However, TEs are shown to differ from the rest of the sample as financial distortions play a more pronounced direct negative effect on medium-term growth in these countries.