Big Bang vs. Gradualism – A Productivity Analysis

In the beginning of the 1990s, the former socialist countries of Eastern Europe and the Soviet Union began reforming their economies. Yet despite two decades of research, it is still unclear which reform path – gradual or radical – is better for long-run growth. Unlike most other studies on the topic, which concentrate on the growth of output per capita, this paper compares the two alternative reform approaches based on the analysis of productivity. We estimate a Malmquist multifactor productivity index for 22 transition economies over 17 years to compare their relative performance depending on their speed of reform. The Malmquist index is further decomposed into efficiency and technological change, and statistical inference is obtained using a smoothed bootstrap procedure. The main results are that the radical reformers exhibit higher rates of productivity growth in the initial years of transition, while the gradual countries do better in the later years. Over the whole time period a gradual reform strategy is superior to faster reforms. These findings have important implications for reforms in the remaining non-market economies and many developing countries.