Technology choices and growth: testing and expanding the propositions of new structural economics in transition economies

We explore the relationship between broad development policies, finance and growth as approached by New Structural Economics (NSE) (Lin, 2012) with special reference to transition economies. On a sample of 164 economies for 1963-2004, our analysis has confirmed Lin’s (2012) conclusions that the type of development policy pursued, as captured by the Technology Choice Index (TCI), has significant effects on long term growth. To complement this finding, we demonstrate a time variant effect of TCI on growth whereby TCI is especially relevant prior to the 1990s (more than prior to the 80s). We also show that the effects of TCI on growth differ for low and middle income countries as compared to high income countries. For the former two groups the relationship is negative and positive for high income countries. Further to this, we also show that there is a significant relationship between financial sector distortions and other economic distortions typical of comparative advantage defying strategies as captured by high values of TCI. These results are especially strong for the 34 countries with the highest TCI values in our sample. We also find that a larger deviation in actual financial structure from its estimated optimal ratio further reinforces the negative effect of TCI on growth. Overall our results offer a strong confirmation of NSE’s propositions regarding the relationship between growth and TCI and TCI and financial development, on average and for the most distorted economies. However, the basic propositions of NSE have not been confirmed as a general case for transition economies (TE). Indeed we find that the relationships investigated do not follow the same patterns for TE as a group, and we further identify different patterns for CEEB countries on the one hand and CIS on the other hand. We propose some possible explanations of why these countries might be behaving differently.