There are significant differences in average growth rates across transition economies.  In this exercise you will investigate whether the differences can be linked to a number of observable variables.  Specifically, you will consider the roles of:
        1. initial conditions;
        2. inflation stabilization; and
        3. the extent of liberalization.
The data for this exercise come from an updated version of the Fischer article which were given to me by Ratna Sahay of the IMF and are gratefully acknowledged. The data are again available in two formats: as an excel file (stabil.xls) and a text file(stabil.txt). The following variables are in the dataset:

• country
• pppy - PPP adjusted GDP per capita (1989)
• scmea - share of CMEA trade in 1990 as % of GDP
• sagr - share of agriculture as % of GDP
• natres - natural resource endowment
• dfduss - distance from Duesseldorf (in km.)
• tcomm - years under communism
• fdebt - foreign debt in pre transition year, as % of GDP
• secs -  secondary school enrollment in pre transition year (share of school age population)
• gy - average real GDP growth in 1992-1998
• inf - average inflation rate in 1992-1998
• loginf - average of logarithm of inflation rate in 1992-1998
• li - liberalization index, which summarizes the extent of policy change since the start of the transition process and captures the extent of privatization, internal and external liberalization of prices and markets, and is reported as average over the period of 1992-1998.

1. Choose 3 of the 8 variables which describe initial conditions in transition countries. Explain how these variables may affect average output growth. Plot each of them against average output growth.  Do the data support your argument? (Note that simple associations do not always capture the true relationship because there are other factors that may affect the variables you are looking at. Therefore, do not worry if the data is inconsistent with your hypothesis. As long as your argument is concise you will get full credit.)
2. Figure 4 in the article by Fischer et al in your reading packet shows that average output growth is negatively related to average inflation.  Fischer et al use data for 1992-1994. Reconstruct the relationship using our more recent data. Is higher real growth still associated with lower inflation?
3. Consider the impact of liberalization on growth record. Is a higher liberalization index associated with higher growth rates? Do you think that the causality runs from liberalization to growth or the other way around? Explain.
4. (Optional and only for students who took Econ 253/255)  Estimate cross sectional regression with average output growth as a dependent variable and the 8 initial conditions on the right hand side. Which initial conditions appear to be most important in determining subsequent output growth?