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Studies on the Post-Communist Transition

While there is a wealth of indicators that reflect specific features of the reform strategies and of the process of institution building implemented in the post – communist countries during the transition period, empirical handling of a large set of such measures proves challenging. The objective in this study is to introduce and employ the method of Confirmatory Factor Analysis (CFA) in order to estimate latent factors that summarize and reflect the complementary nature of specific dimensions of transition. Such specific dimensions are considered in terms of initial conditions, economic reforms and institutions. The empirical analysis in the study focuses on 25 transition economies in Eastern Europe and Eurasia, and on the transition period until year 2001. The CFA method that I employ has the advantage that it supports the empirical testing of the hypothesis that a given set of observed indicators combine into a more abstract theoretical construct in a consistent manner. The current analysis produces two main categories of results. First, there are successful cases when the CFA method applied on specific observed measures produces reliable summarizing indicators in the form of latent factors. This is the case of the latent factors constructed for time-invariant initial conditions, liberalization of relative prices, reforms with state-owned enterprises, reforms in the financial system, and the summarizing indicator of political environment. Second, there are also cases when the analysis indicates that aggregation of a given set of observed measures is not warranted by the structure of the sample data. This situation is encountered when an attempt is made to estimate a latent factor of initial structural economic imbalances. Empirical difficulties that can occur in the estimation of latent factors are also illustrated. In instances with acute problems with missing data, the possibility to construct empirical measures of more abstract concepts is impaired. This is despite the fact that the associated CFA measurement model indicates a potentially high validity of the measures employed. I encounter this situation when I analyze the possibility to construct latent factors of state governance (laws and regulations, and political interference in business activities).