Why have many transition economies succeeded by pursuing policies which are so different from the radical economic liberalization (shock therapy) that is normally credited for the economic success of countries of Central Europe? First, optimal policies are context dependent, they are specific for each stage of development and what worked in Slovenia cannot be expected to work in Mongolia. Second, even for the countries with the same level of development reforms that are necessary to stimulate growth are different; they depend on the previous history and on the path chosen. The reduction of government expenditure as a share of GDP did not undermine significantly the institutional capacity of the state in China, but in Russia and other CIS countries it turned out to be ruinous. The art of the policymaker is to create markets without causing government failure, as happened in many CIS countries.
MANAGING INEQUALITY OVER BUSINESS CYCLES: OPTIMAL POLICIES WITH HETEROGENEOUS AGENTS AND AGGREGATE SHOCKS
