Institutions, Growth and Human Capital

Abstract

We use the experience of ex-socialist countries to examine the role of macro, meso and micro institutions in catch up/fall behind growth. Greater experience of state-level government fosters growth; the extent of socialist entrenchment measured by years under socialism hurts it; and joining the EU boosts it. The higher than OECD level of human capital at transition is not sufficient to overcome the self-serving behavior of old socialist elite/new opaque business networks that emerge to exploit the complex environment upon communism’s collapse. Accepting and implementing the European Union regulations and norms upon joining it permits building of transparent networks and lifts growth. Human capital is the most important factor for growth, not total factor productivity. Suggesting dichotomy between institutions and human capital is misleading. Skilled labor needs right institutions to create value it is capable of - institutions’ effect on growth is channeled through human capital.

Keywords: “old” vs. “new” ex-socialist countries, relative and absolute convergence, growth accounting, initial institutional conditions, opaque versus transparent business networks

JEL Classification: I25, J24, L14, O43, P27