EU Accession, Institutional Change, Growth and Human Capital

Abstract

We use the experience of ex-socialist countries to examine the roles of initial institutions and change in institutions upon joining the EU in the mid-2000s on growth. Using difference-in-difference analysis we show ex-socialist countries that joined the EU boosted their growth after accession. We examine the proximate causes of this boost in growth and find it to be human capital. These countries did not receive a boost in human capital upon accession. Nor did other economic or political confounders change since these countries had fully opened-up and adopted privatization, governance and enterprise restructuring, price liberalization, and pro-competition policy and democracy in early 1990s. Communism’s collapse at transition created poor institutions that permitted self-serving behavior of old socialist elite and of new opaque business networks that emerge to exploit the complex environment. Accepting and implementing the European Union regulations and norms in all details upon joining it puts an end such behavior, permits building of transparent networks, and improves institutions. These countries had higher than OECD level of human capital at transition. Their skilled labor needed right institutions – transparent business networks and EU norms and regulations - to create value it was capable of. Institutions’ effect on growth is channeled through human capital.

Keywords: initial institutional conditions, opaque versus transparent business networks, “old” vs. “new” ex-socialist countries, proximate factors for growth,

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