Deep Economic Integration and State Capacity: A Mechanism for Avoiding the Middle-Income Trap?

Laszlo Bruszt,Nauro F Campos

doi:10.2139/ssrn.3228960

Abstract

Exiting the middle-income trap entails costly improvements in state capacity. That deep economic integration induces powerful actors to support increasing state capacities remain underresearched. Here we ask: Under what conditions can deep economic integration yield increases in state capacity? We measure institutional change in 17 European former communist countries exposed to similar challenges of deep integration (European Union membership candidates), and find large variation in the evolution of their state capacities. To understand this variation, we put forward a conceptual framework and supporting hypotheses. From testing these, we empirically identify key relationships and specific reform implementation sequences. Our main result is the centrality of an intricate relationship between bureaucratic independence and judiciary capacity as a main driver of institutional change. Change in these two institutional fields, we find, is a precondition for increasing internal and external competition, which are key factors for successfully escaping the middle-income trap.

Highlights

Getting out of middle-income trap entails changes in state capacities that might be hard to attain in many countries around the world where powerful insiders and incumbents have high stakes in maintaining the status quo
It remains underappreciated that deep economic integration, which goes beyond free trade agreements, can induce powerful actors to support increasing state capacity
We focus on the question: Under what conditions will deep integration yield changes in these elementary state capacities? We are using an ideal sample and much-improved measures to test various propositions about the right sequencing of institutional change that could yield the coming about of state capacities stressed in the Schumpeterian perspective

Summary

Introduction

Getting out of middle-income trap entails changes in state capacities that might be hard to attain in many countries around the world where powerful insiders and incumbents have high stakes in maintaining the status quo. It remains underappreciated that deep economic integration, which goes beyond free trade agreements, can induce powerful actors to support increasing state capacity.. We ask: Under what conditions can deep economic integration yield increases in state capacity?. A robust coalition of domestic and external actors might have common stakes in supporting encompassing institutional change necessary for participation in deep integration. Powerful external private actors might have strong interests in fighting for a “race to the top” at the level of state institutions that could guarantee even-handed enforcement of the rules of the integrated markets (Vogel and Kagan 2002). External public actors might have strong incentives to press for domestic institutional change necessary to defend the integrity of the common markets (Bruszt and Langbein 2015)

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Conclusion