Institutions and economic growth in transition countries — new experiences and implications from financial crisis 2007–2010 (Part 1)

Abstract

Motivation: Cross-country growth regressions indicate that institutions are important for growth. Some institutions are created, protected and enforced by the government — they are the institutions of state. The most important for economic growth are: economic freedom and protection of property rights, political freedom (or democracy), quality of governance and the rule of law. The changes that took place after 1989 in the countries of Central-Eastern Europe were not only political but also economic. The post-socialist transition was, above all, a change of the institutions of state. It was a kind of the so-called ‘quasi-natural experiment’. Therefore, my intention is to answer the question: how the institutions of state affect economic growth in transition countries. Aim: The aim is to identify the impact state institutions had on the economic growth in transition countries during the financial crisis of 2007–2010. Results: In the first part of this article I review the literature and present hypothesis about dependency of economic growth and institutions during the financial crisis in transition countries. In the relevant literature there is a consensus that without an appropriate institutional background, market incentives do not lead to optimal resource allocation. Institutions have a particularly crucial impact in the case of post-socialist countries which have undergone political and economic transition. A significant and positive impact on economic growth rate is exercised by such institutions as: protection of property rights and political stabilization, government efficiency and rule of law. The experiences of transition countries confirm also the significance of economic freedom for economic situation.