Academic journal article The European Journal of Comparative Economics

Heterogeneity in Institutional Effects on Economic Growth: Theory and Empirical Evidence

Academic journal article The European Journal of Comparative Economics

Heterogeneity in Institutional Effects on Economic Growth: Theory and Empirical Evidence

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

The collapse of socialism led to multifaceted and profound changes in the political, economic, and social systems of post-socialist countries. Formal institutions were expected to mold these changes into a legal framework and define new rules according to which the economy and society were supposed to operate. Fiowever, introducing free market formal institutions did not lead to the expected outcomes in many of the former socialist economies. The well-functioning institutions of capitalism, which are the foundation of economic development according to growth theory, proved rather dysfunctional in post-communist conditions (Polterovich 2005, 2008; Radygin and Entov 2008). The relationship between the quality of formal institutions and rates of economic growth appeared to be peculiar, differing from the pattern usually found in developed and/or developing countries.

This study seeks to demonstrate that the revolutionary approach, through which key economic institutions were formed, can explain the relative dysfunctionality and inefficiency of these institutions in fostering growth in post-communist countries. We argue that the revolutionary mode of institution building occurred independently from both the culture economic agents were accustomed to and trends in economic structural transformations, resulting in institutions that were incompatible with informal norms and features of local economic systems.

2. Literature overview

Growth theory asserts that good formal institutions are conducive to rapid economic development. Empirical evidence from economically developed and/or developing countries (Eicher and Leukert 2009) largely supports this claim (see Acemoglu and Robinson (2012) for an overview) with regard to both political (Chen and Feng 1996; Klomp and de Flaan 2009; Narayan et al. 2011) and economic institutions (Rodrik et al. 2002). Post-communist countries are rarely included in such analyses, because they represent a unique group (Bosworth and Collins 2003).

Research has been conducted independently on these countries. Studies found mixed evidence depending on the type of formal institutions analyzed, statistical methods used or the range of countries included. They either substantiate conventional findings that institutions positively impact growth rates (see Aslund (2007) for a detailed overview). Or, they recognize peculiarities concerning the effect that formal institutional frameworks have on economic growth, with the sign and strength of this impact varying depending on the phase of transition or the maturity of formal institutions (Fidrmuc and Tichit 2009; De Melo et al. 1997; Falcetti et al. 2000). Studies stemming from former Soviet Union countries go even further and entirely negate the claim that fireemarket formal institutions per se may lead to economic prosperity in the post-socialist world (Mau 2007; Petrunya and Ivashina 2010; Polischuk 2008; Polterovich 2008). These formal institutions lack compatibility with post-communist informal norms due to transition countries' insignificant historical experience with democracy and free markets (Yasin 2003) or due to unique features of their economic systems (the military sector's prevalence in their production capacities, dominant large companies, and a deep recession that started at the outset of transition) (Polterovich 2005; Polterovich and Popov 2006).

In addition, the lack of strong political contexts, which assumes an independent political sector from the economic sector, is believed to hinder these countries from improving formal institutions. Their political elite often become economic elite (Aslund 2007), as a result of which institutional reforms simply promote the redistribution of economic or political power without generating substantial economic growth (Dementiev and Vishnevskiy 2011). As a consequence, many transition economies appear to be locked in an institutional trap (Polterovich 2005), with any institutional improvement being associated with considerable economic and social losses (Polterovich 2008). …

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