Halle Institute for Economic
Research
Dynamics of institutional
convergence
IWH
Short presentation of WP 7
(Coordinator: IWH)
GRINCOH meeting
Halle, November 22-23, 2012
Halle Institute for Economic
Research
Overarching objective
Analysis of the positive and negative
dynamics of institutional convergence
and its impact on growth,
competitiveness and cohesion in the
European Union.
Partners: IBS, IEHAS, IWH, UWAR, WIIW
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Halle Institute for Economic
Research
Task 1:
The impact of European institutional convergence on
growth in CEECs
Content: A unified approach to institutional convergence
towards EU norms (related to the acquis communautaire) and
how it relates to growth
Methodology: Multivariate analysis
Progress: Paper in an advanced stage - see presentation
Requirements from other partners/WPs: None
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Halle Institute for Economic
Research
The pattern of European
institutional convergence in Central
IWH
and Eastern European
Countries
WP7, Task 1
Marina Gruševaja
Toralf Pusch
GRINCOH meeting
Halle, November 22-23, 2012
Motivation (1)
Halle Institute for Economic
Research
Increasing attention to institutions since beginning of the transition process in
post-communistic countries
Institutions matter:
• Appropriate institutions as a precondition to macroeconomic stability,
economic development and growth (Olson, 1982)
• Formal and informal institutions (consistency), path dependence (North,
1990, 1994)
• (Formal) Institutions have to be effective/reliable (enforcement)
Accession strategy for the EU enlargement is built on that:
Necessary condition for internal common market → establishing of effective,
appropriate, market supporting institutions (Rodrik, 1999)
→ Community acquis
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Halle Institute for Economic
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Motivation (2)
The EU’s institutional framework is assumed to be effective
• as it enables internal common market free of distortion
• allows for a better coordination between member states
• foster a trend to further economic integration within EU (the EMU)
→ No empirical evidence in the recent literature
→ Concept of “Varieties of capitalism” (VOC, Hall and Soskice, 1991)
Hypothesis
there is one best (praxis proven) coherent combination of effective
institutions for all Central- and Eastern European countries that
ensure macroeconomic stability and enhance economic growth and
CEE countries need to converge to this institutional framework
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Theoretical Framework
Halle Institute for Economic
Research
Concept and measures of institutional convergence: Kaufmann, Kraay,
Mastruzzi (2005) The average World Bank index of the quality of governance
accounts for the combination of political and economic institutions
Transfer versus evolvement of institutions (Roland, 2011)
Two ways of institutional development for us:
• ex ante harmonization (transition strategy/export of
institutions/”mix and match”) and
• ex post convergence (development of EU’s institutional
framework, institutional competition between jurisdictions, from
“policy of process” to “policy of order”)
With/without anchor from international organization like WTO/EU/IWF
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Own contribution
Halle Institute for Economic
Research
Similar to the empirical analysis of economic convergence we assess
institutional convergence testing the hypothesis whether the ex ante
harmonization during the accession to the EU leads to “traditional”
convergence towards EU norms or to institutional club-convergence in
the Central- and Eastern European countries.
 The aim of our empirical analysis is to conduct a cluster analysis of CEE
new member states’ institutional settings.
Further preparations:
 Institutional variables usually exhibit inertia → our analysis is based on
time spans of several years.
 The proper choice of time spans is related to the significant changes in
institutional settings towards European integration of the CEECs – EU
membership applications, association agreements, opening years of
accession negotiations and finally EU accession dates.
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Halle Institute for Economic
Research
Years of important steps towards EU accession in the CEECs
EU membership
application
Association
agreement
Opening of accession
negotiations
Accession
Bulgaria
1995
1995
2000
2007
Czech Republic
1996
1995
1998
2004
Estonia
1995
1998
1998
2004
Hungary
1994
1994
1998
2004
Lithuania
1995
1998
1999
2004
Latvia
1995
1998
2000
2004
Poland
1994
1994
1998
2004
Romania
1995
1995
2000
2007
Slovenia
1996
1999
1998
2004
Slovakia
1995
1995
2000
2004
Median
1995
1995
1998 and 1999
2004
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Data
Halle Institute for Economic
Research
EBRD transition indicators:
• Large scale privatization
• Small scale privatization
• Enterprise restructuring
• Price liberalization
• Trade & Forex System
• Banking Reform & interest rate liberalization
• Securities markets & non-bank financial institutions
• Competition Policy
Further data: government deficit (EBRD), currency regimes (EU Commission)
Countries included: N=20
former communist countries from the CEE region, the Balkans and the CIS region
(Ukraine, Moldova, Armenia and Georgia)
Countries excluded: N=7
Oil exporting countries of CIS, including Russia
Mongolia (exports a number of other commodity)
Belarus (outliner)
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Methodology
Halle Institute for Economic
Research
The empirical method is chosen according to the available data.
The EBRD transition indicators are coded as numbers and should be
understood in qualitative way → they have an ordinal or nominal scaling level:
“1” no steps or almost no steps towards EU norms
“2” some steps towards EU norms
“3” Significant progress
“4” substantial improvement in the considered institutional field
“4.3” institutional standards of typical advanced industrial economies
In first step we group the institutional data into ranges “low” (1.0 to 2.0),
“medium”(2.1 to 3.1), “large” (3.2 to 4.0/4.3) and “very large” (4.1 to 4.3),
according to the extent of institutional reforms towards EU norms.
Based on our classification we apply Multiple Correspondence Analysis
(MCA) before we use Ward’s hierarchical clustering method.
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Cluster Analysis:
1991-1994
1995-1998
1999-2003
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2004-2006
2007-2010
Average data (per period/per cluster)
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Research
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Multiple Correspondence Analysis (MCA)
1991-1994
Halle Institute for Economic
Research
1995-1998
2004-2006
1999-2003
2007-2010
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Research
Significant Dimensions
Significant Dimensions
1991-1994
Cluster 1
Dim.4 3.657329
p=0.0002548567
Cluster 2
Dim.3 1.967634
p=0.04911019
Dim.1 -1.924521
p=0.05428937
Dim.4 -1.961421
p=0.04982994
Cluster 3
Dim.5 -2.616367
p=0.008887102
Cluster 4
Dim.2 -3.132664
p=0.001732274
Significant Dimensions
1995-1998
Dim.2 1.928007
p=0.0538543090
Dim.1 -3.482585
p=0.0004965983
Dim.2 -3.669391
p=0.0002431287
Dim.1 -3.833949
p=0.0001261025
Dim.1 3.520962
p=0.0004299837
Dim.2 2.348147
p=0.0188670859
Dim.2 3.185556
p=0.001444764
Dim.1 2.836648
p=0.004558980
-
Cluster 5
Cluster 6
Dim.2 2.379510
p=0.017335682
Dim.5 1.940856
p=0.052275722
Dim.3 -2.791447
p=0.005247299
Dim.1 3.84774
p=0.0001192123
Dim.3 1.850316
p=0.0642680088
Significant Dimensions
1999-2003
Dim.1 2.175922
p=0.0295610829
Dim.2 -3.371099
p=0.0007486883
Significant Dimensions
2004-2006
Significant Dimensions
2007-2010
Dim.2 3.068013
p=0.002154870
Dim.1 -2.806029
p=0.005015615
Dim.3 2.032729
p=0.042079901
Dim.2 -2.953582
p=0.003141096
Dim.2 2.709837
p=0.006731634
Dim.1 -2.687957
p=0.007189060
Dim.3 2.608853
p=0.009084635
Dim.2 -1.784381
p=0.074361831
Dim.3 -3.201191
p=0.001368607
Dim.3 -1.717279
p=0.08592819
Dim.2 -2.163974
p=0.03046638
Dim.1 3.658556
p=0.0002536402
Dim.4 2.338312
p=0.01937109
Dim.1 1.720793
p=0.08528842
-
-
-
-
Dim.1 2.853790
p=0.004320104
Dim.2 1.760552
p=0.078314239
-
-
-
-
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Halle Institute for Economic
Research
Significant Categories
Significant Categories
1991-1994
Significant Categories
1995-1998
Significant Categories
1999-2003
Significant Categories
2004-2006
Significant Categories
2007-2010
Cluster 1 Preislib = little p=0.01052632
Secur= middle
p=0.0000119076 SSpriv = very_much p=1.190760e-04 CG = much
p=0.000128999 Secur= much
p=0.0005159959
CG = middle
p=0.0001190760 Compe= middle
p=7.144558e-04 Secur = much
p=0.002063983 Compe= much
p=0.0025799794
SSpriv = very_much
Secur= middle
p=7.144558e-04 Compe = much p=0.009803922 CG = much
p=0.0314757482
p=0.0043343653
Forex = very_much p=1.083591e-02 SSpriv = very_much
Sspriv = very_muchl
Forex = very_much
CG = middle
p=2.301414e-02 p=0.016253870
p=0.0361197110
p=0.0162538700
Forex = much
p=8.668731e-02 SSpriv = much
p=0.032507740 Sspriv = much
p=0.0650154799
Compe = middle p=0.0797809002 SSpriv = much
p=1.976661e-02 CG = middle
p=0.016253870
Compe = little p=0.0797809002 Compe= little
p=7.144558e-04
SSpriv = middle p=0.0085139319 CG = little
p=7.144558e-04
CG = little
p=0.0001190760 Secur= little
p=1.082509e-05
Secur= little
p=0.0000119076
Cluster 2 Preislib = middle p=0.007017544 Secur= little
p=0.002619671
Secur= little
p=0.0007144558 Secur= middle p=0.004334365 Sspriv = very_much
Sspriv = little p=0.035087719 CG = little
p=0.019766611 SSpriv = much
p=0.0015400492 CG = middle
p=0.023839009 p=0.03611971
Forex = little p=0.061403509 Forex = much
p=0.049773756 Forex = much
p=0.0288957688 Compe= middle p=0.036119711 Secur = middle
p=0.06501548
Preislib = much
Sspriv = very_much
Compe= little
p=0.0308803683 Compe= little
p=0.088544892 Sspriv = much
p=0.06501548
p=0.035087719
p=0.047678019
CG = little
p=0.0308803683 Secur= little
p=0.088544892
CG = middle
p=0.019766611 Compe = middle p=0.0308803683
Secur = middle
p=0.002619671 Secur = middle p=0.0078590141
SSpriv = very_much p=0.0026196714
Cluster 3 Banklib = little p=0.08854489
Banklib = middle p=0.08854489
Cluster 4 Forex = middle
p=0.007017544
Sspriv = middle
p=0.098245614
-
-
-
Cluster 6 Compe= middle p=0.0004127967
CG = middle
p=0.0020639835
Forex = much p=0.0520123839
CG = little
p=0.0020639835
Compe= little p=0.0004127967
Compe= middle
Secur= middle
Secur=little p=0.061403509
Compe=little p=0.061403509
Compe=little p=0.07481940
-
CG=little_cg
p=0.002063983
Secur=little
p=0.041279670
CG=middle_cg
p=0.072239422
-
-
p=0.06501548
p=0.06501548
-
Cluster 5 no significant Categories at 10%
-
Sspriv = much
p=0.08668731
-
-
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Findings
Halle Institute for Economic
Research
CEEC’ institutional development:
 At the first period four and in the last period three clusters including
all new EU member states – evidence for strong institutional diversity.
 Hungary (HU), Poland (PL) and Czech Republic (CZ) are over all
periods in the same (best) cluster – which could be interpreted as
homogenous institutional development towards EU norms.
 Other countries change clusters. From 1995 to 2003 all of them had a
particularly strong leap forward in institutional compliance with the EU
norms. From 2004 this dynamics slowed down and since then 5 of the 10
new EU member states have been lagging behind in terms of institutional
convergence (interesting case: Bulgaria / BG).
Particularly strong progress in ex ante harmonization of CEE countries
with EU norms occurred in 1995-2003.
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Halle Institute for Economic
Research
Findings
Development of singular institutional indicators:
 Very big steps were done immediately after beginning of transition process
in institutional settings such as price liberalization and trade & forex system.
 The weakest institutional development towards EU norms could be found in
2010 according to the EBRD data:
cluster weak
cluster strong
enterprise restructuring
From 1,2 to 2,6
From 2,6 to 3,5
securities markets &
non-bank financial
institutions
From 1,1 to 2,6
From 1,8 to 3,7
competition policy
From 1,1 to 2,6
From 2,3 to 3,4
These institutions are recently the drivers/obstacles of further
institutional convergence
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Conclusions and open questions
Halle Institute for Economic
Research
Conclusion:

Overall institutional convergence of the CEE countries is proceeding, but
slowed down from 2003 on.

The drivers of recent institutional convergence are institutions in the fields:
Competition Policy, Enterprise restructuring, Securities markets & non-bank
financial institutions. All of them are necessary for contestable and wellfunctioning markets, and thus for growth.

Single countries (Bulgaria, Romania, Slovakia) show a trend of stagnation in
term of institutional convergence (institutional trap?)
Open questions:
1.
How does the different progress of institutional convergence affect growth in
CEE countries?
2.
Are there factors that cannot be observed but which are responsible for
institutional stagnation or divergence, caused by a) path dependence b)
increasing influence of vested interests or c) growing rejection trough
informal institutions?
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Halle Institute for Economic
Research
Task 2:
Impact of institutional diversity on Corporate Governance
(CG) and on the overall growth in CEECs
Content: Analysis of CG of publicly-traded companies in
CEECs in the framework of the varieties of capitalism (VoC)
aimed to identify positive/negative forces of ex-ante and ex-post
institutional convergence
Methodology: Qualitative analysis (Hungary, Czech Republic,
Poland)
Progress: Satisfying progress made
Requirements from other partners/WPs: Input from
WP7/task 1
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Task 3:
The impact of EU-wide coordination of policies and
structural reforms on cohesion
Content: Analysis of coordination and enforcement mechanisms
in the past aimed to propose more feasible and effective ways of
EU-wide coordination (e.g. solutions for trade-off between social
(employment) and innovation (R&D) policies)
Methodology: Qualitative analysis/case studies (Hungary,
Austria, the Baltic states)
Progress: In preparation/data collection/case studies
Requirements from other partners/WPs: Case studies from
big countries, e.g. Poland, Germany / Input from WP3, WP4,
WP5, WP6
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Task 4:
Institutional diversity of CEECs and challenges for
European cohesion policy
Content: A synthesis of selected results from other WPs and this
WP (e.g. indicators for innovation policy, labour market policy,
welfare policy etc.) aimed to produce a balanced view on how
different institutional configurations may affect cohesion with
special focus on CEECs
Methodology: Qualitative and quantitative analysis
Progress: Not started/needs input from other tasks/WPs
Requirements from other partners/WPs: Input/results from
WP1 to WP6 and WP8
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Halle Institute for Economic
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Task 5:
Political stability and institutional change
Content: Analysis of institutional change in terms of capacity for
institutional and economic reforms in CEECs/ object of study:
government efficiency of economic reform (measures: budget
deficit, public debt, GDP growth)
Methodology: Qualitative analysis
Progress: Data basis is collected/work on text related to
convergence of democratic institutions in Western and Eastern
Europe since 1960-70
Requirements from other partners/WPs: ???
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