EU Accession, Institutional Change, Growth, and Human Capital

The effects of initial institutions and change in institutions on the growth of ex-socialist countries is unsettled in the literature. This is due to difficulties in modeling the effects of institutions and their change. The objective of this paper is to contribute to this area. Ex-socialist countries faced heterogenous initial conditions at transition. Those that joined the EU experienced institutional integration as well as institutional improvement. Using publicly available data from about ten years before and after EU accession and two-way fixed effects differences-in-differences estimation, this paper finds that these countries experienced growth boosts post-EU accession. Achieving institutional integration cum improvement by accepting and implementing EU’s regulations and norms in all details permitted this boost. The initial conditions mattered—the effect was greater in “new” ex-socialist countries (which had the additional burden of creating new administrative structures and economic relationships) than in the “old.” Using the neo-classical growth model, the paper then examines whether this boost in growth was due to a higher contribution of inputs or due to an increase in the efficiency with which inputs were used. It indicates that it was due to increased contribution of human capital rather than an increase in the amount of human capital or other economic or political confounders. These countries’ skilled labor, already high in skills at transition by OECD standards, needed the right institutions to unlock its potential.