Institutions and economic growth in transition countries — new experiences and implications from financial crisis 2007–2010 (Part 2)

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. Institutions are especially important in transition countries. Two questions arise: were institutions important for economic growth in transition countries during the financial crisis? What happened to the institutions of state during the financial crisis?

Aim: The aim of the second part of this article is to verify two hypothesis about institutions and economic growth in transition countries, which were put forward in the first part of this article. In order to estimate the relationship between institutions and economic growth in transition countries during the crisis, a cross-sectional regression was conducted. Additionally the Granger causality test was conducted.

Results: The obtained results indicate that during the recession, in countries were before the crisis the institutions were worse, the pace of the economic growth was greater (hypothesis 1 should be rejected). In order to verify hypothesis 2 that the economic growth contributes to changes in state institutions in such a way that the faster the pace of growth the greater the improvement in state institutions a cross-sectional regression was used and the Granger causality test was conducted. Obtained results do not confirm the hypothesis 2. The estimates of parameters were in line with the expectations but statistically insignificant.