 THE IMPACT OF POLITICAL INSTITUTIONS ON ECONOMIC GROWTH IN POST-TRANSITION EUROPEGunter Merdzan (),
Predrag Trpeski () and
Daniela Bojadjieva ()
No 29, Proceedings of the 5th International Conference "Economic and Business Trends Shaping the Future" 2024 from Faculty of Economics-Skopje, Ss Cyril and Methodius University in Skopje Abstract: Purpose The significance of political institutions in promoting economic growth is well acknowledged within institutional economics; however, empirical results often display considerable variation, especially in European post-transition economies. As noted by North (1990) and Acemoglu and Robinson (2012), institutions influence incentives, mitigate uncertainty, and dictate the efficiency of resource allocation. Nonetheless, evidence from transition countries indicates that the relationship between political institutions and economic outcomes is contingent upon specific contextual factors. Earlier studies have yielded mixed results regarding the relationship between economic and political freedoms. Piątek et al. (2013) found that economic freedom fosters growth in transition countries, while political freedom appears to have a neutral effect, suggesting that political reforms may lag behind market liberalisation. In contrast, Uzelac et al. (2020) and Bayar (2016) demonstrate that democracy, political stability, and the quality of governance, particularly in controlling corruption and upholding the rule of law, positively influence economic performance in Central and Eastern Europe. Alexiou et al. (2020) report similar long-term advantages associated with institutional quality, indicating that voice and accountability can enhance growth once the institutional framework becomes stable. Additionally, Tamilina and Tamilina (2014) contend that the growth of post-communist countries relies more on the maturity of political institutions than on their economic counterparts, emphasising the significance of institutional evolution over formal design. Conversely, some scholars, including Hodgson (2006) and Bonnal and Yaya (2015), note that democracy can have neutral or even adverse short-term effects, particularly in fragmented or unstable institutional environments. In this context, the current study aims to contribute to the ongoing debate by empirically re-evaluating the impact of political institutions, assessed through the Freedom House Index (which measures political rights and civil liberties) (Freedom House, 2024) and the Polity IV Index from the Center for Systemic Peace (which evaluates executive constraints and participation) (Marshall et al., 2019), on economic growth in thirteen European post-transition economies from 1996 to 2019. This paper offers updated, dynamic empirical evidence that resolves long-standing inconsistencies in the literature on institutions and growth in post-transition Europe. The topic remains highly relevant, as political and institutional reforms continue to influence the region's prospects for convergence, resilience, and long-term development. Building on prior research, this paper utilises a system generalised method of moments (system GMM) to explore the relationship between political institutions and economic growth. The aim of this study is to assess whether advancements in political institutions, characterised by increased democratic participation, improved accountability, and reinforced constraints on executive power, result in higher GDP per capita growth in post-transition Europe. Consequently, the primary hypothesis examined is: Political institutions that promote greater transparency, participation, and checks on executive authority have a positive, statistically significant effect on economic growth in European post-transition economies. Design/methodology/approach The empirical analysis utilises a dynamic panel-data framework, focusing on thirteen European post-transition economies over the period from 1996 to 2019. To address potential endogeneity, the study employs the system GMM estimator developed by Arellano and Bover (1995) and by Blundell and Bond (1998). This methodology facilitates consistent estimation in dynamic contexts where the lagged dependent variable is included as a regressor and the number of time periods is relatively limited compared to the cross-sectional units. The dependent variable in this analysis is GDP per capita growth, while the primary explanatory variables are political-institutional indicators. These include the Freedom House Index, which assesses political rights and civil liberties (Freedom House, 2024), and the Polity IV Index from the Centre for Systemic Peace, which evaluates executive constraints, political participation, and regime durability (Marshall et al., 2019). Additionally, control variables include the logarithm of GDP per capita in purchasing power parity (PPP), gross fixed capital formation (GFCF) as a measure of physical capital, human capital and population growth. Before conducting the main regression analysis, the study examines partial correlations between GDP per capita growth and the two institutional indicators, while controlling for all other growth determinants. This approach aims to isolate the relationship between political institutions and economic performance, independent of structural and macroeconomic influences. The validity of the instruments and the absence of serial correlation are assessed using standard diagnostic tests. Findings When accounting for the influences of various macroeconomic variables, including initial income, gross fixed capital formation, human capital, and population growth, the partial correlations between GDP per capita growth and the two institutional indicators remain positive, though modest in magnitude. This pattern suggests that enhancements in political rights, civil liberties, and executive constraints are consistently associated with higher growth, provided that structural and demographic factors are controlled for. The system GMM estimation reinforces these associations, demonstrating that political institutions have a positive and statistically significant impact on economic growth. The coefficient for the Freedom House Index is 0.421 (p Keywords: Political institutions; Economic growth; European post-transition countries; System GMM (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:aoh:conpro:2025:i:6:p:299-304 Access Statistics for this paper More papers in Proceedings of the 5th International Conference "Economic and Business Trends Shaping the Future" 2024 from Faculty of Economics-Skopje, Ss Cyril and Methodius University in Skopje Contact information at EDIRC. |
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