Reforming Economic Institutions in Transition Economies: What Determines the Speed of Reform?

This paper studies institutional divergence among two types of transition economies: (1) the former socialist economies of Central and Eastern Europe, which have gradually been converging to European levels of institutional quality, and (2) the countries of the Former Soviet Union, which have, on average, made much less progress with institutional reform. We aim to explain these differences in the speed of institutional reform, which we measure as improvements in four Worldwide Governance Indicators: government effectiveness, regulatory quality, rule of law (including property rights), and control of corruption. We find that the most robust factors explaining institutional divergence are cultural/religious roots (Huntington’s definition of “civilization”), the number of years under a socialist regime, and the presence of natural resource rents. Less significant factors are imperial history (whether a country used to be a member of the Russian empire) and the prospect of EU membership (as proxied by the distance to Brussels in order to avoid endogeneity problems). An interesting finding is that, when political institutions are controlled for, the impact of natural resources is no longer significant. This suggests that the influence of natural resource rents on institutional quality operates through their impact on political institutions.