Economic openness and the EU “anchor”

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Economic institutions

Openness in terms of trade flows (measured by the trade intensity index, which compares a country’s share of world trade with its share of world output)¹ and finance (measured by the Chinn-Ito index of capital account openness) is significantly associated with better economic institutions in both the world and transition region samples (see Tables 3.1 and 3.2).²

The regression results suggest that a one standard deviation increase in the index of trade openness is associated with an improvement of around one-eighth of a standard deviation in the average of the four WGIs. The effect of financial openness is larger: a one standard deviation change in the Chinn-Ito index is associated with an improvement equivalent to 40 per cent of a standard deviation in the quality of institutions (roughly equivalent to the difference between the average WGIs of Morocco and those of Georgia). Interestingly, these effects appear to be particularly strong in countries with low Polity2 scores.

Not surprisingly, the influence of EU membership on economic institutions is positive and statistically significant in all regressions involving the transition region sample. EU membership is captured by a variable that takes the value 1 as of two years before EU accession, as pre-accession reforms usually peak at this time (the following section investigates this effect in the context of case studies.) Note that the effect occurs over and above the influence of democracy, economic openness and per capita income, all of which are correlated with (and, to some extent, induced by) EU membership. Hence, the regressions indicate that, given two equally open, democratic and wealthy countries, where one is in the European Union and the other is not, the EU member would be expected to have better economic institutions.

1. More precisely, the index is a residual in a regression of the volume of trade on a country's GDP and a number of other characteristics that are commonly used to explain trade flows. See Pritchett (1996) and Chapter 1 of this report. [back]
2. See Chinn and Ito (2006) and Chapter 1 of this report. [back]

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