How Do Institutions Determine Economic Growth: Evidence from the CEE Countries Before and During the Global Economic Crisis

The main goal of the paper is to investigate how the institutions influence on economic growth and economic performance of the CEE countries, before and during the global economic crisis. We use principal factor component analysis in order to create a more reliable and representative variable that will measure the institutional capacity in our regression models, and to avoid the multi colinearity, a common statistical weakness of this type of regression model. The results from panel (random and fixed effects) regressions and a GMM dynamic panel regression lead to two contrasting insights. The first regression model shows positive and statistically significant correlation between institutions and economic growth, which would imply that the CEE countries that have created a strong institutional capacity during transition and post-transition period have experienced higher economic growth. On the other side, the estimated results refer to the global economic crisis period, shows a negative influence of institutions on economic growth for the same sample of countries. One explanation for this result might be the fact that countries with a higher degree of integration into the EU were also more vulnerable to the global economic crisis