Discussion Paper

No. 2018-53 | July 02, 2018
Institutional convergence in Europe

Abstract

This paper applies the statistical concepts of σ-convergence and unconditional β-convergence to institutional development within several country groups hierarchized to the degree of European integration (e.g., euro area). Two sets of indicators are employed to measure institutional development: first, the Worldwide Governance Indicators, and second, the product market regulation indicator of the OECD and the Doing Business distance to frontier indicator of the World Bank. The authors can clearly confirm institutional β-convergence within the EU and its aspirants, which is mainly driven by the new Member States and acceding, candidate, and potential candidate countries. However, euro-area countries converge only in the area of product market and business regulation—not in the area of governance. In fact, the authors show evidence for β-divergence in rule of law within the first twelve euro-area members. Concerning σ-convergence, the results are less clear. Only the EU including the EU aspirants reduced the cross-country variance in all aspects of institutional development.

JEL Classification:

E02, K20, L50

Assessment

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Links

Cite As

Nina Schönfelder and Helmut Wagner (2018). Institutional convergence in Europe. Economics Discussion Papers, No 2018-53, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2018-53


Comments and Questions


Gerasimos Soldatos - article review
July 06, 2018 - 08:38

To me, this article suggests that MOST EU countries see that they would be better off without an EMU. The politics surrounding many member states confirm such a thesis; the immigration problem only intensifies the Berlin/Paris led country-member asphyxiation. Hence, seeking further deepening of the Union, will dismantle it. I ...[more]

... would like to see from the authors a comment on this.


Nina Schönfelder - Reply to comment
July 11, 2018 - 19:24

Your suggestions cannot be inferred from my paper, especially concerning the immigration issue. Please, stick to the subject, when you comment on my paper.


Karsten Staehr - Review of paper by Schönfelder & Wagner
July 09, 2018 - 19:41

The paper by Schönefelder & Wagner considers the extent of institutional convergence in Europe in the period from 1996 to 2012 or 2013. The theme is important given the centrifugal forces affecting Europe, especially since the outbreak of the global financial crisis.

The unnumbered introduction could be improved. ...[more]

... The motivation on p. 2 states that institutional convergence is important because it may tell something about income convergence, but this begs the question why the paper does not consider income convergence. I believe the topic of the paper is interesting and important for a number of reasons but they should be spelled out in the paper. The introduction does not really discuss the literature in the area and does not identify any research gap. Likewise, the paper does not explicate its contribution to the literature. These deficiencies make it difficult to place the paper in the literature and cast some doubts on the contribution of the paper.

The descriptive discussion of the European integration process in Section 1 (pp. 4-8) is well written. The paper refers to EU27 but this is not because it is forward-looking and account for the UK leaving the EU, but instead because Croatia is still treated as being outside the EU. Croatia joined the EU in 2013! Other parts of the description are also in need of an update.

The discussion of the definition and measurement of institutional convergence in Section 2 (pp. 8-12) is fine. I am surprised that the concepts of beta and sigma convergence are defined on p. 10 is the context of economic growth; beta and sigma convergence are general concepts; their use in growth estimations could be used as an illustration.

The paper is in dire need for an update of the time sample. The last year of sample is 2012 (or 2013 for a few indicators) and I read this working paper in 2018. What has happened meanwhile? This is a particularly pertinent question given that the global financial crisis and the ensuring deep recessions in Europe may have changed the patterns of convergence. Indeed, the sigma convergence results in Figure 2 suggest divergence since 2010 for several of the indicators. Figure 2 would be much easier to read if there had been an indicator analysed would have been written out under each of the separate plots so that one would not need to revert to the figure note each time to read the plots.

In Subsection 3.2 on beta convergence (or in the definition in Section 2) I would have liked a discussion of some of the key assumptions behind the estimation of beta convergence. One particular concern is that the estimations effectively assume a constant rate of convergence over the sample period. There are several indications in the paper that the convergence rate changes over time.

Section 4 on product market and business regulation is interesting and the results rather clear. Part of the convergence process may simply reflect a deepening process within the EU. The conclusion in Subsection 4.3 is rather unsubstantial. It is noticeable that the results are not compared to those in the literature, but that it is simply stated that there is “supporting evidence” in some other studies; this is not very informative.

The conclusion in Section 5 is brief and not very substantive. It seems simply to summarise the results once again and does not relate them to the literature. Such a brief treatment is particularly surprising given the lengthy discussion in Section 1 on deepening and widening of the EU. What do the results in the paper tell about these processes? I would in particular have liked to see a discussion of different convergence patterns before and after membership of the EU. I have in a somewhat different context found very different patterns of reforms in eastern European countries before and after EU accession (and incidentally also for democratic and economic reforms):

Staehr, Karsten (2011): “Democratic and market-economic reforms in the post-communist countries. The impact of enlargement of the European Union”, Eastern European Economics, vol. 49, no. 5, pp. 3-28.


Karsten Staehr
Department of Economics and Finance
Tallinn University of Technology


Nina Schönfelder - Reply to review
July 11, 2018 - 19:28

Dear Prof. Staehr,

Thank you very much for your valuable comments. Let me reply to some of them.
Your suggestions on how to improve the introduction and the conclusion are very helpful. I had the points in my mind, but obviously did not write them down clear enough. I ...[more]

... have considered an update of the data, but it is not worth the effort. Indeed, the WGIs are available until 2016 now, so additionally three years of observation. However, there is no new release of the product market regulation indicator of the OECD because they are launched every five years. The new releases of the doing business indicator of the World Bank become unusable for time series analysis, because the compilation of several sub-indicator has changed substantially since 2014 and the indicators are recalculated with the new methodology only one year backwards (see http://www.doingbusiness.org/methodology/distance-to-frontier-metrics). Therefore, I refrained from doing an update.

It is true that beta- and sigma-convergence are general concepts. However, I think that most economist know them from the economic growth context. That is why I started the description of the concepts with income convergence.

Again thanks for your suggestions. I am going to improve the literature discussion.

Nina Schönfelder


Anonymous - Referee Report 1
August 14, 2018 - 08:30

see attached file


Nina Schönfelder - Reply to referee report
August 19, 2018 - 14:13

Dear Referee,

Thank you very much for your valuable comments. Your critique concerning the very brief literature review and that I missed to explain how my paper differentiates from the existing literature and fills a research gap, is reasonable. Indeed, I have to improve that part before publication (see ...[more]

... also Karsten Staehr’s review and my answer thereon). Moreover, I am going to accommodate your suggestions concerning the other parts of the paper: to include a discussion about the convergence measures, to improve the graphs and the conclusion.

Thank you for reviewing my paper.

Nina Schönfelder


Anonymous - Referee Report 2
August 20, 2018 - 08:13

The authors apply a statistical exercise to assess the regulatory and institutional convergence of European countries. The focus on institutional quality is well motivated as institutional quality is a key variable for ensuring sustainable and inclusive growth. There is indeed substantial cross-country evidence that high quality of institutions is strongly ...[more]

... associated with long-term growth and well-being, even after controlling for the level of income and thus catching-up potential (see Masuch et al. 2018). Importantly, high-quality institutions are a prerequisite for economic policies to be effectively implemented and yield their full potential. In addition, well-functioning institutions are essential to restrain rent-seeking and socially unfair privileges enjoyed by specific groups.
While the focus of the paper is topical, the authors could provide a much deeper economic meaning to the outcome of their statistical exercise and better explain possible causes of their results. In this context, it is regrettable that the paper largely refrains from references to the growing literature on the determinants of institutional quality.
The elaboration on the EU and euro area enlargement rounds in Chapter 1 is somewhat lengthy and could be shortened or moved to the annex as it does not touch on the core question of the paper. (The chapter numbering is a bit odd with identical headings for some subchapters.) This is not to say that the process of European integration has no links to institutional convergence. Available evidence indeed suggests that ERM II membership and euro adoption are major steps which tend to be seen as a regime shift by both investors and domestic authorities, with significant implications on institutional quality. For example, Fernandez-Villaverde et al. (2013) argue that large private credit inflows in the period before the financial crisis reduced pressures for economic reforms in the euro area periphery and that the abandonment of the reform process and the institutional deterioration in turn not only reduced the longer-term growth prospects of these countries but also fed back into financial conditions, prolonging the credit boom and delaying the response to the bubble when the speculative nature of the cycle was already evident (see also Gopinath et al. 2017, Challe et al. 2018, and Masuch et al. 2018). Against this backdrop, it comes as no surprise that the authors identify Greece, Portugal and Italy as negative outliers in terms of institutional development.



References:
Challe, Edouard and Lopez, Jose Ignacio and Mengus, Eric (2018), “Institutional Quality and Capital Inflows: Evidence and Theory”. HEC Paris Research Paper No. ECO/SCD-2018-1247. Available at SSRN: https://ssrn.com/abstract=3105296 or http://dx.doi.org/10.2139/ssrn.3105296 . An earlier version of this paper (with a particular focus on Southern European countries) was published as: Ignacio Lopez, J., Mengus, E. and Challe, E. (2016), "Southern Europe's Institutional Decline," Les Cahiers de Recherche 1148, HEC Paris.
Fernández-Villaverde, J., Garicano, L. and Santos, T. (2013), “Political credit cycles: the case of the Eurozone”, Journal of Economic perspectives, Vol. 27, No 3, pp. 145 66.
Gopinath, G., Kalemli-Özcan, Ş., Karabarbounis, L. and Villegas-Sanchez, C. (2017), “Capital allocation and productivity in South Europe”, Quarterly Journal of Economics, Vol. 132, No 4, pp. 1915 1967.
Masuch, K., Anderton, R., Setzer, R., Benalal, N. (2018), “Structural policies in the euro area”, ECB Occasional paper No. 210, Frankfurt am Main.


Nina Schönfelder - Reply to the referee
September 01, 2018 - 13:07

Dear Referee,

Thank you very much for your valuable comments. You are totally right. Your suggestions to provide a deeper economic meaning to the outcome of my results and to explain their causes are very helpful. Indeed, there is also a link to the literature on the determinants of ...[more]

... institutional quality and I know some of the references you mentioned. Thank you very much for calling my attention to the papers of Masuch et al. and Gopinath et al. I definitely should link this literature to the outcome of my paper.

Again thanks for your suggestions. I am going to improve the literature discussion.

Nina Schönfelder