The aim of the current thesis was to answer the question “what institutions have been important
for growth in transition economies?” Institutions can be formal or informal. Formal institutions
are laws and regulations governing the society and informal institution are culture, tradition and
other kinds of informal rules. The growth literature suggests that institution have a positive
impact on growth. In this context the originality of the research question is that it examines the
impact of individual institutional categories on growth.
I employed a dynamic model to show the effect of informal institutions such as the shadow
economy on outcomes of the reforms. My findings suggest that the effectiveness of reforms
decreases if a shadow economy is more responsive to the reforms than the official market. Using
regression and principal component analysis, I found that the quality of institutions matters for
growth in transition economies. Moreover, government effectiveness and control of corruption
turned out to be important governance indicators for the transition process. The regressions using
extended sample showed that my findings are applicable to non-transition countries too. The
importance of government effectiveness for growth is a valid argument in the light of the current
economic crisis in Europe.
The regression results were tested for robustness by using spatial analysis. In particular, I tested
if the geographical location could explain the link between governance and growth. Cluster
analysis and spatial regressions showed that the geographic locations of the transition countries
explain the positive link between governance and growth only marginally.