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Home Grown or Imported? Initial Conditions, External Anchors and the Determinants of Institutional Reform in the Transition Economies*


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     The authors thank for helpful comments and suggestions: Anders Aslund, Steven Fries, Manuel Arrellano, Andrew Harvey, Simon Johnson, Dariusz Rosati, participants at the Ninth International Conference on Panel Data, June 2000, Geneva and seminar participants at the EBRD, the World Bank, University College London, University of Maryland, Erasmus University Rotterdam, and University of Cambridge. Further comments by two anonymous referees are also gratefully acknowledged. Financial support from the UK Know-How Fund under EBRD's Policy Studies Programme on the Challenges of the Second Decade of Transition is gratefully acknowledged.


In this article we examine the determinants of institutional change using a panel dataset comprising 25 transition economies. A defining characteristic of our approach is that we treat institutional change as a multidimensional unobserved variable, accounting for the fact that each of our indicators represents a noisy signal. Our results suggest that institutional change is significantly path dependent. However, policy can to some extent break this dependence through economic and political liberalisation at the start of the transition and with the help of an external anchor such as EU accession.