INSTITUTIONAL DYNAMICS AND ECONOMIC RESILIENCE IN CENTRAL AND EASTERN EU COUNTRIES. RELEVANCE FOR POLICIES.

• Author: Pascariu, Gabriela-Carmen

1. Introduction

   The concept of resilience is almost fifty years old. Initially introduced in ecological science (Holling, 1973) and in psychology (Anthony, 1974), resilience thinking was soon extended to any socio-ecological system (Batabyal, 1998; Carpenter et al., 2001) and currently represents a key concept in many areas, such as: regional science, economics and economic geography (Di Caro, 2014; Martin and Sunley, 2015); territorial and urban planning (Magoni, 2017; Banica et al., 2020); social sciences (Linnel, 2014; Cheshire, Esparcia and Shucksmith, 2015); political science (Bourbeau, 2015; Martin and Roman, 2021).

   In the last years, in the global context characterized by an increasing number of more and more various crises, of marked instability and consequent increase in opportunity costs, the scientific research on resilience has intensified (i.e., resilience was a key concept in 21 Clarivate-indexed papers in 1999, in 444 papers in 2000, in 2,555 papers in 2010 and in 16,355 papers in 2020); moreover, the resilience concept was rapidly 'absorbed' by public policies in all the countries of the world. The European Union holds the top position in this trend, the acquis communautaire including the word 'resilience' grew from 6 documents in 1990 to 186 in 2010 and to 1,127 in 2020 (Official Journal of the European Union, 1990-2021). Through its short-term social, economic and political impact, i.e. overcoming the crisis, as well as through its long-term one, i.e. sustainable development, convergence and conditionalities determined by the European Green Deal, the COVID-19 pandemic has clearly reinforced resilience-based policies, which is mainly reflected in the Next Generation EU Plan (European Commission, 2020a). Until 2026, more than 800 billion [euro] will be invested in EU Member States mainly through 'The Recovery and Resilience Facility' (the Facility) within the National Recovery and Resilience Plans (NRRPs). By promoting 'a greener, more digital, more resilient', more equal, safer and healthier development (European Commission, 2019), the main objective is to make sure that Member States' economies do not only recover after the crisis generated by the Coronavirus pandemic but manage to reach a level above the one prior to the crisis. In literature, such a perspective on resilience is proposed by the 'evolutionary approach', according to which resilience does not only imply the capacity of a system to recover its functions, employment and prosperity ('bounce back') and return to the initial equilibrium (JRC-EC, 2015) but also to engage in structural transformations and adaptive processes focused on reaching a new balance and a more performant development model ('bounce forward') (Reggiani, De Graaff and Nijkamp, 2002).

   From the European governance perspective, a fundamental question arises, i.e. to what extent do Member States have the capacity to efficiently implement these plans and to consequently become more resilient in facing the current and forthcoming challenges, transforming, eventually, their socio-economic systems in line with the development perspectives recently reflected in the EU Green Deal? Which are the factors that this transformative capacity depends on and how can these be capitalized on? Which are the main triggers of resilience, in various contexts and for different types of shocks? Can new structural, territorial, social and economic disparities, bearing long-term risks for the integration process, result from this? These questions are more relevant in the case of Central and Eastern European countries confronted with weak institutions which may have a negative impact on the implementation of NRRPs.

   Unfortunately, despite the fact that, for more than thirty years, an extremely rich literature on resilience drivers and a wide agreement of the strong interdependence between institutions and development have been in place (North, 1990; Acemoglu, Johnson and Robinson, 2004), for a long period, resilience literature has paid little attention to the role of institutions and of the governance system (Swanstrom, Chapple and Immergluck, 2009; Bristow, 2010), thus significantly diminishing the explanatory power of the resilience theory. Moreover, despite the fact that, at the EU level, solid economic structures and institutions are considered essential for countries' economic resilience and long-term prosperity (European Central Bank, 2016), the institutional approaches in relation with the differences in resilience performance and/or capacity of the EU Member States are hardly reflected in the literature and even less in the current NRRPs.

   Consequently, the aim of this paper is to analyze the importance of the institutional dimension for economic resilience and to identify the key institutional drivers in the resilience performance for the 11 CEECs (Poland, Romania, Bulgaria, Hungary, Latvia, Lithuania, Estonia, Croatia, the Czech Republic, Slovenia and Slovakia). The institutional dimension is assessed by using the six governance indicators released by the World Bank namely, Voice and accountability, Political stability and absence of violence/terrorism, Government effectiveness, Regulatory quality, Rule of law, Control of corruption. For assessing economic resilience, we used the most common indicators from the literature, namely the GDP growth rate (%) and the Employment rate (%). The analysis covers the 1996-2019 period, long enough to highlight the institutional dynamics and its impact on the economic resilience when a deep shock occurs.

   Key conclusions with normative relevance for resilience-based policies from the institutional thinking perspective will be provided. First of all, the methodological approach implies a cross-country time-series panel regression, using the annual data from 1996 until 2019 and, secondly, in order to capture the country specificities, a principal component regression. The paper is structured as follows: in Section 2 we provide a survey of the literature on economic resilience and the institutional dimension. Section 3 introduces the data and the methodology used for the estimation of economic resilience. In Section 4, we present the empirical analysis for the 11 CEECs; the last section presents the main conclusions.

2. Literature review

   In the economic development studies, resilience could reflect the capacity of a socio-economic system (city, region, country) to be placed on a long-term development path, incorporating a large set of internal and external conditionalities (Martin and Sunley, 2015; Cellini and Torrisi, 2014; Suzuki and Nijkamp, 2017). As such, resilience analysis can outline the vulnerabilities within a system in relation to various types of shocks (natural disasters, climate change, social and economic crises, wars etc.), which may further explain its capacity to resist, recover and transform by adopting a new growth and development pattern. Thus, the resilience analysis of a system can generate findings that have a highly strategic relevance for policy making. From this perspective, conceptual clarifications and a deeper understanding of the drivers of resilience are required, considering the multitude of sometimes contradictory approaches in literature.

   Since a detailed analysis of the multiple conceptual delimitations is beyond the purpose of this paper, we will limit our exemplification to Foster (2007, p. 14) who defines resilience 'as the ability of a region to anticipate, prepare for, respond to, and recover from a disturbance'. Also, Hill, Wial and Wolman (2008, pp. 4-5) consider resilience as 'the ability of a region to recover successfully from shocks to its economy that either throw it off its growth path or have the potential to throw it off its growth path but do not actually do so', while in Briguglio's et al. study (2008, p. 5), economic resilience is defined as 'the policy-induced ability of an economy to recover from or adjust to the negative impacts of adverse exogenous shocks and to benefit from positive shocks'.

   The complexity of the concept primarily derives from the multitude of interconnected factors that influence resilience. For example, Hill, Wial and Wolman (2008, pp. 9-10) consider that there are three main explanations for economic resilience: governance responses, industry or firm responses and the way in which institutional characteristics (including institutional structure, institutional history, and institutional culture) respond to economic shocks. Bristow et al. (2014) argue in favor of the existence of four categories of factors which provide specificity at the regional level while influencing resilience to economic shocks, i.e.: businesses, economy and the business environment, people and the population, place-based characteristics, and community and societal characteristics. Healy's analysis model (2020, p. 10) is in line with the above mentioned study, with the difference that the fourth category is clearly named 'institutions' and that the role of policy-making is discussed separately, with a stress on the influence it exerts on the other categories.

   Moreover, an increasing body of literature emphasizes the role of institutions as 'the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction (...) they structure incentives in human exchange, whether political, social, or economic (North, 1990, p. 3) in understanding and reinforcing economic resilience (Acemoglu et al., 2003; Sonderman, 2017). The study of Briguglio et al. (2008) points to the fact that good governance is essential for the appropriate functioning of an economic system and can, moreover, contribute to the consolidation of its resilience. Sonderman (2017) also brings arguments in favor of the role that the quality of institutions plays in the capacity of an economy to absorb shocks and empirically demonstrates that the probability of a severe economic...