Privatization and growth: natural experiment of European economies in transition

European ex-socialist countries’ experience is exploited for two difference-in-differences analysis: effects of a) transition to a market economy, and b) accession to the European Union (EU) on income. Many countries adopting regime change simultaneously; and ten of them joining the EU mostly in 2004 provides a rich setting. Post-privatization growth varies by ex-ante institutional settings - whether they existed as separate countries before 1991 or came into being by break-up of a larger block - and by ex-post aspiration of (and then) joining the EU. We show starkly how unsuccessful was transition to a market economy - it increased income gap of most of them from the US for at least 13 years. The paper shows institutions are important/critical for growth in middle- or high-income countries of Europe also; and better institutions enhance the role of one (rather than all) proximate factor for growth. Using growth accounting, the growth effects are mostly driven by human capital (rather than by TFP). This paper a) presents a nuanced perspective on privatization’s effect on growth, and b) identifies human capital to be the proximate factor through which the fundamental factor of institutions promotes growth.