Institutional proximity and economic freedom

Erik Paessler // 17 September 2020

The European Union has long positioned itself in a unique role in the international policy sphere. The concept of the EU as a ‘normative actor’ has gained significant currency, as it aims to build a privileged relationship with selected neighbouring countries with programmes such as the European Neighbourhood Policy (ENP). These are built on common values, including normative aims such as democracy, rule of law, good governance and market economy principles. Apart from the size of government –  on which the EU has no official normative stance – these areas roughly translate to the areas included in the Economic Freedom of the World: 2020 Annual Report, published by Canada’s Fraser Institute. These are: legal structure and security of property rights, access to sound money, freedom to trade internationally and regulation of credit, labour and business. It may prove interesting to examine whether successful implementation of these normative aims are mirrored in the according data. In the period immediately after accession or gaining candidacy, a positive development in these areas could be traced in both potential and recently added Member States as well as ENP countries.

A subset of 12 countries was analysed as three distinct political and geographical groupings to take a closer look at the impact of legal-institutional proximity to the EU. The groupings include recently acceded member states, such as Romania, Bulgaria and Croatia, as well as states that have gained status of candidacy, namely Serbia, Albania, North Macedonia and Montenegro. Further, the Eastern Partnership countries Ukraine, Moldova, Georgia, Armenia and Azerbaijan have been added. Each have been analysed over period of 3 years after the respective relevant point of accession, gaining candidacy or entering the EaP. For instance, as Romania and Bulgaria joined the EU in 2007, the data for 2007-2010 was taken into consideration, whereas Croatia’s period spans 2013-2016.

Overall, a balanced picture emerges. Six countries improved in terms of sound money, five countries experienced a rating decrease and Moldova remained stable. Moreover, in the area of freedom to trade, all of the accession candidates improved, as well as two Eastern Partnership countries, Bulgaria, and Croatia.  Three countries declined and Moldova once again remained stable. Further, examining the area of legal system and property rights, six countries improved, six countries declined – and importantly almost all of the Eastern Partnership countries improved. Lastly, in regulatory matters, all the recently acceded member states improved, as well as three out of four accession candidates and four out of five Eastern Partnership countries. Overall, the most improvement seems to have occurred in the areas of freedom to trade as well as regulation. All the recently acceded member states improved significantly in the areas of legal system and regulation, both areas in which four out of five EAP countries have developed positively. All accession candidate countries have improved their rating in terms of freedom to trade.

 

Despite relatively balanced patterns of development emerging when comparing the areas, different conclusions can be drawn when looking at the overall development in the 4 areas of the report, excluding size of government. Apart from Montenegro, all 12 countries have improved within the three-year period following their point of deepened integration, demonstrating an overarching positive impact of EU proximity, despite some variety in detail. It is crucial to mention that domestic developments arguably have primacy in the development of economic freedom. Further, in order to corroborate a causal relationship, further investigation would be required into whether these compare other countries in adjacent regions. Nevertheless, converging patterns between three different geographical and political groupings of countries united through varying degrees of legal-institutional proximity to the EU is at the very least indicative of a somewhat positive impact. Such impact can be elucidated most pronouncedly in the areas of trade freedom and regulation, whereas access to sound money has notably varied results within the subset.

In summary, there is tentative evidence that legal-institutional proximity to the European Union correlates with improving overall economic freedom as defined by the Fraser Institute. It is noteworthy that these political developments are reflected within the dataset and provide indication over the breadth of potential the index has for further use in research and policy making.

This blog is the third part of a series covering issues linked to the 2020 edition of the Fraser Economic Freedom of the World Index


EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).

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