Regulatory Environment and Development Outcomes: Empirical Evidence from Transition Economies

The objective of this paper is to investigate the effect of the regulatory environment and the institutional quality on economic growth and the share of the informal economy in transition economies. We use a sample of 30 transition economies over the period 2005 2011 and observe the relationships within three geographic sub-groups, three regulatory sub-groups and pre- versus during the recent crisis. Results suggest that less cumbersome regulation improves growth if combined with better institutions. Both channels the direct one working via firm creation and the indirect one working via informal economy reduction are found to exert positive and significant effect on growth. The composite effects are the strongest for countries with less business-friendly regulations and institutional environment, for regulatory chapters potentially relevant for the entire life-cycle of the firm, such as investors' protection, contract enforcement and trade, and during the crisis.