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IOS Working Papers 326
The quality of (economic) institutions in the crisis countries of the European Union (EU) is relatively poor along several dimensions, despite the adoption of the acquis communautaire of the EU. Economic literature suggests that efficient institutions matter for macroeconomic growth and stability as well as for good enterprise performance. Against this background, the idea to support European crisis countries by the establishment of institutional pilot regions seems promising. Like the well-known special economic zones, they might exert positive spill-over effects on neighboring regions and trigger country-wide structural reforms. However, the concept is new and opaque and hard to fix in concrete terms. Examples with similar intentions abound, but the heterogeneity of these attempts with respect to problems addressed, measures invoked and the size of the targeted region is huge. Therefore, it is hard to draw robust conclusions from these experiences. In contrast to free trade zones, institutional pilot regions do not put direct monetary and/or fiscal incentives at center stage. Instead, they focus on reforms of institutions that are expected to play a decisive role for business and the functioning of a society; hence, these institutions are service-factors for firms and citizens. Our analysis demonstrates the scope of these service-factors ranging from good governance and low levels of corruption to help in setting up of business networks and improving physical infrastructure. The wide range of possible institutional measures implies that deliberate choices have to be made when selecting and designing institutional reform measures. This selection has to be based on a thorough analysis of the institutional setting and shortcomings in a specific country or region. At the same time, numerous constraints limit the scope for institutional pilot regions. First, institutions are embedded into a country-specific societal background that determines their functioning. As a consequence, no blueprints for institutional reforms exist; before designing reform measures, a careful country analysis is thus required. Second, institutional reforms produce no - or even adverse - effects if they are not implemented and managed efficiently. Thus, the measures have to be accepted by political elites, have to be carried out by competent administrative staff, and have to be carefully explained to the public. Third, if business is to be attracted, the pay-off for enterprises has to be positive; money saved by better service must outweigh additional transaction costs in a new business environment. Fourth, in the low-value-added segments prevailing in free trade zones, institutional pilot regions will not be competitive. So they have to be focused on innovative and high-skill-sectors. Legal constraints add to these economic considerations. First, European Law limits the possibilities of regulatory differentials across nations and regions. Checking the limits, justifying and passing exemptions, although possible in general, is not always promising and certainly requires time. Second, implementation has to be carried out at the national level. Again, solutions may be found, but they are not always promising and require time. Third, there is no supranational institution that could safeguard the new regulations from outside. Legislative capacities at the local, regional or national level would have to be trained and educated to carry out this task. To align the results of our economic and legal analysis, we recommend to make use of already existing instruments of European Regional Policy and to shape European Regional Policy of the future period by stronger focusing on the so far regrettably neglected role of institutions.
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