Thorvaldur Gylfason, Inmaculada Martínez-Zarzoso and Per Magnus Wijkman: Filling the institutional vacuum in Eastern Europe

18. May 2015

The Eastern Partnership (EaP) Summit in Riga in May 2015 provides an opportunity to survey the need to remedy serious deficiencies in partner countries’ progress toward the basic institutions necessary for deep and comprehensive free trade agreements. These deficiencies contributed importantly to the failure at Vilnius in November 2013. While Georgia and Moldova initialed Association Agreements with the EU at the Summit, Armenia and Ukraine chose not to. An important reason for these different choices was that Georgia and Moldova had progressed further in creating the institutional framework for a democraticbased market economy. We have shown (Gylfason et al. 2015) that trade agreements with the EU offer the partner countries significantly greater economic benefits than corresponding trade agreements with Russia. In particular, our paper evaluates and compares the effects of free trade agreements (FTAs) signed by EaP countries with the EU and with Russia and the role played by the quality of institutions (specifically, democracy and corruption) in fostering trade. Our results suggest that the EaP countries, with Ukraine by far the largest in the group, gain significantly from FTAs with the EU, but gain little if anything from FTAs with Russia. A DCFTA with the EU will increase export shares by 78 percent, whereas a DCFTA with Russia will not result in any significant increase in export shares for the EaP countries considered. In order to qualify for and fully benefit from trade agreements with the European Union, the EaP countries must have institutions that foster a democratic political system and a well-functioning market economy. This article identifies some of the most striking institutional deficiencies in the partner countries, thereby suggesting where they should focus their efforts in order to qualify for deep and comprehensive free trade agreements with the EU. Read the publication Filling the institutional vacuum in Eastern Europe