Deep Economic Integration and State Capacity : A Mechanism for Avoiding the Middle-Income Trap?

Getting out of middle income trap entails changes in state capacities that might be hard to attain in many countries around the world where powerful insiders and incumbents have high stakes in maintaining the status quo. It remains under-appreciated that deep economic integration (which goes beyond free trade agreements) can induce powerful actors to support increasing general state capacities. Here we ask: under what conditions can deep economic integration yield increases in state capacity? We measure institutional change in 17 Eastern and Central European former communist countries exposed to similar challenges of deep integration (EU membership candidates) and find large variation in the evolution of their state capacities. To understand this variation, we put forward a conceptual framework stressing three main areas (judiciary, bureaucracy, and competition policy) and supporting a set of hypotheses based on the ideas of Montesquieu, Weber and Smith, respectively. From testing these hypotheses, we empirically identify key relationships and specific reform implementation sequences. Our main result is the centrality of an intricate relationship between bureaucratic independence and judiciary capacity as a main driver of institutional change. Change in these two institutional fields, we find, is a precondition for increasing internal and external competition, which are key factors for successfully escaping the middle income trap