INSTITUTIONAL CHANGES IN THE NEW EU MEMBER STATES AND THEIR IMPACT ON ECONOMIC PERFORMANCE

The importance of institutions for economic growth and development has been recognized and underlined since the days of Adam Smith up to contemporary theorists. Institutions, in the broadest sense, have a strong impact on the economy due to the possibility of creating an enabling environment for economic growth and development. In the nineties, when transition countries began their structural and institutional reforms, they met with sharp falls in production, rising unemployment and high inflation. In that period investment activity was considerably reduced. At the beginning the capital inflow was related to the privatization process but over the time the intensity of the inflow of foreign capital had become increasingly dependent on institutional changes, especially in terms of property rights safety and protection. The institutional environment had the most significant impact on attracting greenfield investments which, in some transition countries, began to deviate from the sectors of low technological level into high technology sectors. Transition countries that have developed institutional framework have attained better economic results and faster economic growth. Institutions and their development can be seen as a necessary precondition for the achievement of economic performance. Although Croatia has made significant institutional improvements, there are indications that there is still much room for improvement. In this regard, recognizing the importance of institutional development can be of significant benefit in considering directions and strategies for future growth of the Croatian economy. Transition countries that have been able to meet these criteria to a high degree have attracted the highest quality foreign investment.