Institutions and EU accession: How countries prosper even before entry

Every country that has joined the EU has become a high-income economy. The power of the EU convergence machine—through robust institutional and structural reforms, the accompanying larger trade, inflows of FDI and EU funds, and increased participation in value chains—has worked wonders to help countries progress. It has motivated all past and present candidate countries to meet stringent membership criteria and anchor domestic institutional and policy reforms to those of the EU. The current candidates—including the countries in the Western Balkans, Moldova and Ukraine—are already benefiting from the ongoing alignment with the Acquis Communautaire, the EU body of laws and regulations. Institutional reforms have brought economic results as EU institutions provide pre-accession funds to support their reform efforts. For example, in the Western Balkan countries, they reach up to 1% of GDP per year.

Reform early and decisively

Eleven countries in Central and South-East Europe joined the EU in 2004, 2007, and 2013. The implementation of substantial structural and institutional reforms in the run-up to EU accession is evident, including through the measured increases of the World Bank Governance Indicators. Governance in these countries improved substantially before accession and continued at a more moderate pace after EU entry (Figure 1). The most significant gains were in the areas of rule of law and political stability. For the former, the gap between governance scores of the EU15 and the 2007-2013 members narrowed by as much as 12 percentage points (pp) in the four years before accession.

Figure 1: The 2004 EU entrants have converged substantially with the older EU members

_{Source: World Bank staff calculations based on the World Bank Governance Indicators.}

Better institutional quality increases the likelihood of accession. For example, improving the score of the rule of law indicator from 0 to 0.5 – a notable improvement – doubles the predicted probability of EU accession to about 60% (Figure 2). This is particularly relevant for current EU candidates, where the rule of law score in 2023 ranged from -0.9 in Ukraine to 0.2 in Georgia. For example, the rule of law score for Croatia was 0.2 in 2013, the year it joined the EU, after increasing more than fourfold in the four years before the accession. After a decade of membership, it rose to 0.4 in 2023. 

Figure 2: Better rule of law suggests a higher probability of EU accession

_{Source: World Bank Governance Indicators and World Bank staff calculations. Note: The chart shows the predicted logistic curve and the 95% confidence interval. For example, for a rule of law score of 0.5, the probability of EU accession is about 60%.} 

Institutional improvements produce results even before accession

The accession process creates a transformational cycle: stronger institutions start boosting inflows of foreign investment, participation in value chains, and trade. For the 2004 accession countries, the stock of inward FDI more than quadrupled between 1997 and 2004 and continued to rise since then, increasing nearly three times by 2023 (Figure 3). In Bulgaria and Romania, the countries that acceded in 2007, these increases were even more dramatic. The countries in the Western Balkans also have had large increases in inward FDI, reflecting their progress in aligning their institutions with the EU.

Accession reinforces institutional quality and supports stronger growth in output, productivity and jobs. The current candidates must make the best of their time leading up to EU accession, as improvements in institutional quality result in higher inflows of FDI, deeper integration with value chains and EU markets, and an uptake and upgrade of technology. These foundations ultimately lead to high-income status. And institutional improvements matter even more in the current environment of sluggish EU growth and rising geo-economic fragmentation.

Figure 3: FDI surges even before EU accession

_{Source: World Bank staff calculations based on the World Bank Governance Indicators.}