Figure 2.20 Trust in institutions (Eurobarometer)

77 Boeri et al. (2019) compare the collective bargaining institutions of Germany and Italy, and find that the German model works better because it allows for local wage agreements that reflect local conditions. 78 The data used in the heatmap reflect Romania’s collective bargaining coverage in 2008, at which point there was widespread collective bargaining at the national, sectoral and establishment levels. The data in the figure reflect Collective Bargaining Coverage in 2019, using data from the European Trade Union Insitute. Labor law reforms undertaken in 2011 altered these structures substantially, and reduced the fraction of the workforce covered by collective bargaining agreements (Trif, 2014). Romania’s collective bargaining indicator therefore changes from among the highest in 2008 to just below average from 2011 onwards. 79 Hijzen, Martins and Parlevliet (2017) report the same differences between collective bargaining in Northern

Europe (helpful to weather the fallout of the crisis) and Southern Europe (seen as an obstacle). In addition to levels of trust and cooperation, they also point to the scope for flexibility at the firm or worker level witin sector-level agreements, among others. 80 For the difference between the Netherlands and Portugal, see Hijzen, Martins and Parlevliet (2018). 81 Germany had institutionalized forms of cooperation: konzertierte Aktion (concerted action) and later Bündnis für Arbeit (alliance for labor) (e.g., Hassel, 2006). 82 Bentolila et al., 2010. 83 This does not imply a causal relationship between these institutional factors and responses to crises, countries with stricter employment protection regulatory frameworks differ systematically from those who do not have such on other grounds. 84 It should be noted that this approach focuses on whether poorer or better-off households had incomes that were more or less exposed to contractions than average households but does not allow us to explore how shifting regulatory frameworks during the crisis, and also does not speak to how employment protection legislation impacts an economy’s absorption and recovery capacity. 85 Dustmann et al., 2014. 86 Effective activation strategies can help make labor markets more resilient in case of adverse demand shocks. 87 EC, 2017. 88 Product market institutions that foster competition and provide a business-friendly environment include the ease of doing business (legal barriers for entry, administrative burdens and costs), contract enforcements, effective insolvency processes, limited sectoral regulations in retail and regulated professions (licensing and permits), anti-monopoly regulations, good governance of SOEs. Ensuring the quality of public administration is also important. 89 As measured by changes in the Product Market Regulation index compiled by the OECD. 90 See also Koske, I., et al. (2015), “The 2013 update of the OECD’s database on product market regulation: Policy insights for OECD and non-OECD countries”, OECD Economics Department Working Papers, No. 1200, OECD Publishing, Paris, https://doi-org.libproxy-wb.imf.org/10.1787/5js3f5d3n2vl-en. 91 Hall and Jones (1999) deployed a closely related concept they call “social infrastructure”. Social infrastructure is defined as “the institutions and government policies that determine the economic environment within which individuals accumulate skills, and firms accumulate capital and produce output.” An ideal measure of social infrastructure would quantify the wedge between the private return and the social return to economic activities. They construct an index using (i) law and order; (ii) bureaucratic quality; (iii) corruption; (iv) risk of expropriation; (v) government repudiation of contracts; and (vi) the Sachs-Warner index of openness to trade. The authors find strong associations between this index and output per worker. This result holds after controlling for educational attainment and capital per worker, and—in order to uncover causal relations—after instrumenting by the fraction of the population speaking a Western European or the English language, and the predicted trade share of an economy. 92 Putnam, 1993. Differences in values and beliefs, historically deeply rooted, are for example held responsible for the diverging evolution of Italy’s Northern provinces and its mezzo giorno (Guiso et al. 2004). 93 Charron and Lapuente (2013) explore subnational divergences in quality of government (understood as control of corruption, impartial treatment of citizens, and government effectiveness) using newly created subnational data including over 70 European regions. They argue that a major factor explaining these regional differences lies in the consolidation of clientelist networks in those regions where elites were historically (seventeenth to nineteenth centuries) less politically accountable. 94 Identity, the aspiration to be part of a specific group by abiding to commonly shared norms of behavior, can be a driver of economic convergence. Akerlof and Kranton (2000, 2010) developed this approach, which they call identity economics. Bénabou and Tirole (2006 and 2007) argue along similar lines. 95 Nannicini et al., 2013. This confirmed Banfield, 1958. 96 Granovetter, 1985. 97 Hoff and Stiglitz, 2005 and 2015.