By Dr Ejike Udeogu, Assistant Professor of Economics
In 2004, the European Union welcomed ten new member countries, known as the “A10.” People hoped this would spark strong economic growth. Joining the EU gave these countries access to the world’s biggest single market and encouraged important reforms. And indeed, over the following years, these countries experienced impressive economic progress.
But what exactly drove this boom? Was it the flashy rise of financial markets—the stock exchanges, bond markets, and investment vehicles? Or was something less visible but far more powerful at play?
Our recent study explores this question. We looked at data spanning over two decades (1997 to 2020) to understand how financial development affected economic growth in these transitioning economies. The headline? It turns out that strong financial institutions—the banks, regulatory bodies, and the frameworks that govern them—matter far more than the growth of financial markets alone.
Think of financial institutions as the backbone of an economy. They provide the stability, trust, and infrastructure businesses and individuals need to borrow, invest, and plan for the future. Financial markets are important too—but they function more like the visible face of finance, relying heavily on the strength and reliability of those underlying institutions.
Our research shows that improvements in the depth (how much financial activity is available), efficiency (how well institutions allocate resources), and access (how easily people can use financial services) of these institutions were the real engines of growth. Financial markets did contribute but in a much smaller way, mainly through improving access to finance.
Why does this matter? Because conventional wisdom often champions financial market expansion as the key to growth, especially in emerging and transitioning economies. But our findings suggest that without strong institutions—robust regulations, transparent governance, and effective oversight—market growth alone can be fragile, even risky.
The A10 countries had to overhaul their financial systems to meet EU standards. This meant strengthening banks, improving regulatory frameworks, and increasing transparency. These institutional reforms created an environment where finance could truly support the real economy, rather than just speculative activities.
For policymakers in emerging economies today, this lesson couldn’t be clearer: building strong financial institutions isn’t just red tape—it’s the backbone of lasting growth. Focusing on improving the quality of institutions, rather than just expanding markets, might not grab headlines, but it creates a more resilient economy, boosts investor trust, and promotes growth that benefits everyone.
In short, joining the EU was about more than just opening borders—it was about building trustworthy financial systems that help economies grow from the inside out. If we want to understand how finance fuels growth, the story is clear: institutions matter most.
*Read the full research article at: