The robustness of the results is tested through several alternative approaches (see Section 4). First, the system-general method of moments (system-GMM) is employed to address endogeneity bias of the lagged dependent and explanatory variables.<sup>8</sup> The results (Annex 2) show that most of the structural determinants of labor are statistically significant. Although parameter estimates are not directly comparable, results seem robust from a qualitative point of view. The robustness of the results is also tested by enlarging the data set to more countries (extended model, Annex 3).

# **Capital Channel**

Table 5 reports the results for capital from the baseline model.

Pillar 1, as proxied by government effectiveness, is a statistically significant and robust determinant of capital deepening. This may likely work through the investment channel, since institutions are a decisional variable for any investment decision. Similarly, extensive and efficient infrastructure, as captured by energy consumption, Internet adoption, and infrastructure quality (WEF), turns out to be also positively associated with capital accumulation, especially in the extended version of the model (Section 4; Annex 3).

A reduction of entry barriers, especially tax rates and tariffs, and an improvement in regulatory quality also boost capital deepening. Irwin (2001) has argued that tariffs in late nineteenth century America may have discouraged capital accumulation by raising the price of imported capital goods. He also observed that productivity growth was most rapid in nontraded sectors whose performance was not directly related to a tariff. This suggests that more open economies may benefit from higher capital accumulation and deepening. Similarly, the EU accession dummy positively affects capital by facilitating capital mobility. Finally, an improved business environment, with a lower cost of doing business, stimulates capital deepening. The results are robust to expansion of the data set to more countries, and seem stronger for ECA countries, as captured by the interaction term.

**Table 5. Use of Capital, Baseline Model**

Dependent variable: log of capital stock ratio ln(K/Y)

||**(1)**<br>**RE**|**(2)**<br>**RE**|**(3)**<br>**RE**|**(4)**<br>**RE**|**(5)**<br>**RE**|**(6)**<br>**RE**<sup>a</sup>|**(7)**<br>**RE**|**(8)**<br>**RE**|**(9)**<br>**RE**|
|---|---|---|---|---|---|---|---|---|---|
||**1996-**<br>**2013**|**1996-**<br>**2013**|**1996-**<br>**2013**|**1996-**<br>**2013**|**1996-**<br>**2013**|**1996-2013**|**1996-2013**|**1996-2013**|**1996-2013**|
|**Pillar 1**||||||0.0628*|0.0468**|0.0414*|0.0511**|
|||||||(2.55)|(1.77)|(1.44)|(1.85)|
|**Pillar 2**||||||0.00005***|0.00005***|0.00005***|0.00005***|
|||||||(3.80)|(4.03)|(3.58)|(3.99)|
|**Pillar 3**|||||||0.0004<br>(1.11)|0.0006*<br>(1.35)|0.0007**<br>(1.70)|
|**Pillar 4**<sup>**b**</sup>||||||0.0282<br>(0.55)|0.0340<br>(0.65)|-0.0111<br>(-0.22)|0.0380<br>(0.71)|
|**Pillar 5,6**||||||0.0885<br>(1.03)|0.0176<br>(0.19)|0.0523<br>(0.53)|0.0192<br>(0.20)|
|**Pillar 7**||||||||||
|Tax rate|||||-0.395***<br>(-5.84)|-0.225***<br>(-3.66)|-0.193***<br>(-2.92)|-0.208***<br>(-3.10)|-0.187***<br>(-2.83)|
|Regulatory<br>quality||||||0.049***<br>(1.98)|0.0550***<br>(1.99)|0.0443*<br>(1.53)|0.0555**<br>(1.96)|

> 8 The instrument set is limited to one lag. The one-step estimator is used.

14