know - how, will be seen again in the near future. that is why the tfp will ultimately prove to be the major determinant of longterm convergence. for us as policy makers, understanding the determinants of technology adoption, the tfp growth, is the key, as this gives us the channel to act through. there is an increasing number of theories and empirical papers linking development and the adoption of technologies to the role of institutions defined in a very broad way. and data support such outcome, here on a sample of emerging market countries. there is a strong positive relationship between quality of institutions and human capital on one side and growth on the other. furthermore, in the context of new eu member states, countries with better institutions tend to withdraw more eu funds, which is another channel through which the government can help to increase the growth potential of a country. when it comes to quality of institutions, developments are not encouraging. if quality is proxied by world bank ’ s worldwide governance indicator, there has hardly been any convergence towards germany, which can arguably be used as a benchmark. notable exceptions are the baltic countries where we have seen positive developments also in the aftermath of global financial 1 / 2 bis central bankers'speeches crisis. cee countries also lag behind when it comes to the quality of human capital compared to those eu countries that achieve the best results in pisa test in math and science ( finland, sweden, austria, and germany ). developments over time are also not encouraging as in many countries the pisa results have actually worsened during the last decade, which is a phenomena not confined only to the cee region, but to the wider europe. such developments are on the one side worrisome, but on the other give us the opportunity to streamline and speed up reforms because potential gains can be substantial. european commission has estimated that structural reforms that close only half the gap with best performers in different areas ( market competition and regulation, r & d expenditure, skill structure, tax structure, labour market participation, unemployment benefit ‘ generosity ’ and active labour market policies ), which does not appear to be overambitious, could have significant macroeconomic effects. the level of gdp in 10 years after the reform would be around 7 % higher in the cee countries and around 12 % after 20 years compared to the “ no reform ” scenario with effects on employment reaching a similar magnitude. the imf also points to significant benefits of structural reforms in terms of t

open market - oriented economy and to promote private and entrepreneurial initiative in all 26 of its countries of operation ”. ( ebrd, 1999, p. vi. ) if we agree that human capital is so important in transition, i ask myself how we can achieve this ambitious goal without knowing more about the level and development of human capital in its countries of operation? does the ebrd have a set of measures of human capital in transition countries ( both cross - country and time series ), maybe invent a new index on human capital ( like the broadly quoted one for privatization ), a separate chapter in the transition report? please, let me assure all ebrd governors, management and staff that these remarks are made only in good faith in the hope that we will all reflect upon them a little bit. in a more general framework let us ask ourselves the following question : have we done enough in the past to achieve this goal? i doubt whether a lot of people in this room ( and policymakers in transition economies in general ) will say yes without hesitation. based on the experience in my own country, croatia, i would say that we have unfortunately somewhat neglected the development of human capital in the last ten years of transition. b ) social capital new literature is trying to explain the complexities of various phenomena by social capital ( collier, 1998, fukuyama, 2000 ). it is clear that for growth we need not only physical and human capital, but quality social capital as well. social capital can be described as features of social organisation, such as norms, trust, networks, etc., that facilitate coordination and cooperation among the group for the mutual benefit of the group. a group can be anything from a household to the nation. in the production process it is an addition to physical capital ( machines, tools ) and human capital ( accumulated knowledge ). social capital can enhance the benefits of both investments in physical and human capital. one may distinguish between government social capital and civil social capital. government social capital encompasses government institutions that influence people ’ s ability to cooperate and get mutual benefit out of it. examples are : the rule of law, enforceability of contracts, civil liberties. civil the original latin saying is : navigare necesse est, vivere non necesse est. social capital includes : common norms, values, informal groups or networks that influence the ability of people to work together. both of them resolve, i. e. overcome the collective action