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The Nature of InstitutionalChange in TransitionRasto OvinPublished online: 19 Aug 2010.
To cite this article: Rasto Ovin (2001) The Nature of InstitutionalChange in Transition, Post-Communist Economies, 13:2, 133-146, DOI:10.1080/14631370120052636
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Post-Communist Economies, Vol. 13, No. 2, 2001
The Nature of Institutional Change in Transition
RASTO OVIN
Abstract
Contemporary empirical evidence of transition in Central and East Europeancountries proves the importance of institutional change, as was claimed by advocatesof this � eld of transition. The article assesses institutional change in the � rst phasesof transition from the perspective of competing strategies: rapid changes versusgradualism. After pointing to some inconsistencies in this debate, the article dis-cusses the possibility and prospects for development of a market for institutions inEuropean transition countries. The main criterion which is used is the requirementfor the rule of law as one of the foundations of a market economy. It concludes thatundeveloped endogenous factors of institutional change still do not enable develop-ment of markets for institutions. Reluctance of national governments to act accordingto a long-run perspective is at present to a certain extent compensated by thepresence of external factors of institutional change.
Recent macroeconomic data for even the most progressive Central and EastEuropean countries demonstrate problems with the achievement of a sustainableinternal and external economic equilibrium. This supports the conclusion that factorsof initial growth such as liberalisation and macroeconomic stabilisation have beenexhausted and cannot ensure sustainable growth. Apart from foreign direct invest-ment (FDI), the contribution of privatisation to domestic GDP has been rathermodest. The thesis of this article is that insuf� cient contribution of disposableresources is a result of an inappropriate policy on institutional change. The startingpoint is that the gradualist approach applied to institutional change hindered evol-utionary development of institutions as it favoured government intervention at thecost of development of markets. In this way also economic agents were excluded aspossible bearers of costs of institutional change. The article concludes with adiscussion of the elements and possible functioning of markets for institutions, whichwill shape the institutional environment in these countries in the future.
When using empirical examples, we will focus on East Central Europeantransition countries. In order to gain consistency (especially in our � nal discussion onemerging markets for institutions), we will concentrate on transition countries whichin the period before the communist project experienced a Central European develop-ment pattern of democracy, rule of law and market economy and are now in the � rstgroup of the planned EU enlargement. In our discussion this group of ‘progressive
Professor Rasto Ovin, University of Maribor, Faculty of Economics and Business, Razlagovaul.14, p.p. 142, 2001 Maribor, Slovenia.
ISSN 1463-1377 print/ISSN 1465-3958 online/01/020133-14 Ó 2001 Centre for Research into Post-Communist EconomiesDOI: 10.1080/14631370120052636
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transition countries’ (PTC) will include the Czech Republic, Hungary, Poland andSlovenia.
Our assumption will be that the PTC nations have decided to follow a modelwhich can be called a Western European pattern and to join integration processes inEurope—here meaning ‘returning to Europe’, as often stressed by candidates forenlargement. In this way we will skip the criticism warning that with this approachbig differences between two development patterns are neglected (Van Ees &Garretsen, 1994; Lichtenstein, 1996; ZÏ upanov, 1997; Bauer, 1998). We will excludethe possibility that these states could form another community, like a deepening ofthe CEFTA. Also ruled out will be the possibility of their own way (like Switzer-land) or even restoration of former multinational states (Soviet Union, Czechoslo-vakia, Yugoslavia). Although the article will often use a theoretical approach, themain emphasis will be on issues of the economic policy of transition.
Importance of Institutions and Conditions of Institutional Change in Transition
We will consider institutions as ‘composed of formal rules, informal constraints, andcharacteristics of enforcing those constraints’ (North, 1992, p. 477). The distinctionbetween formal and informal (North, 1990) and respectively external and internalinstitutions (Lachmann, 1971) will be considered. Consequently, from the point ofview of economic agents there will be a difference between institutional environmentand institutional arrangements (Davis & North, 1971) and between general socialrules and particular organisational forms (Rutherford, 1994). The � rst sort ofinstitutions is considered as a public good and can be imposed externally by the stateor in the process of negotiating in the market for institutions between partiesconcerned (they can be divided into suppliers and demanders of institutions). Thesecond sort of institutions result from internal arrangements between economicagents and are not a public good. Their emergence and form re� ect the historical,cultural and economic experience of parties concerned. They are limited by formalinstitutions. There is also a difference between formal and informal institutions inrespect of institutional change: while formal rules can be changed overnight bydiscretion, informal constraints change very slowly (North, 1992, p. 477). When wespeak about institutions in this article we mean formal institutions.
It has often been stressed that today mainstream neo-classical economics, with itsbasic assumptions such as maximising behaviour, stable preferences and marketequilibrium, neglects the importance of learning processes, institutional choice andtransaction costs, which are especially relevant for the analysis of the transitionprocess (see for instance Pejovich, 1998, p. 4). Therefore, in order to explain theeconomic phenomenon of transition, neo-classical economics must be combined withtheories which can offer solutions in the � elds it neglects.
For this we can turn to the new institutional economics,1 be it an extension ofneo-classical theory to the study of institutions (Van Ees & Garretsen, 1994;Rutherford, 1994) or a reduction of institutionalism to questions of rational choiceand methodological individualism (Lichtenstein, 1996). Despite differences betweenthem, the new institutional economics appears as an amalgamation of severaltheories, including the property rights theory of Coase, evolutionary theory fromAlchian, Nelson and Winter, the transaction cost theory of Williamson, the contractand organisation theories of Alchian and Demsetz and the economic theory of socialinstitutions developed by North. The difference between classical (original) institu-tional economics and new institutional economics could be brie� y described by
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The Nature of Institutional Change 135
saying that, unlike the former, the latter adopts the same individualistic, rationalisticand hedonistic methodology as neo-classical economics (Lichtenstein, 1996, p. 244).Focusing on the role of the state in the supply of institutions as a public good, thecontractarian constitutionalism of Buchanan offers useful answers to transitionissues. In the � rst phases of transition the constructivist approach of Eucken’sordoliberalism also offers solutions for conditions where we have an almost completedissolution of the rules of the former system.
Path Dependence and Universalism as Sources of Misunderstanding
As transition is not just an economic phenomenon, the path dependence approach hasno doubt represented a very useful method of explaining social determinants of theprocess (North, 1990; Lichtenstein, 1996; Rapaczynsky, 1996; Chavance & Magnin,1997). It offers answers to the question how values and norms could in� uence thedevelopment of informal institutions, which then, through the interaction thesis(Pejovich, 1997, 1998), de� ne the cost of change to desired formal institutions.According to the interaction thesis, enforcing formal institutions without consideringinformal institutions brings risk to institutional change, as we just replace the oldcon� ict between formal and informal institutions with a new one (Pejovich, 1997, p.249).
However, the problem with the PTCs arises when we have to decide whichperiod of these nations’ experience we should consider when applying path depen-dence. Western analysts like to assign great importance to the socialist period, whichhas its reason, since it has been subject to change. This starting point, however,brings unnecessary risks into the analysis where the PTCs, and especially the formerCzechoslovakia and Slovenia, which have always been close in terms of develop-ment indicators, are concerned. One should not forget that between the two worldwars these states were not much behind the European average in terms of their levelof development. Italy or Spain, not to speak about Greece, Ireland or Portugal, wereno match for Czechoslovakia at that time (for comparative data see Kaser & Radice,1985). This then implies the conclusion that their social and economic model was notinferior to other European countries. The second problem is methodological: as thesocialist system was imposed from outside as a result of the defeatist Yaltaagreement, it cannot be considered the result of any path dependent development. So,if we are not careful, by applying the path dependence analysis to the PTCs transitionchances and strategy we are actually applying double criteria—one for the periodafter 1945 and the other for the period after 1989. We could easily miss the point ifin path dependence analysis of the PTCs we consider just the four decades ofcommunist experience and rule out the centuries of the preceding Central Europeanpattern of development in which they participated.
These facts not only point to the need for consistent use of the path dependencemethod in analysis of institutional change in the PTCs, but also warn against thequite popular universalism (thus committing the same omission as the ‘a priorism’of the neo-classical analysis). In most theoretical as well as policy discussions,probably wishing to make things more understandable to the Western reader,economists like to give a universal view of the transition. China’s gradualism isopposed to the shock therapy in Poland or Slovenia’s transition perspective iscompared with Russia. Such analysis lacks the very historical component de� ningcultural, social and economic experience which represents a foundation of the pathdependency perspective itself.
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In comparison of different transition strategies between PTCs another form ofuniversalist approach is present. Without analysing individual � elds and transitionmeasures, economists like to consider the Czech and Polish strategies as a Big Bangtransition strategy—meaning � rst of all the stabilisation strategy in Poland and theearly beginning of voucher privatisation in the Czech Republic. On the other hand,Hungary’s transition policy is a synonym for gradualism. A more detailed analysis,however, shows that talking about shock or gradualism is irrelevant if we do notde� ne which transition area we are considering. Therefore it is useful to challengelabels for transition strategies as they are attributed to PTCs (Hoen, 1996). Amongthe countries named, for instance, in some important respects Hungary was moreradical than Poland and the Czech Republic (strengthening bank lending criteria,bankruptcy law) and consequently in some cases both ‘fast reformers’ were equallyor even more gradual than Hungary (liberalisation of the labour market and restruc-turing through the Consolidation Bank in the Czech Republic, privatisation inPoland). The most striking recent example is the reluctance of Polish governmentsto adjust to EU standards and opening in the agricultural sector. Although known fortheir gradual changes, Hungary and Slovenia on the other hand are much furtherforward on the agenda and seem to be annoyed by the set-back that Polishgradualism may cause to the enlargement process. In this case the reason fordivergent points of view is differences in agricultural productivity, rather thandifferent transition strategies. So as to avoid inconsistent universal conclusions wemust therefore beware differences in conditions and individual � elds of transition.
Big Bang or Gradualism?
Transition actualised two opposite strategies, which are well known from thestabilisation debate: Big Bang versus gradualism. We will enter this discussion fromthe point of view of institutional change. Where institutional transition is concerned,this debate actually derives from the question whether measures of transition policyare to be considered as reforms or as transitionary changes.
In respect to economic policy reform means a change of an instrument or limitedgroup of instruments. It corresponds to gradual changes. Applied to institutionalchange and using North’s expression, reform means a ‘gradual institutional changeoccurring through continuous marginal adjustments’ (1990, p. 101). Owing to thefact that transition is everything but ‘continuous marginal adjustments’ the termreform does not really seem appropriate. Here Brennan’s & Buchanan’s (1985, p. 11)distinction between constitutional design and constitutional reform is useful. The � rstcase is relevant for conditions where there are no effective pre-existing rules, whilethe second refers to the change of an existing rule.2
Although extremely widely used in such a way, the term ‘reform’ does notcorrespond to the nature of the transition process.3 This is especially true ofinstitutional change, as the withdrawal of the institutions of the command order wasby no means orderly and steady—e.g. they were not abandoned gradually. For thisreason the basic institutions cannot be completed gradually—if we want to introduceand preserve the rule of law. Unlike in a market economy, where reforms are appliedas corrections in limited � elds while other � elds continue to function, in transitionwe have to cope with a situation in which, owing to the disorderly dissolution of thecommand system (which in its life-time never really became a self-reproducingsystem), an institutional vacuum appears. Only a small part of the former institutions
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The Nature of Institutional Change 137
can be used and new institutions must be introduced. So we have a situation whereno effective pre-existing rules exist.
Change of institutions is not only very extensive but also requires complexcoordination, here meaning Eucken’s principle of the interdependence of rules,according to which every (new) institution will in� uence economic life only ininterdependence with other institutions (Eucken, 1968, p. 221). In respect to basicinstitutional pillars of the market economy, the required institutional change in a PTCtherefore cannot be described as reform, but rather has the character of a revolution-ary change.
Up to now the transition debate has shown a contrasting picture in which, whentransition policy was proposed by neo-classical economists, the focus was onmacroeconomic stabilisation and on a more or less Big Bang strategy (for instancethe initial Washington consensus). On the other hand, advocates of a Keynesianapproach and the majority of economists in the countries concerned seem to prefergradualism.4 This allows the simple conclusion that proposed transition policy wasin� uenced by economists’ standing regarding the role of the state in general. Thiscan be proved also by the fact that, when advocating a certain approach, authors liketo apply this approach to all � elds of transition.
The privatisation issue may serve as an example which explains the abovestatements. Privatisation in transition states differs greatly from the same process inWestern economies in the 1980s. In transition countries the counterpart of theWestern public sector was state-owned enterprises. State control aimed at completecontrol over social and economic life. It often led to mismanagement, which couldnot be controlled via the political process (for interesting analyses see Comisso,1991; Pejovich, 1992 and ZÏ upanov, 1997). A further difference from the Westernprivatisation experience is the dimension of this process in transition countries. Thisthen emphasises the importance of the institutional solutions in the � eld of privatisa-tion in transition countries.
Furthermore, the topic also requires a distinction between the act of privatisation,the process of privatisation and privatisation of publicly owned enterprises.
· The privatisation act in a transition country cannot serve as a magician’s wandfor introducing private property rights by � at, but must � rst of all (i) ensure thelegal foundation of any property rights and (ii) prevent robbery of nationalwealth through spontaneous privatisation. So it is to be considered predomi-nantly as an element of the rule of law (compatible with all transition goals) andshould be introduced rapidly.
· Unlike this, the privatisation process cannot be limited just to a privatisation actbut actually consists of acquiring, abandoning and using of property rights. It isde� ned through the economic behaviour of economic agents. As they actaccording to a time-consuming learning process and by processing information,privatisation as an economic process can only be evolutionary. While the � rstcategory (the privatisation act) refers to a change of formal institutions, thesecond represents a process of adjustment and emergence of new institutionalarrangements in a new institutional environment.
· Certain capacities, such as steel and energy production, telecommunicationsetc., in the � rst phases of transition usually remained state-controlled, but in thecourse of the transition process were reorganised into a public sector. It is onlyhere that transition economies � nd themselves practically in a position similarto the one which the West experienced at the time of privatisation in the 1980s.
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According to the experience of industrial economies, privatisation of the publicsector follows after extensive preparations, which are individual for everysector. Therefore in this form privatisation is also a gradual process.
So we can conclude that privatisation in a transition country requires at the sametime both typical Big Bang measures and a gradual approach and is subject toevolutionary development.
Although it is not a matter of a typical Big Bang versus gradualism debate, theEU enlargement de� nitely includes both strategies. It is now clear that to completethe enlargement they seek both sides will have to undergo institutional change. Fromthe point of view of the EU up to now preparations have been subject to coordinationand search for compromises and were therefore gradual. From the point of view ofan individual PTC, however, institutions are changing in a rather Big Bang manner.First, the new EU candidates are policy takers rather than policy makers on this issueand, second, they must adjust their legislation according to a common scheme (forinstance the Association Agreement) and do not have much possibility to concludeindividual arrangements.
Institutional change has microeconomic consequences. Therefore transitionstrategies such as rapid changes and gradualism should also consider microeconomicanalysis. We will shortly point to the transaction costs analysis and transaction-speci� c investment respectively.
By the term transaction costs we will understand the costs of negotiating,monitoring and enforcing exchange between economic agents. Firms will reducetheir transaction costs through adjustment of organisational form, through negotia-tions with their partners and through transaction-speci� c investment (Williamson,1989, 1991). We will consider that transaction-speci� c investment takes place in acertain time period and, like every investment, is future-oriented and risk-con-ditioned. In a transition country these processes will no doubt be de� ned throughtheir institutional setting and thus through the strategy of institutional change (Ovin,1998) in the way presented below.
Transaction-speci� c investment aims to reduce transaction costs and rests onassessment of the future and expected business environment, including the institu-tional setting. Economic agents will consider and try to avoid risk in their trans-action-speci� c investment before they make their investment decision, but will usetheir real power to prevent changes which would raise the costs and risks of theirpresent investment in the future. So de� cient and partial institutional change, which,however, serves to minimise political risk for transition governments, will in thefuture enlarge the risk and the dimension of resistance of economic agents withrelevant transaction-speci� c investment based on expectations. These may becomewrong because gradually emerging institutional change is other than anticipated. Thisrisk would be minimised through fast initial institutional change in the early stagesof transition (minimum Big Bang). In such circumstances the economic agents’initial choice of institutions would actually be smaller and would be channelledtowards transition goals. If this initial institutional change considered the previouslydeveloped norms and values which were promoted in the former system, plus thePTCs’ interest in EU access, the risk described by the Pejovich interaction thesiscould be reduced. Through adjustment in the sense of transaction-speci� c invest-ment, economic agents would then actually support the direction of transition,internalise certain transition costs, lower its social costs and raise the costs of freeriding.
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The Nature of Institutional Change 139
The Nature of Institutional Change
The discussion in the preceding section has, hopefully, clari� ed some views whichare relevant for institutional change in transition. It may lead to the conclusion that,owing to their historical experience and the importance of the minimal institutionalsetting for the functioning of a market economy, there are reasons for initialinstitutional constructivism in PTCs.
Based on conclusions presented above, this section analyses conditions forinstitutional change in a PTC compared with a market economy. From this compari-son the analysis of applicability of the economic theory of institutional change forinstitutional change in a PTC is then derived.
Institutional Change in a Market Economy
In the economic theory of institutional change the latter should occur following thethree phases or areas of explanation. They are (see North, 1990, and for a shortsystemisation Rosenfeld, 1997, pp. 292–296):
· The area of change inducement explanations, when agents of institutionalchange judge the relation between their costs with the institutional status quoand their expected costs of institutional change, and therefore may consider apossible institutional change. This judgement is driven by changes in so-called‘situative factors’ (institutions, price relations, income, theories, ideologies andpreferences).
· The area of individual choice explanations, where actors judge and react to theinduced institutional change, again from the point of view of the (possiblychanging) relation between the status quo costs and the costs of institutionalchange.
· The area of public choice explanations, according to which institutional changederives from cost-effective transactions on the institutions market betweenchange demanders and suppliers.
The process of institutional change is summarised graphically in Figure 1, whichpresents the process in a developed market economy. In a system of institutionswhich are in general functioning and which have been developed and shaped to theircurrent form in the market for institutions, the changing situative factors (actually,experience in certain � elds) may cause the situation where the costs of the status quoexceed the bene� ts of the status quo. The existing experience with institutionalchange enables expectations that the bene� ts of an institutional change may exceedthe costs of that change. Aware of this process, individual actors in institutionalchange5 make cost-bene� t calculations so as to estimate the effects of a possibleinstitutional change (individual choice explanations). The following step is nego-tiation and market transaction on the market for institutions between actors who canbe distinguished as institutional change suppliers (usually parliament) and demanders(all other actors). The outcome of these transactions is then an institutional change.
From the point of view of our analysis it is important to underline the followingcharacteristics of institutional change in a developed market economy:
· The process takes place in an evolutionary environment—in a system offunctioning institutions; changes in the form of marginal adjustment relate topartial � elds of social (economic) life.
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Figure 1. Summary of the basic explanations of institutional change according to theeconomic theory of institutional change.
Source: Rosenfeld, 1997, p. 293.
· Agents in the process have also cooperated in creation of the status quoinstitutions. Their experience with the status quo institutions and their estima-tions of their costs and bene� ts are a result of their independent gathering andprocessing of relevant information.
· As it includes a market process, the process of institutional change is ratherstochastic: after some experience makes cost-bene� t estimations by certaininstitutions necessary (individual choice explanation), it is not predictablewhether the institutional change will be applied in the area where it started, howextensive it will be, or whether there will be a change at all.
Conditions of Institutional Change in a Transition Country
In the process of institutional change in a transition country the somewhat different
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The Nature of Institutional Change 141
factors involved in this change must be considered. In comparison with the changeprocess in a market economy they can be described as follows:
· Unlike in a market economy the process of institutional change takes place ina revolutionary environment. Here we mean that pillars of the legislation of theformer system must be entirely abandoned and replaced with new ones (systemof election and representation in democratic bodies, property rights, marketorder and so on).
· The former communist system did not emerge and develop through any processbased on economic rationality, path dependence or as an outcome of choiceamong alternative rules with different sets of outcomes (Buchanan, 1977). It didnot occur through any economically explainable bargaining and exchange in themarket for institutions but was imposed through political power, which tookadvantage of the Soviet role in the anti-Nazi coalition in World War II.
· As a consequence of the former system, individual agents do not have acomplete understanding of all existing strategies and pay-offs (Van Ees &Garretsen, 1994, p. 8) which are valid in a market economy. Therefore theiractions could oppose their real economic interest—e.g. that with a consistentand credible policy they will vote differently from the way they will withspontaneous development of institutions.
Let us now brie� y review what could be the real impact of the situative factorspresented in Figure 1 on institutional change in a PTC.
(1) Unlike in a market economy the existing institutional framework in a tran-sition country lacks ef� cient rules of the game for institutional change. Soexisting institutions (especially at the beginning of transition) have only alimited role as a changing situative factor in a transition country.
(2) As empirical studies have shown (ZÏ izÏ mond, 1997, 1998), price relations andrelative prices are subject to extensive change in a transition country. There-fore they can be expected to in� uence institutional change as a changingsituative factor as well as a transitionary factor (as explained below).
(3) Growth of income is an essential goal of transition. However, for a populationwho experienced an economy of shortage in the former system, economicgrowth represents a chance to improve individual wealth as soon as possiblerather than a condition for improving economic security in the long run. Thelatter is, however, connected with institutional change. Therefore the in� uenceof income growth as a changing situative factor is present, although it does nothave exactly the same character as in a market economy.
(4) Theories and concepts have a very limited role as changing situative factorsin a transition country. The decay of socialism took economists by surprise,there is a lack of empirical evidence to guide the transition process, andtherefore no consistent general transition theory exists. Apart from that,transition policies are seldom properly coordinated and so solutions based onopposing concepts may arise.6
(5) The dilemma between the still present collectivist perception and the individ-ualism and rationalism promoted by the transition has still not been solvedeven in PTCs. This is shown in the cyclical reappearance of reform-commu-nist parties in winning coalitions. However, it also turned out that, wheninstitutional change is in question, ‘new’ parties are often more conservativethan reformed ones. Besides, political parties are only now forming their
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pro� le in these countries.7 Institutional change in the political process isin� uenced not so much by a clear change of ideology as by the need ofpolitical parties to present economic and political life according to theirimages of a market economy. So for the time being, ideology in the strictsense in� uences institutional change in transition countries predominantlythrough outside transitionary factors (as explained below).
(6) The preference for developing a market economy in transition countries stillseems to be clear. However, big expectations at the beginning of transition arenow faced with growing inequality, rumours and facts about spontaneousprivatisation, delayed EU enlargement and so on. This of course in� uences thereadiness of the population for the market economy and EU accession.8
The above facts lead to the conclusion that changing situative factors as systemisedby the economic theory of institutional change have only limited in� uence in a PTC.Therefore we must seek additional factors which additionally trigger institutionalchange in a PTC. In order to explain the in� uence of these factors in the area ofchange inducement explanations, factors of transitionary change will be introduced.In a modi� ed scheme of the economic theory of institutional change they will beincluded separately from changing situative factors as their validity is limited to acertain period and they are subject to change in the course of transition developmentand will lose their importance as this proceeds.
From the point of view of the economy, factors of institutional transitionarychange will be systemised in internal and external factors. Internal factors whichmust be added to situative changing factors include institutional vacuum requiringinstitutional change and transition-driven change, which will result from governmentactivity. External factors refer to factors which exert their in� uence from abroad andare also not incorporated in external effects of situative changing factors. This meansthat they refer to outside in� uences which have become effective after transition hasstarted. Opening to international markets and accession processes generate threetypes of factors. Technologically and environmentally driven institutional change(standards) means direct import of institutions. Adjustment to relative prices triggersnot only changes in institutional arrangements but also change of institutionalenvironment. In accepting the Acquis communautaire, the PTCs also accepted directin� uence of the EU on their institutional change in the association process. Reor-ganised in this way, a modi� ed scheme of institutional change in the PTC ispresented in Figure 2.
The separate location of factors of transitionary change corresponds to their rolein institutional change in a PTC. They should � rst be considered as additionalfactors. Secondly, their in� uence on institutional change is stronger than oftenassessed by actors of institutional change. It may happen that the � rst calculationwithin the process of individual choice may be in favour of a status quo andconsequently against institutional change. However, the learning process may enableanother calculation, in favour of change, in the next phase.9
Concluding Remarks
The nature of institutional change in a transition country must be distinguished fromthat in a market economy for two main reasons. The � rst is the underdevelopmentof actors as a consequence of the former system and their weak competence in this� eld. This means that the decision dilemmas of actors which are present in a market
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The Nature of Institutional Change 143
Figure 2. Summary of the basic explanations of institutional change in a PTC.
economy (cooperation versus competition, openness versus closure, governabilityversus � exibility and accountability versus ef� ciency—see Jessop, 1997, pp. 119–120) must be combined in a transition economy with actors’ capability of transac-tions in the market for institutions as discussed above. The second reason derivesfrom the fact that the current level of ef� ciency of institutions in PTCs is too low toexercise synergy effects on required and emerging new institutions. In this wayemerging institutions face an unfavourable environment for their spontaneous devel-opment. To overcome this the state must supply the minimum institutional frame-work. The European integration processes serve here as an anchor helping thedomestic government in introducing the institutions of the market economy. On theother hand, for a PTC striving for EU entry, it means an external cut in the timeavailable for the development of those institutions. In the language of the transition,
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this means that in this way numerous institutions of the market economy are subjectto rapid implementation.
Regarding the need for institutional change the position of governments in PTCsis unfavourable. They are restricted by their knowledge and by the knowledge andloyalty of the administration. Besides, in emerging democracies it is rather dif� cultto achieve the consensus needed for cooperation between different ministries withincolourful coalitions. Therefore, from a public choice perspective, the political risk towhich transition governments are exposed with institutional change is high.
In this way we again come to the basic dilemma of our discussion: what couldbe the government’s role in transition and institutional change and what is to be leftto processes in markets for institutions.
On the basis of the facts stressed in this article, we actually can come to the sameconclusion that derives from the proposal by Pejovich. When explaining his interac-tion thesis he suggests: ‘… instead of building capitalism by � at, East Europeangovernments should try to provide—admittedly by � at—a legal environment thatwould allow people to choose among alternative institutional arrangements, that is toparticipate in a market for institutions’ (1997, pp. 251–252). The decisiveness of atransition government in acting like this and taking the risk mentioned is then closelyrelated to its preference to serve short or long-run goals. As recent problems inachieving sustainable economic growth in PTCs show, transition governments (withthe possible exception of Hungary) have obviously opted for a short-run perspective.
Notes
1. From the point of view of its neo-classical basis we respect Eggertson’s term ‘neo-insti-tutional’ economics, but will here use just the term new institutional economics (T.Eggertson, Economic Behaviour and Institutions, cited in Rutherford, 1994, p. 182).
2. In the � rst case what is relevant is the choice between rules generating different sets ofoutcomes. The second case refers to the situation where the rule that generates the mostpreferred set of outcomes is not dominant (Brennan & Buchanan, 1985, p. 11).
3. The term ‘reform’ causes confusion also owing to the fact that it was extensively usedfor the cosmetic corrections of socialism from the 1960s (Colombatto & Macey, 1997,pp. 11–12).
4. Many in� uential East European economists are now of the elder generation and wereformed in the previous system. When required to take a position on real issues oftransition, they usually shun a solution which could represent ‘too direct’ a capitalist one.Most of them opposed the perversions of the former system but mainly from theillusionist perspective of a mixed economy, the Swedish social state and belief in theredistributional function of the state. The only ‘bourgeois’ economic theory which wastolerated to a certain extent was Keynesian economic analysis. This was obviously dueto its consideration of state interventionism (where a certain contact point with the policyof real socialism existed)—a conviction which today seems to nourish the popularity ofgradualism among Eastern European economists.
5. They include organisations of the following type (North, 1990, p. 4): political bodies(political parties, parliament, a city council), economic bodies (� rms, trade unions, familyfarms), social bodies (church, clubs, sport and other associations) and educational bodies(schools, universities, training centres).
6. In Slovenia the Anglo-Saxon model of privatisation and the role of � nancial markets inthis process are at the moment co-existing with the German model, which in� uenced theCorporate law and Law on labour joint governance (Mitbestimmung).
7. In Slovenia there are, for instance, two parties using the term ‘social democrat’. One ischaracterised as left-wing, the other as right-wing.
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8. Opinion poll research in the Association Agreement countries in 1992 showed that 80%of the population supported integration in the EU while 60% preferred the marketeconomy to the distributive economy. In 1997 only 61% of the population were forintegration and 56% preferred the market economy (Central Eastern Barometer, as citedin Dauderstaedt, 1998, p. 261).
9. According to the ‘Spanish compromise’, before entering negotiations with the EU in1997, Slovenia had to remove the article of her constitution prohibiting acquisition ofland by foreigners. Italy was then ready to lift her veto against Slovenia, thus enablingher to sign the Association Agreement in 1996. The rati� cation of the AssociationAgreement by the Slovene parliament was to be completed by July 1997. When thegovernment submitted the proposal to parliament in June 1997, it was labeled by theopposition as defeatist and was about to be rejected. As the deadline approached in July1997, the parties gradually softened their stand and the needed consensus in parliamentwas reached in time.
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