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Hare – Institutions and economic transition

Institutions and economic transition

Here are two extracts from Hare, Paul (2012). Vodka and Pickled Cabbage: Eastern European Travels of a Professional Economist , Kindle Edition. They highlight the importance of institutions and the adjustments required for institutional changes to give the desired results.

From Kindle Locations 4638-4639:

“…institutional reforms in the transition economies. Their importance was again often misunderstood or underestimated at the start of transition, at least in part because we teach so little about such matters in standard western-style economics courses.”

And to illustrate the point, this second extract is from Kindle Locations 821-841:

“Not only did we visit diverse companies, some of which were showing great initiative in tying up investment deals with foreign partners (and we were unsure whether this was yet legal), while others were doing little more than quietly decaying, but we also had a fascinating long meeting with senior officials from the Leningrad City Council. The first surprise was that of the new business-related laws that had been passed, we often had better knowledge than our hosts. We usually had the official Russian text plus a fairly good translation into English, whereas if Council staff has missed the relevant issue of Pravda (the Party newspaper) or Izvestia (the official Government newspaper), and if the Council’s Communist Party Secretary had not chosen to highlight a particular new measure, then the Council, in effect, knew nothing about it. The second surprise was that even if they knew about a new measure, the Council might not bother to implement it, or if they did, it might not be in the manner envisaged by the Government. For instance, the Council disliked some of the new business forms, or told us that ‘other councils’ did, and this could mean the imposition of fees to allow a firm to start up (no mention of such fees in the law), a refusal to make any premises available for new businesses, or various other obstructions.

At the end of our meeting, the officials asked us what economic reform we would recommend for Leningrad. We perceived that they wanted us to recommend a stock exchange, but to us this seemed a foolish notion, as there were not (yet) any assets to trade on such an exchange. Instead, we suggested they set up a court to handle business disputes between private parties, since private business seemed to us the likely future. The officials reacted as if we had just landed from another planet , and it was apparent that our advice would not be taken. However, what the Russians learned to their cost, in the ensuing years, was that this institutional vacuum would not go unfilled – business disputes would arise as private business blossomed, and means would be found to settle them. Sadly, the means – for a few years at least – was often a bullet. The Russian murder rate rose dramatically in the early 1990s, and part of the rise was due to the business community settling disputes – not very nice, but no doubt effective! By now, the situation has settled down a good deal and rather more civilised means for handling business problems have gradually evolved.”

Last updated 9 September 2014

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