5 - Policy Response and the Role of Institution-Building

Summary

From an economic perspective, the statist centrally planned system had come to the end because of the lack of ability to adjust. The changing environment of the world economy became a more demanding and thus rigid, inflexible system, enmeshed in numerous distortions, proved to be unable to improve its competitiveness. Whereas on the one hand globalization brought a threat for countries unable to adjust, on the other hand it brought also a chance to overhaul an inefficient system. In addition to growing internationalization of economic links, the ongoing technological progress together with vast political changes were critical catalysts in deciding that the time for comprehensive transition had arrived. Otherwise it would have been difficult (if possible at all) to adjust to growing development challenges and to take advantage of increasing chances for long-term expansion. Therefore, two issues have emerged.

First, initially the policies must tackle these new challenges within the framework of inherited old institutions. The institutions, i.e., the rules and the organizations that help to comply with these rules, always matter in economies in transition to a market system. But, within the wider concept of the meaning of institutions, the market culture and behavioral aspects of market economy ought to be looked at also. Hence, in transition economies—even if the law regulating the rules of an emerging market economy has been already adopted, and even if the organizations assisting the observance of these laws have been established—there is still a challenge of market culture and behavior, which are lagging behind the requirements of a sound market system. This culture is also a function of learning by doing, and it takes time everywhere, including the postsocialist societies. Yet it must be admitted that on a historical scale this process of learning by doing is going reasonably fast.

Second, as time is elapsing, these very institutions must be changed for the purpose of facilitating the policies. While in the long run the quality of institutions, and thus their short-term ability to support the course of actions, is a matter of policy, in the short run time the institutions are given. Hence, the policies carried out must be performed within the limits imposed by the existing institutional arrangements. In another words, there were—and to a degree still are—policies that cannot be implemented in transition economies because of institutional weakness.