The two transitions in Central and Eastern Europe as processes of institutional transplantation.

Author:Zweynert, Joachim
 
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In the euphoria of the early 1990s the former socialist countries of Central and Eastern Europe (in the following: CE and EE) were generally expected to quickly turn into democracies with market economies. The experience of the last 15 years, however, has shown that only some of them (the Baltic States, Poland, Hungary, the Czech Republic, Slovakia and Croatia) have done so. With Russia, Belarus, Bulgaria, Moldavia, the Ukraine, Romania, and Serbia and Montenegro it is not yet clear where the journey goes. The increasing gap between the two groups of transition countries with regard to both their economic and political orders (see Kitschelt 2003) cannot be explained by their different starting conditions after the breakdown of the Soviet Union alone. (1) Rather it also has its causes in the cultural and historical circumstances shaping their particular traditions and societal environments. The experience of transition has strongly challenged the neoclassical paradigm (see Murrell 1991), and it has led to a growing awareness of the role of informal institutions in the process of institutional change, not only in institutional and evolutionary economics, but also increasingly in the mainstream. In view of the variety of transitional trajectories, the countries of CE and EE are now sometimes seen as prime examples of historical path dependence with the performance of individual countries "dependent on informal rules carried over from the pre-communist past" (Winiecki 2004, 143). As much as the idea of path dependence has contributed to a better understanding of transition in CE and EE, it should not be overlooked that when we speak of European history it is problematic to define individual national cultures which might have determined the developmental path of a given society, because there have always been strong mutual cultural influences among the European nations. In addition, the European nations developed in close political, military and economic competition with their neighbors. This competition repeatedly forced them to adapt to the institutional arrangements of their more successful neighbors. (2) This political dimension should not be dismissed lightly by one-sidedly referring to "cultural legacies." Undoubtedly, the study of the pre-communist past contributes much to understanding today's political and economic processes in CE and EE, but there is no good reason to neglect the impact of the socialist past.

This is not to say that the idea of historical and cultural path dependency is to be abandoned. However, the impact of historically and culturally determined trajectories can be better understood when seen in the context of and contrasted with the influence of political processes. Our attempt to achieve a better understanding of the interplay between path dependent and politically implemented institutional change in the transition countries is based on the paradigm of the transfer or transplantation of institutions (see Badie [1992] 2000; Polterovich 2001a; Djankov et al. 2003, 609-12; Oleinik 2005). The gist of this paradigm is that if formal institutions are transferred from one country to another, they mingle with the "soil" of the prevailing informal constraints of behavior and thought, which are shaped by the legacies of the past. The theory of institutional transplantation stresses the importance of political competition and the actions of political entrepreneurs on the one hand, and the significance of historical and cultural inertia on the other. This way, the theory of the transplantation of institutions helps to bridge the gap between "institutional monocropping," that is, "the imposition of blueprints based on idealized versions of Anglo-American institutions, the applicability of which is presumed to transcend national circumstances and cultures" (Evans 2004, 30), and the fatalistic assumption that the inertia of informal institutions makes it almost impossible to change the developmental paths of societies.

As the interplay between formal and informal institutions is at the heart of the paradigm of institutional transplantation, the starting point of our analysis is that history matters. Although this has now become a somewhat fashionable statement even within the neo-classically oriented new institutionalism, it too often remains pure lip service. In regard to transition, it is usually overlooked that in the course of the twentieth century the countries of CE and EE have gone through two transitions of their political and economic orders. Until World War II (WWII), the countries of CE had widely participated in the political and economic development of Western Europe (WE). As a result of the October Revolution and WWII they were forced to adopt the formal Soviet political and economic institutions. The voluntary acculturation to WE (which was also the result of political, military, and economic pressure) was substituted by a forced acculturation to the Soviet Union. After the breakdown of the Soviet Union in the late 1980s, all countries of CE and EE, including the former Soviet Republics, initially announced the desire to turn into democracies with market economies. Obviously, the two transitions in CE and EE were caused primarily by political events. We argue that historical and cultural factors also played a decisive role in both transitions, for they determined the degree to which the imported institutions could strike roots in the informal settings prevailing in the receiving countries.

The paper is organized in six sections. Following this introduction, the second section deals with the phenomenon of "culture" as a basis for human life and indicates how a cultural theory of economics could contribute to understanding the relationship between formal and informal institutions. In the third section we introduce two ideal types--the holistic and the extended order--that are basic to our understanding of the interaction of economic, political and cultural factors in periods of rapid institutional change. We apply our framework to the transition processes in CE and EE, in the fourth section of the paper. And in the fifth section, we briefly outline some conclusions for economic policy-making. Finally, in the sixth section, we offer our view of the political and theoretical problems before us.

A Cultural Theory of Economics as the Basis for Analyzing the Transition Problem

The difference between formal and informal rules emphasizes that within the reality of social order, elements of both planned and unplanned (i.e., spontaneous) order are to be found (see Hayek 1964 and 1973; Vanberg 1994, chap.7). Obviously, formal rules and habits of thought are not separate. On the contrary, they work together to form institutions that shape human interaction. A crucial element of economic development and transition lies in the interaction between formal and informal constraints of human action and thought. The following statement of John Dewey perfectly highlights the main problem of transition:

Any one with knowledge of the stability and force of habit will hesitate to propose or prophesy rapid and sweeping social changes. A social revolution may effect abrupt and deep alterations in external customs ... Political and legal institutions may be altered, even abolished; but the bulk of popular thought which has been shaped to their patterns persists. (Dewey, [1922] 1930, 31) Accordingly, the insight that future developments are tied to historical experience binds (formal) institutional developments to a specific time path, and the developing institutional structure of societies is subject to a "lock-in" or "path dependency." Historical events determine the direction of development in such a way that the first stage triggers a process that is self-strengthening and very difficult to reverse (see Arrow 2000; Magnusson and Ottosson 1997). The insight that individual action taking place during social and economic development can only be properly understood as being interdependent with other individual actions, within a specific social environment based on a specific development. Therefore, one can speak of a "socially embedded individual conception" as proposed by Mark Granovetter (1985).

Path dependency does not mean, however, that social development is determined by the past development of the society in question. If this were the case, rapid institutional change would be impossible. Rather, the theorem of path dependency underlines the significance of historical and social contexts, as well as the necessity to take these contexts into consideration in economic policy-making. As we argue in the fifth section of the paper, one of the prerequisites of successful political agenda setting is to be aware of the informal rules that form the soil in which newly established formal rules must take root. Specific institutional arrangements--and this is to be seen with transition processes--are not necessarily successful when transferred to other social environments. It is clear that path dependencies appear to be due mainly to informal rules. Because informal constraints are created through a long-term process, they provide "fertile ground" for path dependent developments.

New institutional economics was successful in shifting the focus away from the neoclassical question of the optimal allocation of specific resources. It still cannot explain sufficiently why in some places or periods of time, institutional change (often initiated by the "transfer" of institutions from abroad) adapted quickly to the challenges of economic growth, and while in other places or periods of time, obsolete institutions persisted for a long time and left no place for the successful implementation of new institutions. The genesis of culture and the set of constraints that are passed down from one generation to the next are hardly taken into consideration in this approach. Because of the long-term perspectives of cultural phenomena,...

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