From Economics of Transition to Economics of Institutions'

1
From Economics of Transitionto Economics of
Institutions.

• Gérard Roland
• UC Berkeley

2
Introduction.

• Economics of institutions, for a long time
  outside the mainstream despite the influential
  work of North, Williamson and others, is now in
  the mainstream.
• Acemoglu, Johnson and Robinson (2001) article
  The Colonial Origins of Comparative Development
  An Empirical Investigation is one of the most
  cited economics articles of the last 20 years.
• I want to argue that the transition from
  socialism to capitalism and the lessons from that
  experience have played an important role in
  bringing institutions to the mainstream.

3
The transition experience.

• The transition form socialism to capitalism was
  (and is), beyond its policy importance, a unique
  opportunity to test our understanding of the
  capitalist system since the transition involved
  the sui generis establishment of the capitalist
  system.
• Interest in transition in the early stages was
  mostly policy-oriented because of the expectation
  that the existing body of knowledge in economics
  was sufficiently advanced so that transition
  would mainly be implementation of existing
  theories.

4
The transition experience.

• The Washington consensus
• Liberalization (markets)
• Privatization (incentives)
• Stabilization (stable macro environment).
• Seemed very reasonable for anybody who has
  studied economics.
• However,there were many unexpected surprises.

5
First surprise output falls after liberalization!
6
First surprise output falls after liberalization!

• Strong difference in performance between three
  groups of countries!
• Output fall after price liberalization was puzzle
  for economic theory. All the more surprising
  given the high inefficiencies under socialism.

7
The output fall puzzle

• Standard theory (general equilibrium) could not
  explain the output fall or differences in output
  path.
• Explanations based on imperfections in
  institutional environment (Blanchard and Kremer,
  1997) or on absence of markets and contractual
  considerations (Roland and Verdier, 2000) solved
  the puzzle (see e.g. Konings and Walsh, 1999, and
  others).

8
Further transition surprises.

• Privatization led in many cases to
  asset-stripping.
• Stabilization was often unsuccessful because of
  soft budget constraints (Russia).
• Huge difference in outcomes between countries was
  very unexpected.

9
The transition surprises.

• Transition policies were different in Asia
  compared to Central and Eastern Europe.
• However, there were no significant differences in
  policies between Eastern Europe and Central
  Europe. Policies alone could not explain the
  Great Divide between Central and Eastern
  Europe.
• Institutional differences appeared to play a big
  role.

10
The evolution of the unofficial economy as a
share of GDP in selected transition countries.
Source Johnson, Kaufmann and Shleifer (1998).
11
(No Transcript)
12
(No Transcript)
13
(No Transcript)
14
Questions

• Once established the importance of the difference
  in institutions in the Great Divide, many
  questions are still raised
• How to explain different institutional evolutions
  ? Why do some countries adopt better institutions
  than others?
• Which are the institutions that really matter
  (legal, political, cultural) and how?
• How to replace inefficient institutions by more
  efficient ones?

15
The influence of transition economics.

• Transition has contributed to a general shift in
  economic thinking taking contracts and
  transactions as object of analysis (output fall
  puzzle).
• Abuse rather than exchange is the core problem in
  contracting (mafia, corruption, predation) gt
  first order importance of protection against
  private and public abuse
• Transition has shifted emphasis in age-old
  controversy on size of government. Emphasis on
  effects of organization of government on
  effectiveness of public good provision
  (democracy, federalism, presidentialism, checks
  and balances).

16
The influence of transition economics.

• Political sustainability of institutions and need
  to build support for continuous reforms and new
  institutions, taking into account political
  constraints (key in transition, standard idea
  now)
• Transition has helped overcome a naïve view of
  institutions as easily imported and exported.
  More serious thinking is now devoted to thinking
  about historical and geographical adequacy of
  institutions. The Chinese experience is a very
  serious spur!
• Transition has generated interest in idea of
  benefits of flexibility of institutions relative
  to commitment.

17
The influence of transition economics

• Transition has put to the forefront enforcement
  issues, not just formal versus informal
  institutions.
• Transition has renewed interest in the difficult
  topic of complementarities between institutions
  and the consistency of an institutional system.
  Problems of institutional transplantation linked
  to this.
• Transition has forced to think about institutions
  in a dynamic way the conditions for change or
  their absence, how momentum for change is
  created, how existing institutions can help or
  block change.

18
Conclusion.

• Research agenda for the new comparative
  economics
• Comparative analysis of legal institutions (civil
  law and common law)
• Comparative analysis of political institutions
  (presidential, parliamentary, electoral systems,
  degree of federalism)
• Comparative analysis of culture
• Interaction between these different institutions
  and effects on institutional evolution and change.

19
Conclusion.

• The transition experience has contributed to
  bring the economics of institutions into the
  mainstream due to the first order effect of
  institutions.
• At the same time, it has raised new questions
  about how institutions emerge, evolve and change
  and how they interact.
• Much future thinking will go not into how
  important institutions are but how to better
  understand them and better think about them.