A discussion of institution establishment and how it will bring positive change in Eastern Europe.
Written in 2002; 3,312 words; 26 sources; $ 94.95
Paper Summary:
This paper stresses the importance of institution building in Eastern Europe and the interaction between formal and informal rules as one of the possible explanators of encountered difficulties. The general situation in Ukraine is described, as well as the banking system.
From the Paper:
"The collapse of the Soviet Union bloc created an institutional vacuum in the whole Eastern Europe. Institutional change was seen as a key factor in solving problems. Three crucial issues were on the agenda at the moment: what and how institutions should be chosen, and how quick this process should be, as there was no possibility at that time to identify alternative institutional arrangements and assess precisely their consequences. The transition from socialism to capitalism made institutional restructuring indispensable. After the expiration of the socialist legal framework, new stable rules were required for carrying out interactions. In the then absence of formal rules people fell back on customs and traditions.
The West perceived the end of the communist rule as a clear vote for the capitalism. But it also assumed existence of the rational utility maximizers who would easily identify new opportunities, assess their consequences and allocate scarce resources in the best possible way. In my view transitologists tended to focus on the future rather than the socialist past, but failures of institution building in Ukraine have proved these approaches to be unrealistic and inappropriate in tackling the restructuring of institutions in CEE because, given incomplete knowledge and uncertainty, the importance of transaction costs, was not paid adequate attention to. Transaction costs are costs of resources necessary for the transfer of property rights from one economic agent to another, they include costs of making exchange and maintaining institutional structure. The calculation of costs did not include the costs for convincing people that the legal system was credible and stable, the cost of new institution-building and the costs of making people understand why the institutional restructuring was necessary or what was required for it. Also, according to Bossak, the frequent changing of rules, insecure property rights and restrictions on asset trading also increased such costs."
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