The uneven results of institutional changes in central and Eastern Europe: The role of culture

Social Philosophy and Policy

Volumn 23, Issue 1, 2006, Pages 231-254

  Pejovich, Svetozar ^a  

^a TEXAS A AND M UNIVERSITY   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 33644917691     PISSN: 02650525     EISSN: 14716437     Source Type: Journal    
DOI: 10.1017/S0265052506060109     Document Type: Article

References (58)

1. The end of socialism in Central and Eastern Europe in the late 1980s opened the region to an influx of new ideas and opportunities. Indeed, everybody wanted a piece of the action. Overnight, former dissidents became political leaders and social innovators. The old ruling elite quickly forgot "the laws of history" and has been trying to find ways to retain power and influence. Western politicians saw an opportunity to extend the political and economic influence of their countries. Western businesses eyed new markets. Western scholars realized that social changes in C&EE were likely to create enormous opportunities for research grants, promotions, and publications in academic journals. In an about-face, many academics from the West who used to preach socialism, economic planning, and all sorts of industrial democracy schemes joined their free-market colleagues in supporting the process of transition to capitalism. In order to "strengthen" their grant proposals and submissions to academic journals, Western scholars needed cooperation from their colleagues in C&EE, and they had no problem getting that support. In exchange for funding, travel, and possible visiting appointments in the West, many scholars from C&EE were eager to join their Western colleagues on projects they privately considered irrelevant.
2. The twentieth century experienced two major applications of socialism: National Socialism, and Marxism-Leninism or communism. Those two brands of socialism were equally unrelenting in their oppression of inferior races and the bourgeoisie, respectively. It is perfectly legitimate to refer to C&EE countries as either former socialist or former communist countries.
3. See, for example, Jacob de Haan and Jan Sturm, "On the Relationship between Economic Freedom and Economic Growth," European Journal of Political Economy 16 (2000): 215-41;
4. Johan Torstensson, "Property Rights and Economic Growth," Kyklos 47, (1994): 231-47;
5. Douglass North, and Barry Weingast, "Constitution and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," Journal of Economic History 49 (1989): 803-32;
6. and Svetozar Pejovich, ed., The Economics of Property Rights (Cheltenham: Edward Elgar, 2001), vol. 2, part IV.
7. James Gwartney, "What Have We Learned from the Measurement of Economic Freedom?" paper presented at a conference titled "The Legacy of Milton and Rose Friedman's Free to Choose: Economic Liberalism at the Turn of Twenty-First Century," Federal Reserve Bank of Dallas, 2003, p. 3.
8. Ana Isabel Eiras, Ethics, Corruption, and Economic Freedom, The Heritage Foundation Lecture no. 813 (Washington, DC: The Heritage Foundation, 2003), 1.
9. Of course, neoclassical economics was mainstream economics in the 1990s (and still is); it is supported by the majority of economists as well as major organizations such as the World Bank. Perhaps the most prominent figure was Jeffrey Sachs.
10. Ronald Coase, The Firm, the Market, and the Law (Chicago: University of Chicago Press, 1988), 175 and 179.
11. Svetozar Pejovich, "After Socialism: Where Hope for Individual Liberty Lies," Journal des Economistes et des Eludes Humaines 11 (2001): 23-27.
12. The Federation of Serbia and Montenegro was ranked as repressive in the 2003 Heritage Index of Economic Freedom and was dropped from the index in 2004 for lack of information.
13. James Buchanan, "General Implications of Subjectivism in Economics," paper presented at a conference titled "Subjectivism in Economics," University of Dallas, 1976, p. 2.
14. Enrico Colombatto, "The Concept of Transition," Journal of Markets and Morality 4 (2001): 269-88.
15. For different definitions of culture, see Vernon Ruttan, "Cultural Endowments and Economic Development: What Can We Learn from Anthropology?" Economic Development and Cultured Change 36 (1988): 247-71.
16. Douglass North, Institutions, Institutional Change, and Economic Performance (Cambridge: Cambridge University Press, 1990), 37. Ernest Gellner defined culture as "a distinct way of doing things which characterizes a given community."
17. See Gellner, Plough, Book, and Sword (London: Collins Harvill, 1988), 14.
18. I refer to a constitution that is credible (i.e., protects individual rights de facto) and stable (i.e., difficult to change). Many constitutions (e.g., Soviet constitutions) are not worth the paper on which they are written.
19. Two major requirements for an independent judiciary are that judges expect their decisions to be carried out and that their jobs do not depend on legislators and/or bureaucrats. An independent judiciary should not be confused with a good judiciary. It all depends on the people who become judges.
20. Robert Barro, "Rule of Law, Democracy, and Economic Performance," in 2000 Index of Economic Freedom (Washington, DC: The Heritage Foundation and the Wall Street Journal, 2000), 47. In the West, the rule of law and democracy go together. However, Fareed Zakaria argues that a number of countries that have multiparty elections are, in effect, illiberal democracies; they do better on political liberties than on civil and economic ones.
21. See Fareed Zakaria, "The Rise of Illiberal Democracy," Foreign Affairs 76 (1997): 22-43.
22. Buchanan, "General Implications of Subjectivism in Economics," 8.
23. Alan Macfarlane, The Origins of English Individualism (London: Blackwell, 1979), 196.
24. See Deepak Lal, Unintended Consequences (Cambridge, MA: MIT Press, 1998), 83.
25. I thank James Buchanan for his comments on the extended family.
26. In a letter to the author of this essay, Professor Avner Greif wrote: " 'Maghrib' means 'West' in Arabic. During the medieval period and long after, the term was used to refer to the Muslim World's west: North Africa, Spain, and Sicily. The Maghribi traders migrated from Iraq in the tenth century to the Maghrib and hence they were called 'the Maghribi traders.' The documents that I have used reflect the correspondence of the Maghribi community in Fustat (known today as Old Cairo)."
27. Avner Greif, "Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and Individualist Societies," Journal of Political Economy 102 (1994): 942.
28. Antonina Zhelyazkova, Albanian Prospects (Sofia: International Center for Minority Studies, 2003), 140-41. Young Albanians who go abroad work hard and save their money. Most of them continue to live in their own cultural ghettos. Those who return to their homeland bring along the money they have saved but not necessarily Western values.
29. Perry Anderson, Lineages of the Absolutist State (London: Verso, 1974), 429.
30. Silke Stahl, "Transition Problems in the Russian Agriculture Sector: A Historical-Institutional Perspective," in Pejovich, ed., The Economics of Property Rights, 157.
31. Timur Kuran, "Why the Middle East Is Economically Underdeveloped: Historical Mechanism of Institutional Stagnation," unpublished manuscript.
32. The law of limited liability was known in Europe as early as the eleventh century. See Lal, Unintended Consequences, 81-82.
33. Cass Sunstein, "On Property and Constitutionalism," Cardozo law Review 14 (1993): 935.
34. I thank Professor Andreas Freytag from Friedrich-Schiller University in Jena, Germany, for this point.
35. Andre Gerolymatos, The Balkan Wars (New York: Basic Books, 2002), 73-77.
36. See 1996 and 2004 Index of Economic Freedom published jointly by the Heritage Foundation and the Wall Street Journal.
37. It is important to repeat that the ranking of countries in the Heritage Index is in terms of economic freedoms only.
38. North, Institutions, Institutional Change, and Economic Performance, 101.
39. Gary Libecap, "Economic Variables and the Development of the Law: The Case of Western Mineral Rights," in L. Alston, T. Eggertsson, and D. North, eds., Empirical Studies in Institutional Change (Cambridge: Cambridge University Press, 1996), 57 (emphasis added).
40. In contrast, positive rights, such as a right to free public education, call for interference by the state.
41. Sunstein, "On Property and Constitutionalism," 918 and 935.
42. Bernhard Heitger, "Property Rights and the Wealth of Nations: A Cross-Country Study," Cato Journal 23 (2004): 400.
43. Armen Alchian and William Allen, University Economics (Belmont, CA: Wadsworth Publishing, 1964), 12.
44. In this essay, I use the terms "lowering" and "changing" the margin of acceptable behavior interchangeably.
45. As far as I know, an article by Goetz Briefs is the earliest attempt to interpret the consequences of the relationship between formal and informal rules via changes at the margin. See Goetz Briefs, "The Ethos Problem in the Present Pluralistic Society," Review of Social Economy 15 (1957): 47-75.
46. In addition to financial losses, those costs could range from losing friends to losing jobs and alienation from the community.
47. James Buchanan, "Politics, Property, and the Law," Journal of Law and Economics 15 (1972): 451-52.
48. For an example of this, see the appendix.
49. Milic Milovanovic, "Endogenous Corruption in Privatized Companies," unpublished manuscript.
50. See Simeon Djankov et al., The Regulation of Entry (New York: National Bureau of Economic Research, Working Paper 7892, 2000).
51. Subsequent investors (shareholders) are buying into those initial contracts made by original investors. In transparent financial markets, share prices incorporate the expected effects of initial contractual terms.
52. Research and evidence have totally undermined Adolf Berle and Gardiner Means's analysis of the costs of the dispersion of shareholding (Berle and Means, The Modern Corporation and Private Property [New York: Macmillan, 1935]). To paraphrase Armen Alchian, the "separation of ownership from control" hypothesis is an empty piece of poetry. Of course, if corporate managers could and did transfer shareholders' wealth to themselves, how do we explain that literally millions of large and small savers are purchasing shares? There is no law that says that they have to do so. And in the United States, people have many other alternatives for investing their funds.
53. See Jonathan Macey, Gli Stati Uniti: Un Paese Senze Legge (Turin: International Centre for Economic Research, Working Paper no. 2, 1998).
54. See, for example, Katharina Pistor, Patterns of Legal Change: Shareholder and Creditor Rights in Transition Economies (Basel, Switzerland: European Bank for Reconstruction and Development, Working Paper no. 49, 2000);
55. and Rafael La Porta et al., "Corporate Ownership Around the World," Journal of finance 54 (1999): 471-513.
56. Alberto Alesina and George-Marios Angeletos, Fairness and Redistribution: U.S. vs. Europe (New York: National Bureau for Economic Research, Working Paper 9502, 2002).
57. Henry Manne, "The Judiciary and Free Markets," Harvard Journal of Law and Public Policy 21 (1997): 21.
58. The material in this appendix is adapted from Svetozar Pejovich, "Understanding the Transaction Costs of Transition: It's the Culture, Stupid," Review of Austrian Economics 16 (2003): 355-56.