Are Transition Economies Normal Developing Countries? The Burden of the Socialist Past

The view that the socialist past of the transition economies (TEs) is irrelevant and that these economies should now be considered as just another group of developing, low or middle income countries, has been gaining many adherents. This overlooks, so we believe, the fact that transition is path dependent and that the process of transition cannot be understood without regard to the socialist heritage. This heritage is relevant in many aspects of the transition process, but it is probably most important in the transformation of the institutional infrastructure from that of the old regime to institutions of a market economy and a democratic society. This paper focuses on the transition of this institutional infrastructure. In it we first summarize, on the basis of previous literature, the stylized characteristics of the two sets of institutions, the dissonance between them and the problems involved in moving from one to the other. This discussion in based to a large extent on Ofer (2001, 2003, 2004) and on references therein. We then estimate the institutional diversion of different groups of TEs from ‘normal’ patterns at comparable levels of development (à la Kuznets). The empirical analysis is based mostly but not exclusively on the database of the Governance and Anti-Corruption project of the World Bank Institute (WBI; Kaufmann et al., 2005). In the analysis that follows we relate the gaps to the specific socialist institutional heritage and underline the differences in the nature of the problems and solutions of building new institutions that stem from this heritage.