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Understanding the transaction costs of transition: it's the culture, stupid


  • Steve Pejovich


In the early 1990s, Central and Eastern Europe countires (C&EE) began transition into free-market, private-property economies. Thirteen years later, the Index of Economic Freedom published annually by the Heritage Foundation and the Wall Street Journal lists only one country in the region as a free market country, seven countries are listed as mostly free, nine as mostly unfree, and two as repressive. The same initial objectives of transition have clearly produced different results in C&EE. The paper argues that observed differences in the results of institutional restructuring in C&EE are not accidental. It attributes those differences to the interaction between the formal institutions of capitalism and the prevailing cultures in dormer socialist states. The “interaction thesis” is summarized as follows: When changes in formal rules are in harmony with the prevailing informal rules, he incentives they create will tend to reduce transaction costs and free some resources for the production of wealth. When new formal rules conflict with the prevailing informal rules, the incentives they create will raise transaction costs and reduce the production of wealth in the community. The Interaction thesis suggests that better understanding of the results of transition in C&EE requires analysis of the following three issues: What are the most important formal institutions of capitalism? What kind of culture is in harmony with formal institutions of capitalism? What is the difference between that culture and informal rules in C&EE countries? The paper analyzes those three issues in some detail. The findings are that the transaction costs of transition are higher the farther east and southeast one travels. Finally, the paper provides several empirical examples in support of the interaction thesis.

Suggested Citation

  • Steve Pejovich, 2003. "Understanding the transaction costs of transition: it's the culture, stupid," ICER Working Papers 24-2003, ICER - International Centre for Economic Research.
  • Handle: RePEc:icr:wpicer:24-2003

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    References listed on IDEAS

    1. Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2002. "The Regulation of Entry," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 1-37.
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    Cited by:

    1. Peter J. Boettke & Christopher J. Coyne & Peter T. Leeson, 2015. "Institutional stickiness and the New Development Economics," Chapters,in: Culture and Economic Action, chapter 6, pages 123-146 Edward Elgar Publishing.
    2. O. Yul Kwon, 2005. "A Cultural Analysis of South Korea's Economic Prospects," Global Economic Review, Taylor & Francis Journals, vol. 34(2), pages 213-231.
    3. Judit KAPà S & Pál CZEGLÉDI, 2007. "What Does Transition Mean?: Post-socialist and Western European Countries Paralleled," The Journal of Comparative Economic Studies (JCES), The Japanese Society for Comparative Economic Studies (JSCES), vol. 3, pages 3-28, December.
    4. Fidrmuc, Jan & Gërxhani, Klarita, 2008. "Mind the gap! Social capital, East and West," Journal of Comparative Economics, Elsevier, vol. 36(2), pages 264-286, June.
    5. repec:eee:jcecon:v:45:y:2017:i:3:p:456-480 is not listed on IDEAS
    6. Zweynert, Joachim & Goldschmidt, Nils, 2005. "The Two Transitions in Central and Eastern Europe and the Relation between Path Dependent and Politically Implemented Institutional Change," Discussion Paper Series 26391, Hamburg Institute of International Economics.
    7. Dimiter IALNAZOV & Nikolay NENOVSKY, 2010. "The Evolution of Post-Communist Countries: An Interpretation from the Perspective of Cooperation," LEO Working Papers / DR LEO 1600, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    8. Ilyess El Karouni, 2009. "Institutional change as cultural change: An illustration by Chinese postsocialist transformation," International Journal of Social Economics, Emerald Group Publishing, vol. 36(7), pages 762-772, June.
    9. Michel Zouboulakis, 2010. "Trustworthiness as a Moral Determinant of Economic Activity: Lessons from the Classics," Forum for Social Economics, Springer;The Association for Social Economics, vol. 39(3), pages 209-221, October.
    10. Joanna Dzionek-Kozlowska & Rafal Matera, 2016. "Institutions Without Culture. A Critique of Acemoglu and Robinson's Theory of Economic Development," Lodz Economics Working Papers 9/2016, University of Lodz, Faculty of Economics and Sociology.
    11. Boettke Peter J. & Coyne Christopher J. & Leeson Peter T., 2004. "The Many Faces of the Market," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 14(2), pages 1-18, December.
    12. Leonid Krasnozhon, 2013. "Institutional stickiness of democracy in post-communist states: Can prevailing culture explain it?," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 26(2), pages 221-237, June.
    13. Joanna Dzionek-Kozłowska & Rafał Matera, 2016. "O poszukiwaniu przyczyn bogactwa i nędzy narodów w teorii Darona Acemoglu i Jamesa A. Robinsona," Gospodarka Narodowa, Warsaw School of Economics, issue 5, pages 5-26.

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