From socialism to an institutional void: Notes on the nature of the transformation crisis

This paper discusses the possible nature of a transformation crisis. The major point is that the institutional void which the collapse of socialism has left behind is a major cause of the slump. The wealth of developed economies, be they socialist or capitalist, springs from a complicated pattern of an extended division of labour. Any beneficial specialisation in production in turn depends on an appropriate institutional framework for the reliable coordination of the various activities. The essence of systemic transformation is an institutional revolution: the old high-cost institutional setting (socialism) is abolished to make way for an ultimately far superior low-cost one (capitalism). However, the emergence, establishment and consolidation of the new institutional arrangements takes time. Furthermore, the new social devices lack two essential features; they have no well-established reputation (credibility) and economic agents are not yet familiar with them (information costs). The present institutional deficiencies include the lack of a reliable means of deferred payments, i.e. a sound money. Before these institutional aspects are elaborated, this paper addresses some other possible causes of the transformation crisis, notably the issue of inherited inefficiencies, the role of an insufficient responsiveness of supply and the consequences of real factor price rigidity.