The Political Economy of Transition: Coming to Grips with History and Methodology

By Jozef M.Van Brabant | Go to book overview

7

THE ROLE OF INSTITUTIONS IN A MARKET ECONOMY

Once one moves beyond the confines of a contemporaneous exchange of the simplest kinds of goods, institutions are required to reinforce the validity of the contract embedded in nearly all forms of exchange in a market economy. Even in a viable contemporaneous market the “institutions” of credibility, trust, and reliability play an important role (Haggard, McMillan, and Woodruff 1996). These contracts need not, and usually are not, explicit. Even if they are, they rarely contain all elements bearing on the satisfactory execution of contracts or the resolution of related disputes.

It would be useful to have a comprehensive overview of the “institutions of the market.” That alone might justify several tomes. This chapter can move only marginally beyond the core institutions introduced in Chapter 3. In this, I shall proceed relatively quickly with the legal codes and institutions required for protecting and enforcing contracts. I devote more attention to the institutions of functioning labor and capital markets and to the requirements for enhancing the collection, organization, and dissemination of various kinds of information. I touch in this context also on the notion of governance. But how this affects the state and the nonprofit institutions closer to the coercive state than the for-profit private sector I defer to Chapter 9.

After clarifying the nature of “market institutions,” I start with the all-important subject of property rights. Next I give a quick rundown of the legal infrastructure. Then I proceed with the various layers of financial and capital markets; but I devote disproportionate attention first to having in place a viable commercial-banking sector. Thereafter I pinpoint the essential features of the institutions of labor markets and indeed of the social safety net, though the latter’s details I explore in Chapter 8. The role of information, regulation, and supervision in a market economy is highlighted next. Before concluding, I set forth key notions of governance, though I take up the broader issues of governing the transition in Chapter 8.

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