Institutions, Recessions and Recovery in the Transitional Economies

By Hodgson, Geoffrey M. | Journal of Economic Issues, December 2006 | Go to article overview
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Institutions, Recessions and Recovery in the Transitional Economies

Hodgson, Geoffrey M., Journal of Economic Issues

In the early 1990s, after the collapse of the Berlin Wall and the break-up of the Soviet Union, many economists argued that the post-communist countries could rapidly develop a capitalist and market system. (1) Some held the market order would rapidly germinate and grow once the old state bureaucracies were swept away. As the influential Western advisor Jeffrey Sachs (1993, xxi) contended: "markets spring up as soon as central planning bureaucrats vacate the field."

In fact, markets did not spring up spontaneously; capital markets, in particular, were slow to develop. As Ronald Coase (1992, 718) observed: "The ex-communist countries are advised to move to a market economy ... but without the appropriate institutions, no market of any significance is possible." From an institutionalist perspective, markets are not the universal physical ether of economic existence, but social institutions that depend upon the evolution of detailed rules and norms (Hodgson 1988; 2001; Vanberg 2001). In the former communist countries, the requisite commercial rules, norms and institutions were scarce (Clague 1997; Kozul-Wright and Rayment 1997; Grabher and Stark 1997).

More than a decade and a half after the fall of the Berlin Wall, there is now plentiful evidence to consider in explaining the differences in performance in the transitional or post-communist countries of the former Soviet Bloc. All these countries experienced severe or extreme recessions in the 1990s, followed by a subsequent recovery. Jan Svejnar's (2002) survey showed that only Poland and Slovenia had significantly exceeded their 1989 GDP by the year 2000. Hungary, Slovakia and the Czech Republic just about matched their 1989 GDP after 11 years. Other former Eastern Bloc countries were still well below their 1989 GDP levels as late as 2001, with Russia about 40 percent lower and the Ukraine about 60 percent lower. Nauro Campos and Fabrizio Coricelli (2002) reported similar results. (2)

This article updates these earlier studies and attempts to identify the principal underlying factors that account for overall post-1989 economic growth in the transitional economies. Priority is given to institutional factors rather than standard macroeconomic variables. The sections below respectively present the relevant growth data, consider a number of hypotheses that might account for these growth outcomes, report the econometric results, discuss their significance, and offer some deeper explanations. The concluding section highlights the importance of effective national institutions, enforcing non-discriminatory rules and overcoming the negative economic legacy of ethnic and other divisions.


The statistical analysis here focuses on the growth in GDP and on absolute levels of GDP per capita. Of course, it should not be assumed that GDP is an accurate measure of welfare or well-being. Official GDP figures may also be inaccurate, particularly in assessing the size of undeclared revenues and the illegal economy.

The data cover 27 former communist countries, including nineteen in Europe and eight in Central Asia. (3) Seven of these countries--Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia--joined the European Union (EU) in 2004. Some key indicators are shown in Table 1, which shows a very mixed picture. Fourteen of these former communist countries have experienced negative overall growth in the sixteen-year period. On the other hand, nine have achieved an average 1989-2005 GDP growth rate of over one percent, and in Poland and Albania growth has exceeded two percent. Taking the 1989-2005 period as a whole, only nine countries can claim a modestly successful overall growth rate. The remaining countries have experienced stagnation or decline.

Moreover, two of the more rapidly growing countries--Albania and Turkmenistan--are extremely poor compared with the more developed European countries. Their levels of GDP per capita are instead comparable to developing economies such as Algeria, Guatemala, Namibia and Thailand.

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Institutions, Recessions and Recovery in the Transitional Economies


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