Capabilities, Routines, and East European Economic Reform: Hungary and Poland before and after the 1989 Revolutions

By Swaan, Wim; Lissowska, Maria | Journal of Economic Issues, December 1996 | Go to article overview

Capabilities, Routines, and East European Economic Reform: Hungary and Poland before and after the 1989 Revolutions


Swaan, Wim, Lissowska, Maria, Journal of Economic Issues


The transformation from centrally planned economies to market-based economies appears to be a complicated process. Much attention has been paid to such macroeconomic aspects as price liberalization, stabilization, and privatization. The limits to creating institutions by design are also increasingly acknowledged [Murrell 1992a, 1992b, 1992c; Koslowski 1992; Kornai 1994; Schmieding 1993]. The current paper focusses on the problem of behavioral change at the micro level, against the background of the growing literature on the role of capabilities in economic organization.

As is argued at length by Nelson and Winter [1982], skill acquisition by an individual and implementing behavioral change in an organization are complicated, protracted processes, irrespective of the economic system the actors are in. In post-socialist economies, moreover, economic competence is very scarce [Pelikan 1992]. Radosevic [1994] has pointed to simultaneity of incentives, institutions, and capabilities in shaping economic performance: neither of the three will in themselves be sufficient to bring about a breakthrough in performance. As has been emphasized by Hodgson [1993, 133, 149-151], the renewed interest in the role of capabilities and routines in economic evolution is in part a resumption of ideas set out by Veblen [1919].

The current paper takes a step back in time and considers to what extent the reforms under state socialism may have helped in shaping market - or customer-oriented capabilities. Following conventional terminology [cf. Kornai 1992, 387-392], the term "reform" will be restricted to the period prior to the political and economic disintegration of state socialism during 1989. In Hungary, directive planning instructions were abolished in 1968, while Poland followed in 1982 - although the other main principles of socialist society remained largely unaffected until 1989. The core of the paper is formed by a detailed discussion of changes in state enterprise behavior in Hungary and Poland in the 1980s and of reasons for differences between the two countries. Special attention is given to the role of routines, tacit knowledge, and cognitive structures in behavioral change.

The focus on developments prior to the disintegration of the socialist system is of interest for two reasons. First of all, by going back in time, a more complex understanding may be gained of the difficulties of the current transformation process, in particular of the barriers to behavioral change. After all, the interaction between capabilities, incentives, and institutions is a continuous process; it would be fairly arbitrary to start the analysis only with the disintegration of the state socialist system. This will appear to be particularly important for gaining a more balanced assessment of the pros and cons of so-called gradualist policy proposals. In general, discussion in terms of shock therapy versus gradualism is of limited value insofar as it supposes a large degree of control by the policymakers: this is precisely what has been lacking in the early stages of post-socialist transformation. Institutional destruction around 1989 was for a large part unintended by the policymakers, and actors at the micro level did not have the required capabilities to respond effectively, at least not in the short run.

Beyond the implications for current developments, study of enterprise behavior under socialist reform is also of interest in itself. By focussing on capabilities and learning processes, this paper adds a dynamic, evolutionary aspect to the literature on the subject. While institutionalist approaches to the study of state socialism have been very common, in particular in Hungary, but also in Poland and in the West, there has been very little interaction with institutionalist studies of market economies [some notable exceptions are Kornai 1971; Laky 1979; Burkett 1986; Roland 1990; for an extensive discussion, see Swaan 1993, 21-51].

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Capabilities, Routines, and East European Economic Reform: Hungary and Poland before and after the 1989 Revolutions
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