Evolving Institutions and Catching-up by the Candidate Countries of the EU

Interim Reports on work of the International Institute for Applied Systems Analysis receive only limited review. Views or opinions expressed herein do not necessarily represent those of the Institute, its National Member Organizations, or other organizations supporting the work. Abstract Since institutions include not only governmental and civic organizations and regulations, but also social customs and behavior, the post-transition development can not be analyzed or understood without the heritage of the past. All-encompassing state-ownership, monopolization and elimination of all kinds of competition reached unprecedented proportions in the Soviet-type economies, creating oligarchic organizations, mentalities, and behavioral patterns. The ruling communist elite enjoyed extreme privileges; citizens became much more alienated from the state than in democratic societies. Experiences of the fastest growing countries proved that by reforming the institutional system and the policy-regime the growth potential of an economy can be much better exploited and catching-up with the more developed countries can be faster. Because of the " velvet " character of transition in East Central Europe, many of the old special interest organizations were not destroyed, thus creating obstacles to faster growth and structural change. In the catch-up process much depends on the openness of an economy, however its performance is basically determined endogenously, by the allocation of resources and their efficient use depending on the institutional structure. The lack or weakness of the rule of the law is one of the main obstacles to the economic catching-up of the East Central European societies and their accession to the European Union. The share of the shadow economy in the transition countries increased very substantially and is about twice as big as in developed market economies. Increased criminal activities and large-scale tax-avoidance is closely related to corruption and is very damaging for the lawful and secure environment of growth. Corruption is strongly negatively associated with the investment rate, and through this it lowers the rate of growth. Clientelistic networks evolved around the political parties, creating a social network where political loyalty prevails against market relations, democratic decision making, and professionalism in public administration. In the political struggles, the question was not only which political group would govern the country, but also who would privatize the vast quantity of state assets, and to whom. In clientelist regimes corruption, favoritism, partiality, give-and-take, and nepotism abound, and thus democratic morale and the logic of the market is destroyed. The analysis shows that the institutions in …