Interaction between Formal and Informal Insitutions in the Process of Transformation from a Planned to a Market Economy

Abstract

In the light of new institutional economics and the history of transformation, the nature of social change becomes an issue of primary importance. To explain this phenomenon, the new institutional economics has turned to the theory of interaction between formal and informal institutions. In this article the thesis functions as a tool for interpreting political and economic changes in the countries of Central Europe, the Balkan countries, the Former Soviet Union and in China. Analysis of the Democracy Scores published by Freedom House seems to confirm the dominant presupposition saying that democracy, clarity and observance of social cooperation rules, a high level of social trust, and high moral standards of individua ls favour economic growth. But case of the China transformation shows that i nstitutions that have proved successful in the West does not necessarily provide the best solutions for underdeveloped countries. An optimal transformation policy depends on a given cultural background and political situation. However, despite important differences, some similarities between the transformation processes taking place in different regions and countries are discernible. The common feature of all transformation processes is greed and a lack of responsibility on the part of the ruling elites, which pose the greatest threat to reforms and economic development in the long run.