The Uneven Results of Institutional Changes in Central and Eastern Europe: The Role of Culture

A summary

Svetozar (Steve) Pejovich

Professor Emeritus, Texas A&M University

Given at the CRCE symposium in Bled, Slovenia September 2004

The paper argues that the process of transition from socialism to capitalism is a cultural problem rather than a technical one. It demonstrates that cultural differences in Central and Eastern Europe create transaction costs specific to the process of transition, and that those costs, in turn, explain the uneven results of institutional restructuring.

The relationship between culture and economic performance derives from the interaction of institutional reforms and the prevailing culture in the region. The interaction thesis says: When members of the community perceive the consequences of new formal rules to be in conflict with their prevailing culture, the transaction costs of integrating those rules into the institutional framework will be high, consume more resource, and reduce the production of wealth. And when members of the community perceive the consequences of new formal rules to be in harmony with their prevailing culture, the transaction costs of integrating those rules into the institutional framework will be low, consume fewer resources, and increase the production of wealth.

To test the interaction thesis against the actual results in Central and Eastern Europe, the paper identifies the major basic institutions of capitalism and asks what kind of culture is supportive of those institutions. The answer is the Anglo-American tradition of individual liberty, self-determination and self-responsibility.

Then, the paper looks into the prevailing cultural traditions in Central and Eastern Europe. Of course, there are similarities but also some major differences. Those differences could be attributed to the influence of three major Empires (Austrian, Russian and Ottoman) and three religions (Orthodox, Catholic and Islam). However, in general, the prevailing culture in Central and Eastern Europe is at variance with the culture supportive of capitalism.

The paper then asserts that if the transition were a cultural problem we should observe that the results of transition depend on the conflict between the culture of capitalism and the prevailing culture in the region. That is, we should expect to observe that the results of transition depend on the extent of the influence of Western culture in Central and Eastern Europe. To test this assertion, the paper divides all countries in the region into those that were (significantly) influenced by the West those that were not. Then the Heritage Foundation Index of Economic Freedom is applied to measure the results of institutional restructuring in 1996 and 2004.

The results provide striking evidence in support of the interaction thesis, which says that the conflict between the basic institutions of capitalism and the prevailing culture in Central and Eastern Europe explains observed differences in the results of transition.

Then the paper turns to the issue of what set of institutions would encourage voluntary adjustments of the prevailing culture in Central and Eastern Europe to the culture supportive of capitalism. The paper identifies and analyzes three factors that could eventually reduce the transaction costs of transition: the development of the competitive market for institutions, the identity of the carriers of institutional restructuring, and the margin of acceptable behavior (the marginal ethos). 

Note: The author’s presentation at the Bled symposium, 2004 was based on the paper to be published under the same title in Social Philosophy and Policy, vol 23, no 1, 2006.