Understanding the Transactions Costs of Transition: It's the Culture Stupid

The paper argues that the interaction between the formal institutions of capitalism and the prevailing culture in former socialist states is a major reason for observed differences in the results of

Scholarly research and empirical evidence showing the strong positive relationship between the free-market, private-property economy and economic growth is very convincing. The Index of Economic Freedom published annually by the Heritage Foundation and Wall Street Journal demonstrates a strong correlation between economic freedom and economic growth. To measure economic freedom the Index uses a set of factors that also define the free-market, private-property economy.

In the early 1990s, the former socialist states in Central and Eastern Europe (hereafter C&EE) began transition into free-market, private-property economies. Thirteen years later, the Index of Economic freedom lists only one country in the region as a free market country, seven countries are listed as mostly free, nine as mostly unfree, and two as repressive. The same initial objectives of transition have clearly produced different results in C&EE.