Few issues in economics have experienced such a grandiose revival as the role of institutions in economic development. The institutional tradition may be traced back to the writings of Thorstein Veblen in the United States at the end of the nineteenth century and to the German Historical School represented by authors such as Schmoller.
The role of institutions was also recognised in the early writings of development economists (Hirschman, 1970). However, it took North’s (1990) formulation for the role of transaction costs, imperfect information and a variety of resulting sociocultural constraints to be fully integrated into the analytical framework of mainstream economics.
One of the most promising terrains for an application of institutional economics is provided by the current transition process in central and eastern Europe and parts of Central and East Asia. What distinguishes the reforms implemented in all of these countries from earlier stabilisation and structural adjustment policies in developing countries is their systemic character, aiming to change not only relative prices but the entire set of economic, legal and social incentive structures governing human economic behaviour (for an early recognition of this task and a rebuttal of partial reforms on that basis, see Kornai, 1980; similar ideas are expressed in Balcerowicz, 1995).
The directors of this project have thus correctly noted that “the success of the overall reform effort depends to a considerable extent on the existence of adequate institutions ...” (Cornia and Popov, 1996, p. 10). One might go further and state that what transition is all about is a redesign of the institutional framework of formerly centrally planned economies. A transition theory therefore will necessarily be a theory of institutional change.
This paper focuses on one particular subset of institutional change, namely the role of informal institutions in economic transition. In what follows, I will adopt North’s definition of institutions as “humanly devised constraints that structure political and social interaction” (North, 1991, p. 97), or more specifically economic exchange. Informal institutions may then be understood as the collection of social norms, conventions and moral values that constrain individuals and organisations in pursuit of their goals.
The distinctions between individual goals and informal institutions as constraints on the realisation of such goals may seem arbitrary. Indeed, psychologists and sociologists often argue that individual goals and the social environment in which they are formulated cannot be analytically separated.1 For Elster (1989, p. 103), for instance, “social norms ... are emotional and behavioural propensities” and Adams and Neal (1993) consider institutions as “sets of opportunities” rather than as a set of constraints. North’s definition is retained here because it highlights the conceptual similarity of informal and formal institutions and their joint role in reducing transaction costs and facilitating economic exchange. At a practical level, whether informal institutions are considered to be constraints or parts of a society’s opportunity set is probably less important than the recognition that informal institutions fundamentally influence human behaviour while not being directly amenable to policy. Any process of rapid formal institutional change such as currently observed in the transition economies must contend with the legacy of an inherited set of informal institutions that may or may not be efficient under a changing economic and social environment.
