Institutions in Transition : Reliability of Rules and Economic Performance in Former Socialist Countries

The predictability of a transition economy's institutional framework may well influence the amount of foreign direct investment and economic growth the economy can expect. Building reliable institutions that support a market system is widely believed to be critical to a successful economic transition. Brunetti, Kisunko, and Weder present indicators on the predictability of the institutional framework across twenty transition economies - indicators of the predictability of rules, political stability, the security of property rights, the reliability of the judiciary, and the lack of corruption. They then investigate whether these indicators can explain differences in economic performance. The results suggest that the predictability of the institutional framework may indeed explain a large part of differences in foreign direct investment and in economic growth among transition economies. Political stability and secure property rights are particularly important to entrepreneurial confidence in the economy. This paper - a product of the Office of the Chief Economist and Senior Vice President, Development Economics - was produced as a background paper for World Development Report 1997: The Role of the State in a Changing World. The study was funded in part by the Research Support Budget under the research projects "Cross-Country Indicators of Institutional Uncertainty" (RPO 680-51) and "Indicators of Government Quality as Perceived by the Private Sector" (RPO 681-52)