Introduction

Under communism, the economic and the political sphere were tightly coupled. With the nomenklatura, a single elite existed which governed both the polity and the economy. State ownership and state planning, along with the unfettered power of the ruling elite, provided for nearly complete and highly discretionary political control of the economy. The transition to capitalism is precisely about the softening of this tight coupling and the institutionalization of a relatively autonomous economic system. As for the economy, the drawing of clear boundaries between the political and the economic system corresponds to what we have dubbed “horizontal consolidation.” In addition, the consolidation of the new economic order presupposes a sufficient degree of internal institutional structure, that is, the existence of a set of well-defined and generally recognized rules that specify property rights and facilitate exchange by reducing transaction costs. This is the “vertical” dimension of consolidation.

Consequently, one might distinguish between two central elements of East European economic reform. On the one hand, there are those measures that aim at redefining the relationship between the state and the economy, both by limiting the state's role in the economy and by replacing the old hands-on mode of state interference with a more indirect, rule-based, and framework-oriented approach. This group of reforms comprise the privatization of state-owned enterprises, the abolition of central planning and the liberalization of economic activities, as well as the trimming of state expenditure.

The retreat of the state from the economy, however, is but a necessary condition for the emergence of a consolidated capitalist economy. As well-functioning markets grow up “from below” but slowly, the carving out of markets must be supplemented by the furnishing of markets.