STATE-MARKET-CIVIL INSTITUTIONS - THE CASE OF EASTERN-EUROPE AND THE SOVIET REPUBLICS

The transition tasks facing the countries of Central and Eastern Europ e are monumental. The public sector will play a dominant role during t he transition process. Available evidence suggests that orthodox presc riptions for public sector reform cannot be effectively implemented wi thout an underlying constitution and a legal and regulatory infrastruc ture (LRI). A well-designed constitution and LRI instill confidence an d policy credibility. With perfectly rational expectations and confide nce in the constitution and LRI, the sequence of reforms matters littl e; future reforms are perfectly anticipated today and agents act as th ough the reforms will occur with certainty. Short of such confidence, reforms need to be simultaneously pursued on many fronts. The most imp ortant activity is to redefine the role of the state, setting a consti tution that clearly defines and secures basic political, civil, and ec onomic freedoms and designing an LRI that creates a fertile environmen t for a vibrant market economy.