Reform Design: How To Search For Interim Institutions

Institutional reform is defined as a feasible sequence of interim institutions in an appropriate institutional space; the sequence "connects" an initial institution (or a system of institutions) with final one which is considered as desirable by reform designers. Interim institutions are necessary since direct one-step transition ("shock therapy") is usually very costly or even not feasible at all due to cultural, institutional, resource, technological or political constraints. Interim institutions soften these obstacles for the reform step by step so that the whole sequence, leading to the final desirable institution, turns out to be feasible and efficient. Saying it by another way, each interim institution softens reform constraints to increase efficiency of transformation of its predecessor into its follower. The main reform design problem is to find the feasible and most efficient sequence of interim institutions. The concept of interim institution was introduced in Polterovich (2001, 2007, in Russian). In this paper, a classification of interim institutions is suggested. Sometimes, interim institutions can be built by a development of institutions that already exist in the reforming country. Another case occurs when interim institutions are new inventions. The third, the most important case for developing countries, takes place when interim institutions are transplanted from more advanced systems. I illustrate these concepts analyzing a number of reforms: price liberalization, international trade liberalization and privatization in Russia and China, as well as the unification of Europe. The role of regional and sectored institutional experimentation for finding of interim institutions is underlined. I describe also a methodology of institutional transplantation, and its application to the problem of creation of mass mortgage credit system in transition economies. In this connection, results of an experiment in one of Russian regions are presented.