Institutional change and economic performance in transition economies: the case of Poland

Central and East European countries (CEEC) differ significantly with regards to their economic performance despite the fact that external policy prescriptions are very similar in all these countries. Extreme diversity and fragility in the performance of the main economic variables such as GDP growth, unemployment rates, public debt, trade balance and inflation are evident. Moreover, there seems to be no significant convergence on GDP level of the European Union but a considerable divergence among the CEECs and their regions can be observed. This paper argues that the fragility of economic performance is due to a certain level of institutional instability and a lack of consolidating the new institutional arrangements. The behaviour of economic agents is affected not only by formal institutions such as law, new constitutions and organisations, but also by social norms, old values and habits. There has been little consistency between formal and informal institutions since the new institutions were built on the dichotomy between old rules and new formal rules. The inconsistency between both seems to affect economic growth. The paper focuses primarily on Poland as a case study. In Poland, the accession towards the EU and the strong increase in foreign direct investments (FDI) has had a significant impact on growth and trade as well on the institutions of the Polish economy. The paper points out that the Polish economy is affected adversely by such factors as inconsistency between informal rules and new institutional settlement, fragility in the attitudes and behaviour of enterprises and problems of trust between economic agents. The paper consists of two main sections. The first section introduces some basic definitions and a brief overview of the relevant literature. The second section presents a model which shows the dynamic evolution of institutions.