ABSTRACT
This chapter applies the New Institutional Economics to transition economies and explains the necessary reconstruction of institutions that must take place in order for the transition to be successful. It examines the experience of East Germany in the reunification with West Germany and describes the key microeconomic and macroeconomic issues that transition economies face. Economic history provided something of a natural experiment on the impact of socialist versus capitalist institutions on economic performance. The ultimate goal of macroeconomic policy is to create an environment in which people do not have to be overly concerned about sharp output fluctuations and the inflation and currency risks of making exchanges over time. This type of environment lowers transaction costs and facilitates growth. Transition economies also face key microeconomic issues. The ultimate goal is to replace the planning system with a well-functioning, efficient market system backed by an institutional framework that allows low-cost transactions.
