Policies first, institutions second: lessons from Estonia’s economic reforms

Abstract

It has become convention in recent years to treat the building of institutions as the centerpiece of successful economic reform. The case of Estonia challenges this view. Although effective economic institutions eventually arose, Estonia began its transition bereft of the institutions that supposedly serve as the requisites of robust achievement. The institutions only emerged after an ideologically driven core of leaders implemented policies that laid the groundwork. In particular, the imposition of hard budget constraints sidelined political capitalists opposed to the rule of law by severing them from the state subsidies, soft loans, and other privileges on which they thrive. In the absence of a powerful class of political capitalists, Estonian governments were free to forge and continually improve a collection of institutions that sets the country apart among its postcommunist peers. Good institutions are desirable but not necessary for policy reform, and they are better seen as auspicious knock-on effects than as prime movers.

Keywords:

• Estonia
• institutions
• postcommunist economic reform
• property rights
• corruption

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. All interviews for this article were conducted by Abrams.

2. The 2008 rankings had to be excluded from the analysis since they were not available for some of the countries under consideration.

3. The term “criminal corporate raiding” first appeared in Firestone (2008).

4. The sector that was excluded was “public administration and defence, education, human health and social work activities.”

5. The rankings of the 10 largest privatizations were compiled by multiplying a company’s revenues the year prior to the privatization by the percentage sold.