Legal and institutional reform in the European transitional economies

Since the early 1990s our world has changed more radically than in any other comparable period of time in history. A whole system of social and economic organisation has been discarded and the 300 million people that used to live by its rules are now part of a radically different economic and social environment. The few remaining communist countries, most notably China, have adopted extensive market reforms that will no doubt bring forth important political changes in the medium term. A revolution of such magnitude in the economic and social sphere can only result in a radical reshaping of the legal and institutional i framework. In the old system relationships between individuals were a part of a unitary command structure. Civil rights - including property rights - were in theory protected by law 'except when exercised in contradiction to their Purpose in a socialist society'.(2) There were four main categories of property rights (listed in hierarchical order): state or social property, cooperative property, personal property (mainly goods destined for individual consumption) and private property (that is, the right to own production assets).(3) With the exception of Poland, where private agriculture somehow lowered the role of the state in the economy, more than 85 per cent of property belonged to the state. In contrast to the above, the rules in liberal, market-based societies aim at creating a level playing field for essentially private exchanges in the market or civil society in general. Even when it comes to defining the (sometimes extensive) power of the state, the rights of the individual - including the right to own property - are of primary concern to the legislator. The assumption in favour of individual freedom constitutes the main thread behind public (that is, penal, administrative) law. However, simply changing the rule book is not enough for the establishment of a market economy. Very few of the existing public institutions are able to fulfil their roles as enforcer, of (new) rules and umpire/regulator in a fundamentally private economy! and society. Some of these institutions may disappear altogether; others will see their role radically changed; while a number of important new institutions will emerge. Moreover, private institutions hitherto non-existent or atrophied become central to the development of markets and the functioning of the new civil society. This chapter will not attempt to address the whole process of change in the legal and institutional fabric of transition economies as this would require volumes. Its modest aim is only to identify certain areas that have a direct bearing on the progress of economic reforms and the transformation of the economy, highlight a few of the problems encountered by reformers and suggest some of the policy options that are available to them. Even with such a narrow task, a fair degree of simplification cannot be avoided, especially if one bears in mind that the geographical scope extends to more than 20 countries in Central and Eastern Europe (CEE) and the former Soviet Union. Country experiences have to be used quite selectively and comparisons will be of a rather broad-brush nature. Notwithstanding the above constraints, a number of main trends can be discerned and certain conclusions reached on both the pace and the quality of these reforms in different transforming economies. Section 9.1 addresses certain issues related to constitutional reform. Section 9.2 discusses a number of areas of general private law; their main interest is that they define and determine the content of private property rights, a fundamental concern of this chapter. Section 9.3 discusses the legislative framework for the creation, functioning and dissolution of private institutions, notably commercial companies. Section 9.4 focuses on a number of areas that are directly related to the emergence of private property rights but are, in contrast to the previous categories, transition-specific; they include foreign direct investment legislation and, most importantly, corporatisation and privatisation. Finally, Section 9.5 draws a number of conclusions, based on certain horizontal features of legislative and institutional reform efforts.