Whither reform? Ten years of the transition

What lessons have we learned in the 10 years since the beginning of the transition? Broadly speaking, most observers would conclude that China's transition has been a success so far, while Russia's has not. The failure of reforms in the Russian Federation and in most of the countries of the former Soviet Union are not simply the result of poor implementation of sound policies. The failures go deeper, to a misunderstanding of the foundations of a market economy and of the basics of an institutional reform process. Reform models based on conventional neoclassical economics are bound to underestimate the untoward consequences of information problems, opportunistic behavior, and human fallibility-and those consequences are now plainly visible. A process of institutional reform modeled on shock therapy ignores the lessons extracted by Hayek and Popper from (ironically) the Bolshevik Revolution. The promise of quick economic transformation based on voucher privatization with investment funds has proven illusory. An alternative strategy of decentralization is to push economic decisionmaking down to the level at which stakeholders have a better chance to protect their own interests, without presupposing elaborate legal machinery that will take much longer to evolve.