Source: Carnegie
Summary
Recent experience in Eastern Europe, East Asia, and South America supports the idea that institutions—such as an effective judiciary, protection of property rights, and more specific laws—are key to both long-term economic development and recovery from crises. Developing good institutions is generally viewed as a desirable goal, but there is no agreed road map for such changes.
Åslund and Johnson suggest, at least for former communist countries, the right way to begin strengthening institutions is by lowering the barriers to entry for new small businesses and the costs of running these firms by switching to a simple low lump-sum tax. This policy has economic advantages, but its most important effect is to change the political equilibrium, creating a powerful force for further institutional improvement.
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About the Authors
Anders Åslund is director of Carnegie's Russian and Eurasian Program. He is the author of The Enlargement of the European Union: Consequences for the CIS Countries (Carnegie Working Paper No. 36), and Building Capitalism: The Transformation of the Former Soviet Bloc.
Simon Johnson is associate professor of economics at the Sloan School of Business at the Massachusetts Institute of Technology.
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