Entrepreneurship and Transition

The substitution of private for public entrepreneurship is a crucial aspect of the process of transition. While output and employment in the overextended and overmanned state sector decrease, it is crucial for the success of transition that private entrepreneurship builds up, increasing production and employment, in a process somewhat paralleling the dual development Harris-Lewis-Todaro model, where the state sector plays the role of the traditional sector endowed with an almost unlimited reserve of labor. The way this takes place depends to a great extent not only on the specific features of the privatization processes pursued, but also on the overall institutional and social conditions affecting the development, and the nature, of private entrepreneurship. In particular, under conditions of insufficient construction of the institutional framework of the market, and lack of prevention and punishment of fraudulent behavior and self-dealing, the development of entrepreneurship can be derailed into unproductive and destructive forms, according to Baumol's distinction, with dire economic and social consequences. The different outcomes of the transition process may also be explained through the different preconditions affecting the severity of the specific impediments encountered in development of entrepreneurship. Some policy suggestions for speeding up this development, both in quantitative and qualitative terms, conclude the paper.