4 Conclusion
This paper studies institutional reforms from a choice perspective in Central Asia from 1995
to 2006. By comparing the reform processes in Central Asian economies to those of their
neighbours in Central and Eastern Europe, Russia, and the Middle East and North Africa,
we identify shortcomings in education and preferences of individuals and policy makers about
reforms as the main obstacles in the reform process. Based on this, we identify factors that
can act as commitment devices for Central Asian economies to reform existing institutional
arrangements.
We provide stylised evidence that external factors such as real and financial openness and
factors that are related to both provide an incentive for policy makers to sustain institutional
change.
Real and financial openness, fixed exchange rates, non-trade related international agree-
ments, as well as external shocks have helped to change institutions in Central Asia and has
made the reform process more dynamic in recent years. This results from the fact that small
open economies, by definition, are more exposed to external shocks and international capital
and trade flows.
A high degree of trade and financial openness may provide an incentive to reform institutional
settings as small and open countries have a larger share of revenues per GDP from external trade
and a larger share of foreign investment in total investment. Therefore, opportunity costs in
terms of forgone business opportunities as a result of bad governance provide incentives to
improve the institutional set-up. Similarly, financial openness provides an incentive to remedy
deficiencies in the regulatory framework, and thereby making the economy less prone to sudden
capital outflows which may result in financial turmoil and painful economic recessions. Pegging
the exchange rate, in combination with financial openness, has the same effect as undesirable
domestic policy measures may result in speculative attacks against the currency regime.
We also find that external agreements, such as the TACIS-programme is also likely to con-
tribute as an incentive for Central Asian countries, as institutional reforms towards more market-
oriented institutions are essential for closer ties with the EU. Lastly, external shocks, such as an
economic crisis may shift preferences of individuals and politicians towards better institutional
arrangements.
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