Similarly, Beck and Laeven (2006) find that the CEEC were better reformers when compared
to their Central Asian counterparts as a result of having spent less time under a socialistic regime
with a non-market based institutional framework. In this case individuals find costly to adjust
to a new set of rules. And therefore, the old ones stay in place.
Looking at Figure 1 these factors seem to explain initial values in the graph for Central Asia,
CEEC, and the MENA economies. But it does not seem to explain the changes of the reform
process over time. MENA economies show higher values at the beginning of the sample when
compared to Central Asian countries maybe due to a different legal system implemented during
colonial times. But despite more favourable starting conditions MENA countries show little
change throughout the following years and did not manage to catch up with the EU. Moreover,
it does not explain why several Central Asian countries have overtaken MENA economies.
As neither history nor geographical factors can be undone, and thus cannot be subject to
political change, it is important to understand the transmission channels trough which historical
factors affect current choices.
Even if the effect of the former socialistic regime seems to be not present anymore, some of
the transmission channels are likely to be autonomous reasons for persistence in the the Central
Asian case. Social norms, habits, or costs arising from adjusting to a new set of rules are likely
reasons why agents prefer a status quo or gradual changes rather than a quick adjustment, even
if it would be socially desirable.
Economic and institutional reforms are often not Pareto-optimal, such that certain groups of
the population will be confronted with utility losses due to these reforms. Even though, reforms
may be socially optimal on a global scale the non-existence of a political Coase-Theorem, such
that winners cannot credibly commit themselves to compensate the losers of the reforms makes
reforms less likely (Acemoglu, 2003). Continuing with a reform path that is but sub-optimal
for a strategically important group of the voting population or special interest groups bears the
risk for politicians of loosing their incumbency (Acemoglu and Robinson, 2006).
In a similar fashion, individuals’ risk preferences may yield a congenerous effect. Uncertainty
about the outcome of reforms due to interdependence of different institutions may also prevent
reform efforts or even worsen existing arrangements unintentionally. Hence, the effect of uncer-
tainty on the individual’s utility may provoke risk averse agents to prefer keeping their status
quo rather then voting for reforms (Fernandez and Rodrik, 1991). As a result, risk averse policy