In transitional economies, there has been a rapid and decisive change in the economic environment. How should we try to model the transition? There are of course many perspectives on this question. I want to look at one particular one.
Individuals and institutions find themselves in a new environment. Old objectives and ways of achieving those objectives are no longer feasible or appropriate.
However, old arrangements will survive into the transition: for example, the centralization of production under central planning means that high levels of industrial concentration will persist for some time. Also, privatisation will take time, and State Owned Enterprises (SOEs) persist: even where they do not, the role of workers in newly privatised firms may be similar to that in SOEs if they are major shareholders.
The way individuals, groups and organisations will respond to this is by trying out new strategies and ideas. Some ideas will work: some will fail.
An evolutionary or learning perspective is useful in this context. Since the payoff or utility of an agent will in general depend on what others are doing, we need to model the interaction of individual level behaviour with the population level behaviour. This can be done using the evolutionary/learning perspective. Successful behaviour will be discovered by experimentation, and success by one agent will lead to other agents changing their behaviour. This will either be indirectly (for example, the non-innovator falls behind the innovator), or directly (the non-innovator imitates the successful innovator).
These processes have been well studied in standard economic environments. However, the case of a transitional economy raises particular problems:
(1) Institutional. Organisations may be very unlike western share-holder driven firms: how do we model their "success", what are their objectives?
(2) The nature of budget constraints, capital markets and so on are rather difficult to define. Hence the "natural selection" process may not be straightforward as people imagine it is in developed economies.
(3) Trade, inward investment. Western firms and commodities will be entering the transitional economies (along with economic consultants). This outside invasion will influence the domestic behaviour. How should we model that?
(4) Because of (1) and (2), the diffusion process may be very hazy (information is noisy).
There are many problems and issues raised. As a conclusion to this very brief note, two questions:
Q1: Is there a need for a "different" methodology at all? Should we just use the same models that we might use in a standard model of a western economy?
Q2: If the answer to Q1 is "yes" (for example due to observations (1-4) above, then is there a danger of developing models that are too closely linked to the problem, that will limit its potential to change?