Ever since the seminal discussion by Douglass C North, the idea that institutional development can be explained by competition between institutions has been analyzed by institutional economists. North, in various articles and books, such as Institutions, Institutional Change and Economic Performance (1990), tried to explain the long-term change of economic systems through the choice of alternative institutions by economic actors. The focus of these discussions was the question of how far the analogy between competition in markets for goods and the market for institutions, where political and economic competition interact, is legitimate.
Applying market principles to institutions
The impact of institutional competition as a Hayekian discovery procedure for new institutions, possible market failure in institutional competition and the necessity of a competition system for institutional competition are some of the issues currently analyzed. In the last respect, the European Union's single market, with the principles of mutual recognition of regulations and the principle of subsidiarity, is an example.
Institutional competition is even more relevant in the case of transformation in Central and East European countries (CEE) Simultaneously, the transformation states applying for EU membership have to adjust their economic systems (institutional innovation) and adjust to the multitude of EU regulation (institutional imitation).
Ralph M Wrobel's recent country study, Estland und Europa: Die Bedeutung des Systemwettbewerbs für die Evolution und Transformation von Wirtschaftssystemen investigates this double task of transformation. It is a timely attempt to fill the gap between the theoretical discussion mentioned above and the still largely missing application.
Wrobel's analysis is based on an evolutionary theory of economic change in the tradition of Hayek and Schumpeter. On this foundation, institutional competition is defined in an analogy to competition in markets for goods. For analytical purposes, Hoppmann's categories of two interdependent processes resulting in competition, the "exchange process" (between demand and supply side) and the "parallel process" (on one market side), are used to describe institutional competition. This leads to a comparison of economic change in market economies and centrally planned economies, first as closed systems, then as open, interdependent systems. The role of international institutional competition and the problems of cartelization and protectionism as two strategies are discussed.
The case of Estonia
In Estland und Europa, Wrobel applies this framework to the case of Estonian economic transformation. As a response to massive voice and partly exit processes in the breakup of the Soviet Union (in Estonia in the form of mass demonstrations at cultural events, the so-called "singing revolution"), Estonian political entrepreneurs developed market conform institutions.
Attractive conditions for Foreign Direct Investment (FDI), privatization according to the German Treuhand-model focusing on strategic investors, the liberalization of factor markets and opening to foreign competition, the introduction of competition policy and monetary stabilization through a currency board are discussed in the framework of institutional competition.
A different dimension is Estonia's application for EU membership. Since 1995, the effort of all Estonian governments has been a fast track towards EU membership. This strategy was successful—Estonia was in the first group of countries opening accession negotiations. However, the imitation of several thousand regulations to comply with the single market alone, not to speak of the other policies of the EU, also closes the "window of opportunity" for institutional change.