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roots, since both Veblen and Gerschenkron paid close attention to the special institutional characteristics, and especially the role of the state, in the catching up by Germany and other European countries in the 19th and early 20th centuries.

It is this “institutional catching-up” that is at the heart of the view that the transition countries can both grow rapidly and converge in various dimensions towards the developed market economies. When countries of Eastern Europe and Central Asia started their transition process, they lacked well-functioning markets of all sorts – product markets, factor markets, financial markets – while their institutions, inherited from the era of central planning, were very different from the range of those observed in either mature or middle income market economies. This “institutional gap” and the need for institutional reforms were recognized at the very start of transition (see, e.g., Fischer and Gelb 1991). Convergence of the transition countries in terms of institutions should therefore be accompanied by growth in productivity and living standards. More nuanced versions of this argument point to the importance of history and the strength of the institutional inheritance from the pre-socialist period (sometimes called or even proxied by “the distance to Brussels”; see Fidrmuc 2003), and to the role of prospective or actual EU membership in generating institutional change: transition countries with experience of developed capitalism in living memory and members of the EU (e.g., the Baltics) are expected to converge more rapidly than countries with neither (e.g., the Central Asian states).

The same intellectual framework motivated the research and policy agendas of the World Bank and EBRD looking at the “business environment” and “investment climate” (see, e.g., World Bank 2004, EBRD 2005). Over a period of years, both institutions have engaged in large-scale research efforts, looking at the quality of the business environment in transition, developing and developed market economies. The policy perspective behind these efforts is straightforward: promotion of policies and institutions that create sustainable growth. For the most part, these recommend policies and institutions that are in place in many developed market economies, and hence the implication is that

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