The strength or weakness of the microfoundations of state-socialist systems provides an important explanation for the divergent patterns of economic transformation in the former socialist countries in the last decade. This paper argues that institutional arrangements that structure the incentives for local governments, firms, and individuals merit a fresh look in studying why rapid growth accompanied economic transition in some state-socialist countries while severe recession followed reform in others. It also attempts to link these two factors to the emerging political realignments in these countries.