The transitional recession in countries of Eastern Europe and the former Soviet Union has lasted much longer than expected. The legacy of the past and recent policy mistakes have both contributed to the slow progress. As structural reforms and gradual institution building have taken hold, the post-socialist economies have started to recover, with some leading countries building momentum toward faster growth. There is a possibility that in the wider context of globalization several of these emerging market economies will be able to catch up with the more advanced industrial economies in a matter of one or two generations. © 2001 Published by Elsevier Science Ltd on behalf of The Regents of the University of California.

The political and ideological concerns aside, the fundamental economic argument in favor of postsocialist transition to a market system has been a supposition that it will improve allocative efficiency and thus the competitiveness of the industries and standard of living of households. It is believed that the shift of property rights from the state to private sector must quickly facilitate such an improvement. Yet in the majority of cases, even after the first decade of transition, the economies have not returned to the path of sustainable growth. The countries tackling the issues of recovery and growth relatively better are these which were able to focus not only on de-nationalization of the state assets, but mainly on the development of venture entrepreneurship. The grass-rooted development of especially small and medium enterprises has contributed significantly to overcoming the transitional depression and then to recovery and fast growth. Yet to accomplish such a sequence specific systemic and policy conditions must be met. To facilitate such a path of development proper institutional arrangements must be executed by the governments, legal framework must be established and the government policies ought to support the rise and competitive performance of the small and medium enterprises (SME). Liberalization is a prerequisite of growth of this sector in transition economies, but is not a sufficient condition. The crucial factors involve the institutional arrangements.