How Institutional Framework Affects the Formation of Capitalism in Countries in Transition: Following the Path or Finding New Ways?

Abstract: There is a variety of capitalist systems in Europe that many scholars attempt to classify using social, political and economical determinants. Among a diversity of methods, institutional approach has received a growing recognition in the recent years. It tries to explain why the European countries’ socio-economic models follow different paths in their developments through analysis of formal and informal institutional frameworks. As a theoretical basis for the thesis, Hall and Soskice’s theory of “Varieties of Capitalism” is used. This theory distinguishes three models, which have developed along fundamentally different lines and currently are operating in the EU countries – co-ordinated market economy, liberal market economy and Meditteranean one. In the centre of the study are the countries in transition, which represent newly founded unique capitalist systems characterised by turbulent changes and dynamic progress. The present study assumes that VoC model may be applicable to study the countries in transition that cannot be taken for granted though due to the specifics of countries institutional system. Empirical analysis attempts to find an answer to the key question of the thesis: “Which of the varieties of capitalism does Latvian system represent and how does it relate to other European capitalistic systems?”, Latvia being chosen as a sample country in transition. Analysis conducted in the legal part complements to the discussion by adding valuable legal and political perspectives to the topic. As a result, the analysis represents an interdisciplinary study that incorporates political, economic and legal aspects of the problems, thus, underlining the interdependence of institutional elements and socio-economical determinants. The study demonstrates how the unique characteristics of Latvian institutional framework can be fitted into the VoC model, and argues that countries in transition are on the way of forming their specific form of capitalist system, which incorporates features of the three existing models.