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The paper emphasizes the importance of embedded institutions for the transformation of the agricultural sector and rural economies in the transition countries and identifies and analyses institutional aspects regarding agriculture and rural development common to the transition countries. It focuses on the institutional dimension of reform policies, i.e. on the political economy aspects of the transition process that were decisive for the success or failure of the reforms. The importance of identifying the “mental models” of various stakeholders during the transition process is emphasized and the reasons are explored why the transition process in the countries of Central and Eastern Europe has not resulted in a restructuring of the agricultural sector towards family farms as most were expecting. The paper then discusses the role of institutions for the governance of farms, the comparative advantage of farm sizes and the choice of specific legal forms of farms.