The need to define a new economic policy approach to stabilization, as well as a new social policy for adjustment and restructuring, became particularly urgent following the collapse of communism in Eastern Europe and the disintegration of the Soviet Union. The full difficulty of implementing a thoroughgoing free-market reform, of the kind proposed in the 1980s for Third World countries, was highlighted dramatically in the Commonwealth of Independent States and Eastern Europe during the early 1990s. The collapse of communism created institutional chaos, leading to situations which were socially inhumane and politically volatile; and the willingness of many people to support free-market reform opened up a vast field for experimentation in social and economic restructuring on the part of international advisers and agencies. This experience proved extremely difficult.

In the former communist world, the basic institutions underpinning the market in developed capitalist countries were either very weak or entirely lacking. Such a situation, visible in an extreme form in the ex-Soviet bloc, called attention to a problem faced from the inception of the radical free-market adjustment effort: the lack of compatibility between existing local institutions — in Third World countries as well as in Eastern Europe and the ex-Soviet Union — and the (often implicit) requirements of the neo-liberal project of reform.

The experience with restructuring in the former communist world thus reinforced the gradual emergence of a new current of thinking on adjustment, gaining ground in the international business, donor and financial community, which explained difficulties encountered by economic reformers in the course of the 1980s and early 1990s through reference to deficiencies in existing economic, social and political institutions in the countries involved.

The World Bank clearly presented this point of view in its analysis of African adjustment at the end of the 1980s. In a marked departure from its previous position, the Bank focused less on macro-economic policy reform than on the need to improve efficiency, transparency and accountability in government; to restructure and upgrade public bureaucracies; and to strengthen local level institutions through decentralization and promotion of citizens' organizations.

Renewed interest in institutional analysis marked a step away from economic idealism, toward investigation of the complex social and political foundations of different economic systems. When combined with growing interest in designing compensatory social policies, it also implied greater recognition on the part of the Bretton Woods institutions that good economic advice must rest on strong social and political analysis.

Nevertheless incorporation of institutional issues in the economic adjustment model is still fragmentary. As long as the indissoluble links between economic, social and political reform are not systematically explored, the economic adjustment model will continue to produce situations which make it impossible to solve basic problems of governance.

Furthermore there is a danger that, in the context of high indebtedness and conditionality still shaping relations between international financial institutions and their clientele, the shift toward institutional reform will be associated with a type of top-down social engineering not essentially different from the top-down economic engineering already associated with stabilization and adjustment programmes. Standard prescriptions for social and political reform can be urged upon a large number of governments despite the patent differences among them. As in the realm of economic policy, such a course can be counter-productive.