Certain types of laws and institutions shape economic behavior in market economies. In Eastern Europe these general rules and market institutions are often nonexistent, and a major problem is to create market economies while simultaneously building the supporting institutions. We describe the type of institutions inherited from Soviet‐style economies and show institutional reforms and macroeconomic policies may have limited effects due to the interdependence and lack of complementary market institutions. Without a “critical mass” of market institutions, the benefits of markets are slow in realization. The advantages of reforming existing but distorted institutions over building new ones is str