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This study compares transition processes in countries of Central and Eastern Europe, the former Soviet Union (FSU) and sub-Saharan Africa.By widening the scope from most- to least-developed transition economies, the study establishes the importance of a strong state with evolved institutional capacity to protect citizens, enforce property rights and generate social capital.The evidence presented further argues that enforceable, credible property rights with associated market discipline are among the best antidotes to corruption, shadow economies, criminal injustice and poverty.The presence of accountable institutions also influences economic growth and the ability of a country to attract trade and foreign direct investment.Consequently, when institutions of FSU and sub-Saharan countries develop to the point they become attractive to traders and investors from rich countries, their governments need to focus on abolition of barriers to trade, investment and capital.The author commends the recent reorientation of the international donor community towards encouraging recipient governments to commit credibly to increasing capacities of their state institutions with a view to supporting property-based rule of law and social order.

The aim is to review transition literature for evidence that supports sequential reform strategy, as presented in this report. The second part discusses the findings in the context of Azerbaijan, a formerly socialist transition economy with interesting initial conditions.Evidence of the country's current need to focus on improving public services fits well with the sequential reform view. The authors argue that constraints captured by initial conditions (human resources, administrative capacities, traditions, etc.) necessitate sequencing of reforms and outline general aspects of a sequential reform strategy designed to expedite the transition process.The literature survey supports the Washington Consensus recommendations for starting transition with macroeconomic reforms, but over time initial conditions inevitably constrain and necessitate sequencing.In other words, reform efforts initially need to be directed across the widest possible front, but later in transition the emphasis of reform efforts needs to shift from one area to another.In the later stages, emphasis needs to be laid on improvement of public sector governance to support and promote macroeconomic reforms and formation of a healthy corporate sector. Democratic institutions arise with economic growth generated by the corporate sector.

The macro economic stabilisation in Azerbaijan has been successful. Following cessation of conflict with Armenia, and decline of GDP by 60 per cent from 1990 to 1995, the government in effect implemented a big-bang reform process in 1995.The inflation rate has now declined to the lowest rate of any transition country and important reforms in the monetary-fiscal mix have been undertaken.The second plank of first generation reforms, liberalisation, has also been successfully implemented with liberalisation of prices, the trade and foreign exchange regimes and virtual completion of small-scale privatisation, although the onset of the Russian crisis in 1998 has impacted negatively both internal and external balances.The paper presents the current economic picture for Azerbaijan and then assesses economic policy issues facing the country. Azerbaijan is well endowed with natural resources, particularly oil but also gas.The second part of the paper considers the question by focussing on policy issues related to the potential flow of oil-based monies into Azerbaijan.The possibility of the "Dutch Disease" syndrome impacting Azerbaijan through a rising real exchange rate on the non-oil sector is not considered to be a problem at present but is expected to become a policy concern in the medium- to long term.Structural reforms in public finance to deal with expected surpluses are lagging and are necessary in the next phase of the transition of Azerbaijan.Moreover, significant reforms are required in banking - privatisation, improvement in regulation and supervision and in the implementation of supporting legal rights, given the current lack of financial intermediation.