The paper by Johnson, Kaufmann, and Shleifer (1997) examines the unofficial economy in transition economies, particularly in Eastern Europe and the former Soviet Union (FSU). It argues that the persistence of political control over economic activity in these regions has hindered the development of functioning market institutions. The authors show that countries that have successfully transitioned to market economies have also had healthier public finances, smaller unofficial economies, and better growth records. The paper defines the politicization of economic life as the exercise of control rights by politicians over businesses, including regulatory powers, tax collection, and control over trade and foreign exchange. Politicians often use these rights to enrich themselves through bribes or to support politically friendly entrepreneurs. This political control reduces the profitability of doing business, thereby adversely affecting entrepreneurial activity and economic growth. During the transition from communism to capitalism, the adverse effects of political control on growth are manifested in several ways. One is the growth of the unofficial economy, where firms avoid taxes and regulations. The unofficial economy is characterized by firms using protection and other services from private organizations, including criminal ones. The paper shows that the movement of production into the unofficial economy has significant consequences for public finance, as firms in the unofficial sector largely escape taxation, undermining tax collections and the government's ability to provide public goods in the official sector. The paper presents a simple model to illustrate the relationship between the unofficial economy and public finance. It shows that economies can be in one of two equilibria: one with low taxes and regulations, high government revenues, and a small unofficial economy; and another with high taxes and regulations, low government revenues, and a large unofficial economy. The paper argues that the second equilibrium is associated with worse aggregate performance than the first. The authors also emphasize the importance of depoliticization and the development of market-supporting institutions for successful transition. They argue that stabilization alone is not sufficient for growth and that the building of market-supporting institutions is a separate and crucial requirement. The paper also discusses the role of electricity consumption as a proxy for the unofficial economy and the effects of political control on economic performance. The authors find that countries with more effective institutions and less political control have better growth records. The paper concludes that the unofficial economy is a key factor in the transition process, and that successful transition requires the development of market-supporting institutions and the reduction of political control over economic activity.The paper by Johnson, Kaufmann, and Shleifer (1997) examines the unofficial economy in transition economies, particularly in Eastern Europe and the former Soviet Union (FSU). It argues that the persistence of political control over economic activity in these regions has hindered the development of functioning market institutions. The authors show that countries that have successfully transitioned to market economies have also had healthier public finances, smaller unofficial economies, and better growth records. The paper defines the politicization of economic life as the exercise of control rights by politicians over businesses, including regulatory powers, tax collection, and control over trade and foreign exchange. Politicians often use these rights to enrich themselves through bribes or to support politically friendly entrepreneurs. This political control reduces the profitability of doing business, thereby adversely affecting entrepreneurial activity and economic growth. During the transition from communism to capitalism, the adverse effects of political control on growth are manifested in several ways. One is the growth of the unofficial economy, where firms avoid taxes and regulations. The unofficial economy is characterized by firms using protection and other services from private organizations, including criminal ones. The paper shows that the movement of production into the unofficial economy has significant consequences for public finance, as firms in the unofficial sector largely escape taxation, undermining tax collections and the government's ability to provide public goods in the official sector. The paper presents a simple model to illustrate the relationship between the unofficial economy and public finance. It shows that economies can be in one of two equilibria: one with low taxes and regulations, high government revenues, and a small unofficial economy; and another with high taxes and regulations, low government revenues, and a large unofficial economy. The paper argues that the second equilibrium is associated with worse aggregate performance than the first. The authors also emphasize the importance of depoliticization and the development of market-supporting institutions for successful transition. They argue that stabilization alone is not sufficient for growth and that the building of market-supporting institutions is a separate and crucial requirement. The paper also discusses the role of electricity consumption as a proxy for the unofficial economy and the effects of political control on economic performance. The authors find that countries with more effective institutions and less political control have better growth records. The paper concludes that the unofficial economy is a key factor in the transition process, and that successful transition requires the development of market-supporting institutions and the reduction of political control over economic activity.