This paper analyzes institutional and organizational developments in the early stages of postsocialist reforms, focusing on policy decisions on the timing of privatization and on the allocation of resources between different types of sectors. We identify links between these decisions and legacies of communism, limited market resources, distorted industrial structures, and poor institutional conditions. The results are consistent with the observed pattern of development that has emerged across a wide variety of countries adopting different reform strategies. This pattern is one in which a burgeoning private sector of small firms in services and light industry develops separately from state-owned heavy industry.