Lessons from 25 years of post-communism: the importance of reform, democracy, and geography

Berliners sing and dance on top of the Berlin Wall to celebrate the opening of East-West German borders, November 1989. Source: AP Photo/Thomas Kienzle
Joshua Tucker: The following is a guest post from University of California – Los Angeles (UCLA) political scientist Daniel Treisman.
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As the 25^th anniversary of the fall of the Berlin Wall approaches, scholars have begun appraising just what has changed since then in the territories to its east.
With support from the Peterson Institute and George Soros, the economists Anders Åslund and Simeon Djankov recently assembled in Budapest a high-powered collection of the original reformers — including Leszek Balcerowicz, Vaclav Klaus, and Anatoly Chubais — to tell tales and ponder lessons.
In a paper written for that symposium, I examine the last quarter century of data on political and economic change, focusing in particular on the extent of economic reforms. (Of course, these statistics have flaws, but many changes were large enough to dwarf any measurement problems.)
A first trend is obvious — divergence. Communism compressed variation. All Soviet Bloc countries had distorted economies, Leninist party dictatorships, and relatively low GDP per capita. Once the brace was taken off, differences quickly reappeared. The income gap between richest and poorest countries grew from $11,000 in 1990 to almost $25,000 in 2010. By then, their political regimes ranged from oriental despotism (Turkmenistan) to consolidated democracy (Poland). In terms of market liberalism, Georgia came eighth on the World Bank’s ease of doing business rankings in 2013, while Uzbekistan was 146^th.
A second trend is almost as obvious — convergence. As they diverged from one another, the postcommunist countries were converging towards something else: their neighbors. In income levels, political institutions, and economic freedom, these countries have become more and more like the non-Soviet-Bloc countries nearest to their borders.
I demonstrate this statistically. Controlling for a country’s initial income, its change in income between 1990 and 2010 correlates strongly with the initial level of income in its nearest non-Soviet-Bloc neighbor or neighbors. The same holds for democracy and economic liberalism.
The maps below show the changing geography of democracy. As of 1985, the edge of the Soviet Bloc marked a clear political divide (especially in the West since in the East China was also communist). By 2010, the former iron curtain had disappeared into the undergrowth as political regimes to its east came to resemble those on the other side.
Since 1989, the Baltic states have converged towards Finland; the Caucasus countries towards Turkey and Iran; Central Asia towards Iran, Afghanistan, and China. Central Europe has approached Germany and Austria, but with the occasional tug from the East. (Hungary is currently slipping backwards.) Russia appears disoriented by the contradictory pulls of Finland and China. There are exceptions — Mongolia is “too democratic,” for its location, Belarus “too authoritarian.” But most of the former satellites, after escaping Moscow’s gravity, have sped out to join the neighborhood beyond the Bloc’s nearest border.

How did this occur? Focusing on countries’ economic systems, ratings compiled by the European Bank for Reconstruction and Development show that almost all experienced a rapid surge of economic reform in the early 1990s, slowing to a crawl from the mid-1990s. During the initial sprint, leaders distinguished themselves from laggards, and relatively few major changes in the order occurred after that. The hares won, not the tortoises.

At the start of transition, economists debated whether a “gradual” or a “radical” strategy — dubbed “shock therapy” by critics — would produce more effective marketization at lower social cost. In retrospect, this debate — for all the passions it aroused — looks like a distraction. The actual reform path in countries that prided themselves on “gradualism” — such as Hungary — was extremely close to that of radicals such as Poland. Speed did matter. Countries that fell behind rarely caught up. And the cost — in lost output or high unemployment — was greater in countries moving slowly than where reform was rapid.
The reasons some countries stalled halfway had little to do with deliberate strategy. The best explanation is politics. Most of those that marketized fastest had one thing in common — they had become relatively democratic. This might seem surprising. Early on, scholars had expected the opposite — that more responsive political systems would succumb to populism, as demagogues exploited the pain of transition to capture power and reverse reforms.
Yet the evidence is quite strong. Although identifying the separate impact of interrelated factors in a small dataset is difficult, the relationship is robust. Using an error correction model, I find both a long-run relationship between levels of democracy (Polity2) and levels of marketization (the EBRD’s index) and a short run relationship between increases in democracy and increases in economic reform the next year. These remain strong including country and year fixed effects and controlling for various other factors — GDP per capita, oil, economic crisis, foreign aid, war, civil war and prospective EU accession. In theory, it might be greater economic liberalism that fosters political reform. But Granger causal modeling suggests the reverse: increases in democracy predict economic reform the next year, but not vice versa.
This may help explain why reform was concentrated in the early 1990s, with the pace slowing almost everywhere after 1996. The Berlin Wall’s fall set off a burst of democratization in Eastern Europe — which led, a little later, to economic liberalization. By the mid-1990s, political reform had stalled or even reversed in some places, perhaps contributing to the slowdown in market reform.
Why didn’t the economic pain of transition prompt a political backlash, leading to reversal of reform? In part, because what electorates turned out to hate was not painful reform but just pain. Poor economic performance meant electoral defeats for incumbents, whether they were radical reformers or conservative communists. And, at least in the first few years, poor economic performance often engendered demands for faster rather than slower reforms.
As a result, even communists who regained office rarely reversed reform — and sometimes continued it. In Hungary, as output tanked in 1993-94, angry voters returned the reconfigured former communists to power. Yet, according to Eurobarometer polling, that year 56 percent thought economic reforms were going too slowly rather than too fast. The new socialist government under Gyula Horn disregarded ideology to introduce a stringent but necessary fiscal austerity package.
In the longer run, democracy seems to encourage economic liberalism by constraining the executive (which might otherwise channel rents to cronies); in the short run, a shift to more competitive elections often translated into bursts of reform. While communists or former communists in office did not consistently retard reform—recall Gyula Horn—reform was slower in countries where no turnover to an outsider had occurred.
Finally, some reform programs were associated with the visionary leaders who launched them — a few of whom attended the Budapest symposium. Did individual leaders make a difference, above and beyond the circumstances in which they served? Was it the man or his times?
Although they should be interpreted with caution, econometric estimations suggest a preliminary answer. I controlled for country, year, and other possible influences on marketization — democracy, war, the proportion of communists in the legislature — and then tested whether the years in which particular leaders served saw more or less economic reform. I ran these tests for all the roughly 120 leaders who served in the 29 postcommunist countries (presidents in presidential systems, prime ministers in parliamentary ones). I also checked for the influence of two noted reformers, Yegor Gaidar and Leszek Balcerowicz, who served respectively as acting prime minister of Russia and deputy prime minister of Poland.
Controlling for the context in which each leader served, the three whose reform achievements most exceeded expectations were Gaidar (Russia in 1992), Balcerowicz (Poland in 1990-91), and Dimitar Popov (Bulgaria in 1991). The three who surprised the most on the downside were Leonid Kravchuk (Ukraine in 1991-3), Petre Roman (Romania in 1989-1991), and Zhan Videnov (Bulgaria 1995-6).
Of course, reforms are usually advanced by teams, not individuals, sometimes against the president’s resistance rather than on his initiative. Other idiosyncratic events might be at work. The timing of the measures is also imperfect since the EBRD scores are annual but leaders serve for irregular periods. Still, the results give reason to think that leaders matter. Had Ukraine’s economy in 1992 been overseen by Yegor Gaidar and Russia’s by Leonid Kravchuk, the short-run outcomes in the two countries might have been quite different.