July 12, 2016

25 Years of Reforms in Ex-Communist Countries: Fast and Extensive Reforms Led to Higher Growth and More Political Freedom

By Oleh Havrylyshyn, Xiaofan Meng and Marian L. Tupy
HumanProgress.org's editor, Marian L. Tupy, recently co-authored a policy analysis on reforms in ex-Communist countries. Please find the executive summary below and check out the full analysis here.

The transition from socialism to the market economy produced a divide between those who advocated rapid, or “big-bang” reforms, and those who advocated a gradual approach. More than 25 years have passed since the fall of the Berlin Wall in 1989, providing ample empirical data to test those approaches. Evidence shows that early and rapid reformers by far outperformed gradual reformers, both on economic measures such as GDP per capita and on social indicators such as the United Nations Human Development Index.

A key argument for gradualism was that too-rapid reforms would cause great social pain. In reality, rapid reformers experienced shorter recessions and recovered much earlier than gradual reformers. Indeed a much broader measure of well-being, the Human Development Index, points to the same conclusion: the social costs of transition in rapidly reforming countries were lower.

Moreover, the advocates of gradualism argued that institutional development should precede market liberalization, thus increasing the latter’s effectiveness. In a strict sense, it is impossible to disprove this argument, for no post-communist country followed that sequence of events. In all post-communist countries, institutional development lagged considerably behind economic reforms. Waiting for institutional development before implementing economic reforms could easily have become a prescription for no reforms at all.

However, after 25 years, rapid reformers ended up with better institutions than gradual reformers. This outcome is consistent with the hypothesis that political elites who were committed to economic liberalization were also committed to subsequent institutional development. Conversely, political elites that advocated gradual reforms often did so in order to extract maximum rents from the economy. One extreme consequence of gradualism was the formation of oligarchic classes.

When it comes to the speed and depth of reforms, the relative position of countries has remained largely unchanged. Most countries that moved ahead early are still farthest ahead.