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Creating Capitalism: Politics, Reforms, and Economic Performance

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  • Frank Wykoff

    (Pomona College)

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    Abstract

    Building on a model that integrates reforms into exogenous and endogenous growth models, this paper designs an econometric model of the interplay between economic reform measures, political decisions and economic performance. Several key hypotheses about transition are tested using two-stage least squares on a logit model using data for six countries (Bulgaria, the Czech Republic, Estonia, Hungary, Russia and Slovakia) over their first ten years of freedom. We draw three conclusions from the empirical evidence. (1) Contrary to the litany that everyone favors reforms, we find that voting for strong reform parties leads to more reforms. (2) History matters, even in a model of forward looking rational agents. Where communism was relatively popular, Russia, Hungary and Bulgaria, reform is slower, more problematic, and aimed toward a welfare state not US-style capitalism. The cost of debunking communist ideology evidently slows progress considerably. (3) Better economic performance does not result quickly from reforms. From a public choice perspective the immediate identifiable social costs of reforms often appear stronger than the eventual diffuse benefits. Though not surprising this result does not auger well for reformers. Finally, critical macroeconomic data for the earlier years around the transition period are very poor quality. Indeed economic data seems to be too poor to reveal much about changing economic circumstance. Measured output may actually move in the opposite direction of realized output. International agencies could contribute greatly to analysis of transition by quickly and deeply engaging the local statistical agencies.

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    Bibliographic Info

    Paper provided by Claremont Colleges in its series Claremont Colleges Working Papers with number 2001-17.

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    Date of creation: Jul 2001
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    Handle: RePEc:clm:clmeco:2001-17

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    Keywords: transition; reforms; growth; voting; public choice; Central Europe; Russia; two stage least squares; logit;

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    1. Robert J. Barro, 1989. "A Cross-Country Study of Growth, Saving, and Government," NBER Working Papers 2855, National Bureau of Economic Research, Inc.
    2. Maxim Boycko & Andrei Shleifer & Robert W. Vishny, 1993. "Privatizing Russia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 139-192.
    3. Murrell Peter & Wang Yijiang, 1993. "When Privatization Should Be Delayed: The Effect of Communist Legacies on Organizational and Institutional Reforms," Journal of Comparative Economics, Elsevier, vol. 17(2), pages 385-406, June.
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    6. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December.
    7. Milanovic, Branko, 1993. "Social costs of the transition to capitalism : Poland, 1990-91," Policy Research Working Paper Series 1165, The World Bank.
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    9. Rodrik, Dani, 1995. "The Dynamics of Political Support for Reform in Economies in Transition," CEPR Discussion Papers 1115, C.E.P.R. Discussion Papers.
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    12. Roman Frydman & Cheryl Gray & Marek Hessel & Andrzej Rapaczynski, 1999. "When Does Privatization Work? The Impact Of Private Ownership On Corporate Performance In The Transition Economies," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1153-1191, November.
    13. Wolf, H.C., 1999. "Transition Strategies: Choices and Outcomes," Princeton Studies in International Economics 85, International Economics Section, Departement of Economics Princeton University,.
    14. Easton, Stephen T & Walker, Michael A, 1997. "Income, Growth, and Economic Freedom," American Economic Review, American Economic Association, vol. 87(2), pages 328-32, May.
    15. Corbo, Vittorio & Fischer, Stanley, 1995. "Structural adjustment, stabilization and policy reform: Domestic and international finance," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 3, chapter 44, pages 2845-2924 Elsevier.
    16. Easterly, William & Fischer, Stanley, 1995. "The Soviet Economic Decline," World Bank Economic Review, World Bank Group, vol. 9(3), pages 341-71, September.
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