Don’t Blame Capitalism for Turmoil in Central Europe

Populist gains in Central Europe were caused by government corruption, not by liberal reforms

October 25, 2006

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WASHINGTON – As we mark the 50th anniversary of the Hungarian revolt against communism, liberal reforms in Central Europe are once again endangered — this time by the growth of populist and extremist parties. High government spending and economic interventionism increased corruption among public officials and contributed to the downfall of liberal parties in Central Europe, argues a new policy analysis by the Cato Institute.

In the study released today, “The Rise of Populist Parties in Central Europe: Big Government, Corruption, and the Threat to Liberalism,” author Marian Tupy, policy analyst with Cato’s Center for Global Liberty and Prosperity, finds that liberalism, once the favored philosophy in the region, is now on the defensive.

Much of the post-communist era was plagued by cronyism and a lack of transparency. A politically connected few, many of them former communists, have accumulated disproportionate wealth. “The outraged public has exacted punishment on the ruling class by withdrawing its support from the established political parties and by increasing its support for the populists, who skillfully tapped into the feeling of disenchantment with the transition process,” he writes.  

The transition from communism to capitalism remains unfinished. Though the public opinion polls suggest continued support for capitalism, the state remains the most important actor in Central European economies. Government spending consumes nearly 44 percent of the region’s GDP, and Central European economies remain more regulated than those in the West. Combined with the relative lack of government accountability, spending and overregulation create plenty of opportunities for corruption among public officials.

Unfortunately, membership in the European Union will contribute to the persistence of corruption in the region. The constant stream of regulations from Brussels will no doubt keep the region’s economies overregulated, while tens of billions of euros in “structural and cohesion funds” will keep Central European budgets bloated.

In the long term, however, Tupy predicts that populism will not last. “Since the populists are unlikely to reduce the size and role of government in their economies, they will be unable to address the underlying causes of corruption,” he asserts. He recommends that future liberal rulers “focus on tackling the underlying causes of corruption, such as the size and scope of the state.”

Development Policy Analysis # 1