Rapid Reformers in Post-Communist World Have Shown Best Economic and Institutional Performance

Transparency is crucial for effective privatization

November 9, 2007

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WASHINGTON—The ex-communist countries that rapidly liberalized their economies after the collapse of the Soviet Union outperformed those that undertook more gradual reforms, shows the study, “Fifteen Years of Transformation in the Post-Communist World: Rapid Reformers Outperformed Gradualists,” released by the Cato Institute today on the anniversary of the fall of the Berlin Wall.

“With the passage of time, it is now clear that rapid reforms were on the whole better than gradual reforms. Countries that adopted far-reaching reforms tended to experience higher growth rates and lower inflation and received more foreign investment. Inequality increased less among rapid reformers than among gradual reformers. The same is true with respect to poverty rates,” finds author Oleh Havrylyshyn, the former Ukrainian deputy minister of finance, and former senior International Monetary Fund official.

Looking at 15 years of empirical evidence collected by the European Bank for Reconstruction and Development, United Nations, and the World Bank, the author explores the debate between the proponents of rapid and gradual reforms — two schools of thought that emerged after the fall of communism.

Based on that data, Havrylyshyn concludes that early reformers had the best economic performance. Those with more advanced market reforms achieved stronger recovery from recessions that followed the collapse of communism.

Moreover, the author finds that early liberalizers also moved farthest on institutional development. “Countries that moved early and fast on macroeconomic stabilization and liberalization also built better institutions such as independent judiciaries that protect private property rights… In fact, all of the rapid reformers developed into liberal democracies, whereas in many of the gradual reformers, such as Russia, small groups of super-wealthy oligarchs captured the state and dominated its economic decision-making.”

The social pain of transition was also reduced by rapid reform. “A key motivation for gradualism was the concern that rapid reforms would impose too great a social cost in the form of unemployment, income deterioration and poverty. In practice, the opposite has occurred… radical reforms led to less social pain, not more.”

Privatization, the author acknowledges, was often deeply flawed under rapid as well as gradual reforms. Future reformers should note that the success of privatization depended on the transparency and honesty of the process.

The author concludes with policy recommendations for countries suffering from state capture by an oligarchy, such as Ukraine and Russia, where he argues for greater transparency and “liberalization of the business environment with respect to small and medium-sized enterprises.”