Development Policy Analysis No. 4

Fifteen Years of Transformation in the Post-Communist World

By Oleh Havrylyshyn
November 7, 2007

Executive Summary

The collapse of the Soviet empire freed hundreds of millions of people from communism. In most of the post-communist world, political freedom was followed by economic liberalization. The transition from central planning to the free market was uneven, however.

In the early days after the fall of communism, two schools of thought about economic reform emerged. Some economists argued for a rapid break with the past, whereas others favored a more gradual approach. With the passage of time, it is now clear that rapid reforms were on the whole better than gradual reforms. Countries that adopted farreaching 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.

Importantly, rapid reformers developed better institutions than countries that opted for gradualism. 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 decisionmaking. The efficiency of large-scale privatizations was not dependent on the speed but on the transparency and honesty of the process.

Future reformers should not be afraid of adopting rapid reforms. To gain maximum benefits from economic reforms, however, they need to ensure that the privatization process is more transparent than it has been in the past.

In countries where the state has been captured by a small clique of oligarchs, rapid reforms may be politically impossible in the short run. Still, liberalization of the business environment, especially with regard to small and mediumsized enterprises, could stimulate the economy without being seen as a threat by the ruling oligarchy.

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Oleh Havrylyshyn is a research scholar at the University of Toronto’s Munk Centre for International Studies. He is the former Ukrainian deputy minister of finance, a former senior International Monetary Fund official, and the author of Divergent Paths in Post-Communist Transformation: Capitalism for All or Capitalism for the Few? (New York: Palgrave Macmillan, 2006).