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The real

Havrylyshyn, an International Monetary Fund

ness, and civil society, though stronger than

economist, shows that on virtually all the rele-

before, remains weak relative to Western coun-

problem with the

vant criteria ranging from economic growth

tries.

transition process

rates to corruption, the "big-bang" countries

It was under those difficult conditions,

in Central Europe

of Central Europe performed significantly bet-

therefore, that one of history's most dramatic

ter than most of their eastern neighbors who

social experiments--the political and economic

is not that it was

took the gradualist approach.78 His conclu-

transformation from communist repression to

too fast, but that

democratic capitalism--took place. The chal-

sions are overwhelmingly supported by the

academic literature.79

lenge was enormous. Moreover, there were no

it was not fast

detailed blueprints for the reforms that could

enough.

guide the region. The reformers knew where

Estonia: An Example Worth

they wanted to go but did not know how to get

Emulating

there. Not surprisingly, transformation was not

all clear sailing. For example, rigged privatiza-

tion deals channeled unearned wealth to

The success or failure of the transforma-

crooked government officials and their cronies.

tion process in Central Europe can only be

Today, those who partook in that privatization

judged in relation to other countries and

bonanza continue to enjoy their ill-gotten

regions. Central Europe has performed much

wealth, which generates much resentment

better than, say, Russia and Ukraine, whose

among the populace. Rigged privatization deals

approach to reform was haphazard at best.

have also undermined the values that form the

However, in comparison to Estonia, the most

moral underpinning of capitalism, including

fervent liberalizer in the post-communist

hard work and entrepreneurship.

world, Central Europe looks much less im-

Instead of auctioning them off to the

pressive.

highest bidder, Central European govern-

Estonia began to liberalize at the end of

ments often "sold" state assets at heavily dis-

1992. The government eliminated import tar-

counted prices to their political supporters,

iffs and instituted a flat income tax. Corporate

friends, and families. The forgone revenue

taxes on reinvested profits fell to zero. To

could have been used in a variety of ways

arrest inflation, the government established a

ranging from tax cuts to paying off the

currency board. State enterprises underwent

region's debt. Moreover, the early privatiza-

privatization. As was the case with all former

tion deals proved quite "sticky." Many of the

communist countries, initially the Estonian

new owners of the privatized enterprises did

economy went into a recession as many ineffi-

not try to resell them to more competent

cient firms folded. By 1995, however, the econ-

entrepreneurs. Instead, they either "tunneled

omy was growing again. Between 1995 and

them out" (a term for asset-stripping used in

2004, Estonian GDP per capita rose by 96 per-

cent.80 That rise was 47 percentage points

the Czech Republic and Slovakia) or drove

them to bankruptcy. Regrettably, the resale

higher than that of Hungary, the best per-

forming Central European country.81

of privatized enterprises in Central Europe

continues to be delayed by bureaucratic hin-

According to the Fraser Institute's Economic

drances, which forces the new buyers to

Freedom of the World: 2006 Annual Report,

resort to bribes.

Estonia was the 12th economically freest

Does that mean that Central European

country in the world and the freest country in

the post-communist world.82 The smaller role

countries should have waited before disman-

tling their socialist economies? The answer is

that the state plays in the lives of the Estonian

an emphatic no. The cost of postponing

people is reflected in the surveys of Estonian

reforms, in terms of subsidies to inefficient

public opinion. For example, only 38 percent

producers and foregone economic growth,

of Estonians felt that the state's role in their

would have been immense. Moreover, Oleh

lives was overbearing. The score in Poland, a

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