Framework Paper on the Political Economics of Growth in Transition Countries

What were the problems confronting the choices to be made by transition economies? At the start of transition, post-communist countries had the "choice of a system", but at the expense of major costs. Democratic decisions about how to shape institutions, wealth distribution, social protection etc were confronted with a series of tight constraints such as the inefficiencies in existing industrial structures and the strong grip on power of the former ruling classes.

The paper summarises the initial conditions these countries were facing and the history predating transition. The problem of passing reforms democratically is then analysed. Particular aspects of the political economy of transition are then analysed, alternating theoretical and empirical arguments.

Findings include:

• transition countries, started the transition race with very different backgrounds, skills and chances
• the debate between good and bad policies was strongly distorted towards finding a general model of transition and away from accommodating each country's peculiarities
• research has overlooked an important aspect of institutional reform
• if the democratic mechanism of checks and balances is unclear to the voters, it is hard for them to judge who is to blame for badly chosen policies
• if the institutions that translate policy choices into policy actions are captured by external agents, then it is impossible to judge the quality of policy choices themselves
• different countries in different periods resorted to one or more mechanisms of implicit redistribution
• transitional democracies are less efficient than either authoritarian regimes or well established democratic regimes in resisting macroeconomic populism
• institutional arrangements, such as a more independent central bank, and clear separation of powers between the executive branch and the legislature and between the central government and the regions, help protect macroeconomic policy from populist demands

Conclusions include:

• economic performance is basically unaffected by the speed of liberalisation at the initial stage of transition, instead, the weakening of the institutional capacity reveals itself to be a much stronger determinant of this performance
• the rule of law and command of democracy seem to be important factors in what makes institutions work
• fast democratisation and reforms under a poor rule of law generate an institutional collapse, which reinforces the output fall and prevents recovery
• conventional wisdom, which stays that deforms tend to be stalled more easily under a democratic regime does not apply to most of the post-communist countries, where democratic transition is successful the strong popular support for change is translated into efficient policies
• more democracy is correlated with faster reforms and recovery
• the only aspect for which transition countries do not seem to differ from developing countries is the one of macroeconomc stabilisation.