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Winners Take All: The Politics of Partial Reform in Postcommunist Transitions

Abstract

Conventional models of the politics of economic reform tend to be based on an assumption about the costs and benefits of reform, known informally as the J-curve. Reforms are expected to make things worse before they get better. This presents a classic time inconsistency dilemma for reformist governments forced to demand severe sacrifices from the public in the short term for the mere promise of future gains. In response, political economy models of the reform process have tended to stress the importance of insulating governments from the pressures of the short-term losers until a sufficient constituency of winners has been created with a stake in supporting and enhancing the reforms.

Based on evidence from the postcommunist transitions, this article suggests that the most serious political obstacles to the process of economic reform have come not from the short-term losers but from the shortterm winners. Groups that gain substantial rents from the early distortions of a partially reformed economy have a stake in maintaining a partial reform equilibrium that generates high private gains, but at a considerable social cost. In these countries, the main political challenge has been, not to marginalize the losers, but to restrain the winners. This explains the paradoxical outcome of the postcommunist transitions: that political systems which are more inclusive of the losers have been able to adopt and sustain more comprehensive economic reforms than states insulated from popular pressures.

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1 Przeworski , Democracy and the Market (New York: Cambridge University Press, 1991), 138.

2 Variations on this theme have stressed the virtues of autonomous states (Evans Peter, “The State as Problem and Solution: Predation, Embedded Autonomy, and Structural Change,” in Haggard Stephan and Kaufman Robert R., eds., The Politics of Economic Adjustment [Princeton: Princeton University Press, 1992]); powerful executives (Haggard Stephan and Kaufman Robert, The Political Economy of Democratic Transitions [Princeton: Princeton University Press, 1995]); insulated technocrats (Williamson John, “In Search of a Manual for Technopols,” in Williamson , ed., The Political Economy of Policy Reform [Washington, D.C.: Institute for International Studies, 1994]); and substantial external assistance (Sachs Jeffrey, “Western Financial Assistance and Russia's Reforms,” in Islam Shafiq and Mandelbaum Michael, eds., Making Markets: Economic Transformation in Eastern Europe and the Post-Soviet States [New York: Council on Foreign Relations, 1993]). Przeworski himself does not support such a view, which he believes will lead to problems in the consolidation of democracy, Przeworski , “Economic Reforms, Public Opinion, and Political Institutions: Poland in the Eastern European Perspective,” in Pereira Luis C. B., Maravall Mario M., and Przeworski Adam, Economic Reforms in New Democracies:A Social-Democratic Approach (New York: Cambridge University Press, 1993).

3 This is one of the arguments made against the radical or “big bang” approach to economic reform. For a review of the political economy case against such an approach, see Roland Gerard, “The Role of Political Constraints in Transition Economies,” Economics of Transition 2, no. 1 (1994).

4 In the expected utility function of any given actor, the benefits of reform would be discounted by the probability that the reform will be reversed prior to the receipt of the benefits. For a review of this problem in the politics of economic reform, see Mariano Tommasi and Andres Velasco, “Where Are We in the Political Economy of Reform?” (Manuscript, Cambridge, Mass., 1995).

5 Haggard and Kaufman (fn. 2,1995).

6 On the earlier literature, see the classic treatment of this issue in Huntington Samuel, Political Order in Changing Societies (New Haven: Yale University Press, 1968); and the review in Haggard Stephan, Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries (Ithaca, N.Y.: Cornell University Press, 1990). The recent work on the advantages of state autonomy and insulation is voluminous. Some prominent examples are Evans (fn. 2); Haggard and Kaufman, “Economic Adjustment and the Prospects for Democracy,” in Haggard and Kaufman (fh. 2, 1992); idem (fn. 2,1995); and the contributions to Williamson (fn. 2).

7 Nelson argues that this approach can be directly applied to the postcommunist transitions; Nelson Joan M., “The Politics of Economic Transformation: Is Third World Experience Relevant in Eastern Europe?” World Politics 45 (April 1993).

8 Broad, cross-national comparisons of the postcommunist transitions include EBRD, Transition Report, 1994 (London: European Bank for Reconstruction and Development, 1994); idem, Transition Report, 1995 (London: European Bank for Reconstruction and Development, 1995); and World Bank, World development Report, 1996 (Washington, D.C.: World Bank, 1996). Other studies include Åslund Anders, Boone Peter, and Johnson Simon, “How to Stabilize: Lessons from the Postcommunist Countries,” Brooiings Papers on Economic Activity (1996); Martha de Melo, Cevdet Denizer, and Alan Gelb, From Plan to Market: Patterns of Transition, World Bank Policy Research Working Paper, no. 1564 (1996); and Stanley Fischer, Rajiv Sahay, and Carlos Vegh, “Stabilization and Growth in Transition Economies: The Early Experience” (Manuscript, Washington, D.C., 1996).

9 World Bank (fh. 8).

10 The groups exclude those countries affected by war: Armenia, Azerbaijan, Croatia, Georgia, Macedonia, and Tajikistan.

11 Similar results can be obtained by replacing the economic reforms ratings of the World Bank with transition indicators developed by the EBRD that measure progress in six categories of reform; EBRD (fh. 8,1994). The EBRD measures include more institutional variables in their ratings.

12 De Melo, Denizer, and Gelb (fn. 8).

13 Åslund, Boone, and Johnson (fn. 8) find no direct statistical correlation between the extent of economic reforms adopted and the magnitude of cumulative output declines once some basic control variables are added to the regression. They do not test for the existence of a nonlinear relationship as Figure 2 would suggest. Nevertheless, they reach the same conclusion through comparative case analysis.

14 Unemployment data from the postcommunist countries have serious reliability problems and therefore must be used cautiously.

15 Åslund, Boone, and Johnson (fn. 8).

16 Haggard and Kaufman (fn. 2,1995), 156.

17 Postcommunist cases affected by war are excluded because executive turnovers are much more likely to be affected by the dynamics of war.

18 Executive turnovers consist of the number of times the country's lead policy-making executive has been replaced during the time period. In presidential systems, presidential turnovers are counted. In parliamentary and semipresidential systems, prime ministerial turnovers are counted. A count of zero signifies that the same executive governing the country under communist rule was still governing the country through the transition, thus indicating no executive turnovers at all.

19 Government tenure consists of the number of months in which the leading executive (president in presidential systems and prime minister in parliamentary and semipresidential systems) has remained in office.

20 On Slovenia, see Ramet Sabena Petra, “Slovenia's Road to Democracy,” Europe-Asia Studies 45, no. 5 (1993); and Pleskovic Boris and Sachs Jeffrey D., “Political Independence and Economic Reform in Slovenia,” in Blanchard Oliver J., Froot Kenneth A., and Sachs Jeffrey D., eds., The Transition in Eastern Europe (Chicago: University of Chicago Press, 1994), 1.

21 On Hungary, see David L. Bartlett, “Stabilization, Adjustment, and Reform: The Political Economy of Transition in Hungary” (Manuscript, 1995); Bruszt Laszlo and Stark David, “Remaking the Political Field in Hungary: From the Politics of Confrontation to the Politics of Competition,” in Banac Ivo, ed., Eastern Europe in Revolution (Ithaca, N.Y.: Cornell University Press, 1992); and Bunce Valerie and Csanadi Mario, “Uncertainty in the Transition: Post-Communism in Hungary,” East European Politics and Society 7, no. 2 (1993).

22 Even Vaclav Klaus has faced strong electoral pressures, as evidenced by his poor performance in the 1996 parliamentary elections. Klaus' s three-party coalition government lost its majority share and has been governing as a minority coalition. On the Czech Republic, see Orenstein Mitchell, “Out of the Red: Building Capitalism and Democracy in Post-Communist Europe” (Ph.D. diss., Yale University, 1996).

23 This should not be taken as a proxy measure for the continued dominance of former communist rulers in the postcommunist era. Not all of the slow reformers have faced continuous rule by former communist leaders. Kazakhstan, Turkmenistan, and Uzbekistan did continue to be governed by chief executives who were former first secretaries of their respective communist parties prior to the transition. The first leader of Ukraine, Leonid Kravchuk, was formerly second secretary of the Ukranian Communist Party. In Belarus, Kyrgyzstan, Moldova, and Russia, new chief executives were elected, most of whom held previous positions—though not the leading positions—in the communist parties of their respective republics prior to the transition.

24 Romania is a semipresidential system in which the popularly elected president shares considerable powers with a parliamentary government. Since 1990 Romania has had three prime ministers with an average tenure of twenty-one months each. On Romania, see Katherine Verdery and Gail Kligman, “Romania after Ceausescu: Postcommunist Communism?” in Banac (fh. 21).

25 In a recent paper on the politics of stabilization in postcommunist systems, I show that stabilization programs are as likely to be introduced just before elections—the moment of greatest insecurity in a politician's tenure—as immediately after electoral victories; see Joel S. Hellman, “Competitive Advantage: Political Competition and Economic Reform in Post-Communist Transitions” (Manuscript, 1996).

26 Przeworski (fh. 1), 179.

27 Similarly, the EBRD's transition indicators measuring progress in economic reform in six categories in 1994 and nine categories in 1995 do not reflect any backtracking on reform scores in any of the postcommunist countries; EBRD (fh. 8,1994,1995).

28 For detailed accounts of the privatization process in Central Europe and the Baltic states, see Frydman Roman and Rapaczynski Andrzej, The Privatization Process in Central Europe, 2 vols. (Budapest: Central European University, 1993).

29 ibid.

30 For assessments of macroeconomic policy in Hungary and Lithuania, see the country sections in EBRD (fn. 8,1995).

31 Of course, this does not preclude such reform reversals in the future, nor is it necessarily advantageous for the creation of a stable democracy. Przeworski (fh. 2) expresses the concern that electoral backlashes against reformers that do not lead to backtracking on economic reform can be politically destabilizing in emerging democracies. If voters continue to find that their votes are not reflected in policy changes, then they could lose confidence in the democratic process and be more attracted to authoritarian solutions.

32 This assumption is especially important in political economy models that are designed to highlight the advantages of gradual reforms. Roland argues that the best political strategy of reform is to start with measures that produce winners in the short term who gain a stake in the reform process that they will continue to defend once more costly measures need to be adopted down the road. See Roland Gerard, “Political Economy of Sequencing Tactics in the Transition Period,” in Csaba Laszlo, ed., Systemic Change and Stabilization in Eastern Europe (Aldershot, U.K.: Dartmouth Press, 1991); and idem (fn. 3). This is also the spirit of Murrell's critique of the shock therapy reform program; Murrell Peter, “Conservative Political Philosophy and the Strategy of the Economic Transition,” East European Politics and Societies 6, no. 1 (1993); and idem, “Evolution in Economics and in the Economic Reform of the Centrally Planned Economies,” in Clague Christopher and Rausser Gordon C., eds., The Emergence ofMarket Economies in Eastern Europe (Cambridge, Mass.: Blackwell, 1992).

33 Haggard and Kaufman (fn. 2,1995), chap. 1, emphasize this collective action dilemma in the political economy of reform.

34 The only work that explicitly examines the dynamics of partial reform is Murphy Kevin M., Shleifer Andrei, and Vishny Robert, “The Transition to a Market Economy: Pitfalls of Partial Reform,” Quarterly Journal of Economics 57, no. 3 (1992). Ronald I. McKinnon touches on this issue in his analysis of different sequences of economic reform; see McKinnon , The Order of Economic Liberalization: Financial Control in the Transition to a Market Economy (Baltimore: Johns Hopkins University Press, 1991). Richard E. Ericson discusses the social costs of partial reforms in the specific context of the transition from centrally planned economies, though he does not explore the distribution of gains from such reforms; see Ericson , “The Classical Soviet-Type Economy: Nature of the System and Implications for Reform,” Journal of Economic Perspectives 5, no. 4 (1991).

35 Ericson (fn. 34).

36 The fact that such market distortions exist does not guarantee that actors will be able to take advantage of them in these partially reformed economies. It is possible that a highly restrictive state could build walls between the liberalized and more highly controlled spheres of the economy, preventing actors from gaining access to these rent-seeking opportunities. This is often the explanation for the success of Chinas partially reformed economy, though press reports of high levels of corruption within China's state sector suggest that there are limits to the state's capacity to enforce such restrictions; Murphy, Shleifer, and Vishnay (fn. 34).

37 Of course, these are not the only components of comprehensive reform, but they do encompass what are generally considered to be the key elements of reform. See EBRD (fh. 8,1995).

38 Such a measure assumes that the distance separating the thresholds of the 1–4 scale within each dimension are directly comparable across all the dimensions, which may not necessarily be the case. As a result, this measure of partial reform should be interpreted with considerable caution. Given the potential measurement error in gauging partial reform, it would not be appropriate to use these data in any sophisticated statistical tests. Rather, at this stage the data are more suggestive of trends that are worthy of further empirical investigation.

39 The World Bank has collected the only detailed data on inequality and the concentration of incomes in the transition economies based on household surveys. Unfortunately, because data are not available on the entire set of transition economies, it is impossible to make any statistical tests on this small sample of countries. Branko Milanovic presents the data and provides an interesting analysis of the relationship between inequality and poverty. See Milanovic, Poverty, Inequality and Social Policy in Transition Economies,” World Bank Policy Research Working Paper, no. 1530 (1995); and idem, Income, Inequality and Poverty during the Transition, Transition Economies Division Research Paper Series 11 (1996). Data on inequality among postcommunist countries require more than the standard caveats in this field, given the strong incentives to hide income from taxation at all levels. Gini coefficients from the prereform period should be biased downward, given the ideological constraints on revealing inequalities in socialist systems and the numerous forms of perquisites in kind available to the nomenklatura. In the transition period Gini coefficients are likely to be biased downward, as higher income groups have greater access to outlets for hiding income than do those in lower income groups.

40 Milanovic (fn. 39,1996), chap. 4.

41 Countries that adopt radical economic reforms from the very start are not necessarily immune from this problem. Even the most radical reform programs are composed of multiple elements each with a different time horizon giving rise to temporary market distortions and arbitrage opportunities that produce concentrated gains in the short term. Since the reform process does not consist of a single choice of reform programs, but rather is a sequence of numerous choices on separate dimensions of reform over time, there are still many opportunities for the short-term winners to scale back the intentions of radical reformers.

42 Dmitriev et al. provide a detailed analysis of the rents to newly created commercial banks directly related to the lack of macroeconomic stabilization in the context of a highly liberalized financial system and how quickly those rents declined as the economy began to stabilize. See Dmitriev Mikhail E. et al. , Rossiiskie Banki Nakanune Finansovoi Staiiliaztsii (Russian banks on the eve of financial stabilization) (St. Petersburg: Norma, 1996).

43 EBRD (fn. 8,1994).

44 House Freedom, Freedom in the World, 1993–1994 (New York: Freedom House, 1994).

45 Tsebelis argues that increasing the number of parties in a coalition government increases the number of veto points in the policy-making process; see Tsebelis George, “Decision-Making in Political Systems: Veto in Presidentialism, Parliamentarism, Multicameralism and Multipartyism,” British Journal of Political Science 25 (1995).

46 The scale is slightly modified for the postcommunist countries to include a category for single-party governments that explicitly restrict party competition. The scale is as follows: 1 = one-party authoritarian government (competition restricted); 2 = one-party majority parliamentary government or united presidential government; 3 = two-party coalition government or divided presidential government, 4 = three-or more party government; and 5 = minority government. Monthly coalition government scores were coded for each postcommunist country beginning with the first free election or the formal declaration of independence. A weighted average of die monthly scores is used in the scatter-plot graph. See Roubini Nouriel and Sachs Jeffrey, “Government Spending and Budget Deficits in the Industrial Countries,” Economic Policy 8 (1989); and idem “Political and Economic Determinants of Budget Deficits in the Industrial Democracies,” European Economic Review 33 (1989).

* The work leading to this paper was supported from funds provided by the National Council for Soviet and East European Research and the Kennan Institute for Advanced Russian Studies, which, however, are not responsible for its contents or findings. This paper was originally presented at the 1996 annual meeting of the American Association for the Advancement of Slavic Studies and the 1997 annual meeting of the American Political Science Association. I would like to thank the participants in those meetings for their very helpful comments, as well as seminar participants at Harvard University and St. Antony's College, Oxford. The views expressed here do not represent those of the European Bank for Reconstruction and Development.

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