Almost a hundred years have passed since the Bolshevik coup d’etat on October 24 1917. The overthrow of the Russian Provisional Government under Alexander Kerensky provided the Russian people with temporary relief subsequent to Russia’s withdrawal from the Great War. Unfortunately, the country was soon plunged into a civil war, Stalinist purges, the Gulag and the man-made famine in Ukraine. And those were the good days!
Weakened by internal bloodletting, the country found itself unprepared for another round of mortal combat with Germany that would cost the Soviet Union 27 million lives. As a testament to the dogged perseverance of its people, the USSR emerged out of the smouldering ruins of the Second World War not only victorious, but also in possession of a number of colonies in central and Eastern Europe – and it is here that the author enters this story.
Professor Walter Williams of George Mason University once said that travelling from West Berlin to East Berlin in the 1980s was like stepping into a black-and-white movie.
Growing up in 1980s Czechoslovakia, I witnessed Communism’s final decade. The people around me were still afraid of eavesdropping by the secret police, jail time for anti-socialist activities, professional ruin and social ostracism. But Communism no longer inspired terror in the way it had in the early years after the Czechoslovak Communist putsch of 1948. Show trials were no longer held and people were no longer murdered by the state. Exhausted, the regime had lost confidence in its ideals and itself. My grandparents’ generation associated Communism with unimaginable deprivations and rivers of blood. My generation associated it with annoying but manageable food shortages and with the grey monotony of everyday life under a dictatorship.
Professor Walter Williams of George Mason University once said that travelling from West Berlin to East Berlin in the 1980s was like stepping into a black-and-white movie. The same could be said about the whole of the Communist Bloc: grey streets, grey houses, grey people, grey food – grey everything. Thus, when the Berlin Wall came down on November 9 1989, the first sensation the newly liberated East Germans experienced was the colourful effervescence of capitalism: freshly painted houses, neon signs of commerce, colorful food packaging, etc. Our own “Velvet Revolution” followed eight days later, and thus it came to pass that my parents and I found ourselves celebrating Christmas in Vienna – a city that seemed to me, a 13-year-old boy, Disney-like in its beauty and extravagance.
It was not long before the blessings of freedom could be felt in my native country. Within weeks after the removal of price and wage controls, and after the first round of trade liberalisation, shops miraculously filled with a mind-boggling array of previously unimagined goods. The end of censorship led to a vast array of new publications, and satellite dishes appeared on most balconies. On Friday evenings, the people marvelled at the conspicuous consumption of the Ewing family in the reruns of the American soap opera Dallas, while late on Saturday they could catch a naughty movie on German television. Political parties and, more importantly, political differences sprang up – with monumental consequences for ex-Communist countries that continue to the present day.
My parents and I found ourselves celebrating Christmas in Vienna – a city that seemed to me, a 13-year-old boy, Disney-like in its beauty and extravagance.
Last year I co-authored a paper entitled 25 Years of Reforms in Ex-Communist Countries: Fast and Extensive Reforms Led to Higher Growth and More Political Freedom. The paper has identified two approaches to transition from communism to capitalism that emerged after the fall of the Berlin Wall. On the one side were those who favoured rapid economic reforms. On the other side were those who wanted a more gradual approach.
The gradualists argued that rapid reforms would cause too much social pain, as loss-making enterprises shut down and unemployment grew. Their opponents argued that in the absence of rapid reforms, special interests would come to monopolise both the political process and the economy. Central Europe and the Baltic countries opted for rapid reforms. Other ex-Communist countries chose the gradual path. Some, like Belarus, Uzbekistan and Turkmenistan, eschewed most reforms.
As Figure 1 shows, rapid reformers experienced much shorter recessions and grew much faster than gradual reformers. Rapid reformers also received much more foreign direct investment, and ended up with lower rates of poverty and income inequality. Moreover, they outperformed gradual reformers on measures of institutional development, such as quality of democracy and control of corruption.
In general, political elites that favoured economic liberalisation also favoured institutional development. Conversely, political elites that favoured gradual reforms often did so in order to extract maximum rents from the economy. One consequence of gradualism was the emergence of oligarchic classes. Of course, rich capitalists arose in all transition economies, but their concentration and degree of political influence appears to be far higher in slowly reforming countries, in general, and in large economies of the former USSR in particular.
Political elites that favoured gradual reforms often did so in order to extract maximum rents from the economy. One consequence of gradualism was the emergence of oligarchic classes.
That said, institutional development in the whole of the former Soviet bloc remains unfinished. Like their Western counterparts, Central European and Baltic countries are full-fledged democracies (see Figure 2). Unlike their Western counterparts, both ex-Communist regions continue to struggle with corruption and other institutional weaknesses. The situation is much worse in countries that opted for gradual reforms or eschewed most reforms (see Figure 3).
Evidence shows that it is easier to legislate economic reforms than it is to build sound institutions. Economic growth is a consequence of removal of barriers to exchange between free people. But how does one make a society less corrupt and more law-abiding? One lesson of the transition from Communism to capitalism is that fast and extensive reforms led to much better economic and political outcomes than slow and limited reforms. The other lesson is that it is easier to make people rich than it is to make them virtuous.