The politics of economic reform
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Previous chapters have shown that while a number of transition economies (principally those in central Europe and the Baltic states) have made sustained progress in economic reform, the majority of countries (including most of the economies of the Commonwealth of Independent States) have been unable to sustain reform. A smaller group of countries (Belarus, Turkmenistan and Uzbekistan) has effectively failed to embark on any serious reform path.
Yet if economic reform is beneficial– and there is ample evidence that it is– then why has it proven so hard to make progress? One common answer is that politics is to blame. Narrow interest groups, populist politicians and obstructive bureaucrats are often viewed as blocking reforms that would benefit the entire society. This is the classic problem of specific interests dominating the policy-making agenda. Equally, the lack of progress might be due to the inability of groups favouring reform to organise and coordinate their activities, allowing opponents the opportunity to obstruct reform.
This chapter focuses on the political factors contributing to the variation across the transition economies in the implementation and sustainability of reforms. The chapter argues that essential to successful reforms is increased competition in both the realm of politics and in product and other markets directly affecting the behaviour of firms. Reform failures have been consistently associated with weak political competition, which reduces the incentives for politicians to introduce new policies and increases the likelihood that governments will be "captured" or be unduly influenced by narrow vested interests. Such groups often gain from the market distortions and corrupt practices associated with partial reforms.
Two themes emerge from the analysis. First, in a significant number of transition countries, the ability of vested interests to influence the state and modify policy to their advantage has been a primary threat to economic reform. Second, economic reforms at the early stages of transition have a significant effect on the distribution of power among interest groups at a later point in the process. Where initial policy choices have concentrated economic power in particular groups, this power has been used to distort or stall reforms later in the transition.
The analysis is conducted at two levels. The first takes a crosscountry approach and looks at factors that help to explain these differences. The analysis suggests that many commonly held views about the connection between politics and economics, based on the experience of economic reform in other parts of the world, have not been borne out in practice in the transition economies. Rather, five political factors have influenced economic reform across the transition countries: the initial turnover of political elites following the collapse of communism; the extent of social cohesion at the early stages of the reform process; the strength of vested interests; the extent of organised political competition; and the role of external factors. At the same time, the chapter also provides a more detailed analysis of a key component of the reform process– the political economy of privatisation– in four countries with a prolonged pattern of inconsistent reforms.
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