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Creating Capitalism

Transitions and Growth in Post-Soviet Europe

Patricia Dillon and Frank C. Wykoff

Employing historical analysis and building on growth theory and modern political economy, Dillon and Wykoff explain Soviet disintegration and analyze efforts to create capitalism in newly independent states. They show how five fundamental economic reforms generate growth, and use an original model to test the connections between reforms, elections and economic performance. The authors examine the progress of six countries (Bulgaria, Czech Republic, Estonia, Hungary, Russia and Slovakia) in terms of each country’s history and its successful application of the five reforms. Anyone interested in how capitalism works and why pro-market reforms encounter resistance in spite of their potential for generating higher living standards will find this book essential reading.
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Chapter 2: The Political Economy of Reform

Transitions and Growth in Post-Soviet Europe

Patricia Dillon and Frank C. Wykoff


1 In the aftermath of the collapse of the Soviet Union, reformers began to transform centrally planned economies into something new. Calls for democracy and for private markets were widespread, but political resistance to restructuring and contradictions inherent in democratic capitalism continue to be evident. Transforming an economy from socialism into a market democracy is a “public good,” something that the private sector will not adequately produce on its own. Success depends on the political system properly setting the stage by passing and enforcing viable private property laws; by creating decentralized, regulated and solvent new financial institutions; and by disengaging itself from ownership and micromanagement of industry. Disengagement requires an unnatural political act – the bureaucracy must self-reform and must voluntarily relinquish many powers while creating and performing unfamiliar new tasks. Needed reforms impose short-term losses before gains begin to appear and citizens, weary from decades of false promises, balk at such losses. All of this makes reform more difficult. Socialism is alive in Central and Eastern Europe. While some countries have set their sights on US-style democratic capitalism, others prefer a middle path in which private enterprise remains heavily regulated. Whether this middle road is viable remains to be seen. Russia’s leaders vacillate between socialism and capitalism, with citizens fully committed to neither one. NEW POLITICAL AND ECONOMIC CHALLENGES After the collapse of the Soviet Union, new political entities began to emerge and the evolution away from authoritarian socialism got under way. While Western-style democratic free markets quickly became...

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