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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 6: Challenges Facing Reformers

Transitions and Growth in Post-Soviet Europe

Patricia Dillon and Frank C. Wykoff


A change in political orientation from communist centralization to democratic decentralization has great economic consequences. Bureaucrats are more insular under a one-party political monopoly than under a multi-party democracy. One-party regimes are less responsive to dissent; entrenched bureaucracies can avoid corrective mechanisms and ignore changing circumstances. Periodic elections force eventual responses to public interests. We develop a model that links politics to the economic model presented in Chapters 4 and 5: economics affects politics through polls taken by candidates and through decisions made by voters, and politics affects economics by establishing the legal rules of the economic regime. Before an election, politicians allocate their human and political capital between four activities: setting goals, designing strategies, winning supporters and debunking opponents. These activities are optimally chosen to maximize political success. One purpose of the model is to analyze similarities and differences among countries. Local historical distinctions imply different prospects in transformation. A history of well-being and liberalism gives some countries clear goals to attain through reform. Situations under the Soviets also influence longer-term prospects: the Estonians viewed the Soviets as foreign military occupiers, whereas the Bulgarians enjoyed unprecedented economic improvement under the Soviets. These historical circumstances have shaped consumer attitudes and thus how voters will assess reform proposals. WHY A POLITICAL MODEL IS IMPORTANT In Chapter 2 we argued that certain powerful political forces would resist the economic reforms needed to move a society away from central planning toward private markets. Such resistance is to be expected because of the...

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