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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 9: Estonia is Headed West

Transitions and Growth in Post-Soviet Europe

Patricia Dillon and Frank C. Wykoff


* How did a former Soviet republic end up with one of Eastern Europe’s best growth stories, and the most liberal economy west of Hong Kong? (Matthew Brzezinski, Wall Street Journal, 9 December 1996) In spite of foreign domination since the thirteenth century with the exception of a few decades of independence between the World Wars, Estonians have maintained a strong sense of national identity. They provide a clear case for our hypotheses about historical determinants of success of the transition process: namely, that success depends heavily on a country’s vision of itself in the future (based on its best period in the past) and on its experience under Soviet domination. The better and more prized a country’s “golden era,” the clearer are its goals for the reform process. The more repressed and mistreated the society during the Soviet period, the more eager are people for complete change and for self-determination. The Estonians have, since independence in 1991, demonstrated a remarkable degree of social cohesion on the direction and nature of the economy. They continue to be committed to market reforms and a future wherein Estonia once again approximates Finland in its standard of living. Their experience of Soviet occupation has united them in their determination to depend upon markets to allocate resources. Some indexes rank Estonia at the top of the class of emerging market economies with respect to degree of liberalization and economic freedom.1 Estonia lies south of Finland, less than fifty miles across the Baltic Sea and, like...

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