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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 13: The Long and Winding Road

Transitions and Growth in Post-Soviet Europe

Patricia Dillon and Frank C. Wykoff


Inevitably the Soviet Union disintegrated; fortunately it did so with little bloodshed. While its demise freed millions of people from intellectual and economic constraints, it at once made many of them poorer. Domestic economies collapsed, the trade regime shut down, political and social rules were shattered. It was a near-total collapse of a highly centralized and ossified system. We explain all this from the perspectives of growth theory and political economy before we address attempts at recovery. Each newly independent country, born under difficult circumstances, has tried to modify or reform its economic system so that decentralized private markets can play a greater role in allocating resources. The difficulty and complexity of transforming an economic system and a political system while reconstructing new legal, financial and social structures has, over a period of ten years, become increasingly evident. Some countries have fared better than others. How does one measure economic success in this transition enterprise? Economic growth, calculated either as growth in GDP per capita, growth in personal income or growth in consumption per person, is the appropriate measure of the degree of success of economic reforms. Unless reforms lead to improvements in living standards in democratic regimes, reformers and their policies will be rejected. Any reform is politically hazardous even under the best of circumstances, because it generates clearly identifiable and immediate losers even as it promises widespread winners in the long term. Under conditions of total societal collapse reform is even more problematic. The...

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