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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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Appendix A: Reforms in Growth Models

Transitions and Growth in Post-Soviet Europe

Patricia Dillon and Frank C. Wykoff


Western economists have identified five generic economic reforms that it is necessary for former socialist states to adopt in order to transform their economies into private market economic systems.1 Table A.1 lists these reforms. Much of the research on transition economies has dealt with various aspects of these five reforms,2 with most of the emphasis on fiscal and monetary policies, exchange rate regimes and other monetary and financial issues.3 Researchers have also focused on privatization methods adopted in different countries that have had significantly varying degrees of success.4 Industry deregulation is often referred to in transition research as “restructuring.”5 It means how the economies disentangle centralized organization and disengage central power from more microeconomic economic decision-making processes. Our focus here is on long-term consequences of reforms for the real economy rather than on financial issues.6 Table A.1 Five generic economic reforms 1 2 3 4 5 Price liberalization Property privatization Macroeconomic stabilization International trade liberalization Industry deregulation/restructuring Part of the reason that different countries have adopted reforms in varying degrees is that there has been considerable variance in the virulence of political resistance. In some countries voters through democratic processes have at times ejected reform governments in favor of parties of former communists.7 In others, resistance has taken the form of subversion by insiders and of corruption and violence.8 But what can explain the variance in the pace of reform and economic performance among countries? More importantly, does reform imply better performance? We pose some speci...

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