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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 B: Political Influence, Economic Performance and Reform Efforts: An Econometric Analysis of Six Newly Independent Countries, 1989–1999

Transitions and Growth in Post-Soviet Europe

Patricia Dillon and Frank C. Wykoff


Appendix B. Political influence, economic performance and reform efforts: an econometric analysis of six newly independent countries, 1989–1999 Here we develop an econometric model linking voting decisions, economic reforms and economic performance. In this model politics influences economics and economics influences politics. We briefly review the integration of five generic economic reforms (price liberalization, property privatization, macroeconomic stabilization, trade liberalization and industry restructuring and deregulation) into the growth model framework.1 In section 2 we link analysis of growth and reforms to voting behavior. Next we model the relationship between decisions by voters, proposals by reformers and election outcomes.2 Finally, we model an intertemporal sequence linking historical economic performance and proposed reforms to decisions by voters in elections. We also argue that reform regimes carry the effects of the past on to contemporary economic performance. Reform regimes follow from election outcomes and votes for reformers depend on prospective reforms. Thus we encounter possible simultaneous equation bias. We model this in section 3. Before dealing with data we analyze in section 4 the concern that votes do not reflect pocketbook issues. Some people choose not to vote at all and others vote for non-economic reasons. We model this problem employing analysis from the labor market supply literature. In section 5 we explain construction of the variables for reform and voting to be used in subsequent analysis.3 We begin the empirical analysis in section 6 with a model using simple (crude) binomial (0 – 1) dummy variables for...

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