first draft east europe essay

Candidate Number: 131768 Word Count: 3705

Why did some commentators believe that radical reform from a centrally planned to a capitalist market economy was incompatible with democratisation and why did they appear to be proved wrong?

After the fall of communism in the late 80’s and early 90’s many nation states within Eastern

Europe radically reformed their political and economic structures. It meant a shift away

from the state controlled economy and a move to a capitalist market economy whilst

democratising at the same time. Countries that did undertake these radical reforms in

Eastern Europe started from different points of the process, for instance Baker and Jehlicka

(1998) argue that Hungary by allowing some private enterprise in 1968 made the

construction of the market economy slightly easier. However, as Daniel Gros and Alfred

Steinherr (2004, p.60) highlight in their work on Economic transition in Central and Eastern

Europe, “despite very different starting points the main elements of the reform programme

are common to all countries”. This essay will begin with an explanation of what exactly this

reform programme involved for many Eastern European countries and look at why some

commentators such as Przeworski hypothesised it would not be compatible with

democratisation. It will then discuss some of the explanations scholars have suggested as to

why Przeworski was proved empirically wrong, concluding that there is no precise answer

but that the most convincing is Orenstein and Hellmann’s work that suggests democracy is

not only compatible with radical reform but that it improves the process.

Radical reform from a centrally planned to a capitalist market economy completely changed

the institutions and the role they had to play in the market. One of the first acts by many

nation states was to liberalise their pricing and external trade. This meant radical reform of

the pricing structure from state controlled to the market price. Goods and services would


now be priced by the demand and supply of the products. This was accompanied by the

external liberalisation of trade, which entailed removing all previous barriers to imports and

exports. Further liberalisation also occurred of the capital account, as the liberalisation of

trade meant importers and exporters had to have a financial market to be able to buy and

sell foreign currency. However, the creation of a market economy was not enough on its

own as “the entire legal structure of the centrally planned economy is inappropriate for a

market economy” (Gros and Steinherr, 2004, p. 100). The privatisation of firms in Eastern

Europe meant property rights now had to be clearly defined or “the supply responses to

price reforms would be weak”. (Gros and Steinherr, 2004, p. 75). Each of these radical

reforms were taking place at the same time to create a capitalist market economy and they

were all interlinked. The radical reforms came with inevitable costs. There were transitional

recessions in several countries with for example, “Latvia’s real output falling 44.2% and

Poland’s 13.7%” (Marelli and Signorelli, 2010, p.18). Furthermore, price liberalisation

enabled a “few well connected people to become rich quickly” (Gros and Steinherr, 2004, p.

62) and the labour markets in many Eastern European countries reached new highs in

unemployment figures.

Radical reform from a centrally planned to a capitalist market economy meant that nation

states had to liberalise their markets, create new institutions and new laws. It also came

with social costs such as the large rises in unemployment and scholars such as Przeworski

hypothesised that given this was happening at the same time as democratisation the social

costs such as unemployment, which are a result of the radical reforms, hurt large areas of

the population and will evoke opposition from these groups. This will result in either

democracy or the reforms being abandoned or even both.


Przeworski hypothesised in his work on Democracy and The Market that the radical reform

process which hurt large groups of the population through negative consequences such as

inflation, social inequality and unemployment was incompatible with democratisation. He

argued that “even if the the reform strategy minimises social costs and enjoys initial support

it is likely to erode over time” (Przeworski, 1991, p.189). This would result in either the

radical reform of the market being abandoned or authoritarian regimes returning to force,

meaning the abandonment of democracy. He looked at Latin America for an explanation for

why he hypothesised that radical reform from a centrally planned economy to a capitalist

market economy was incompatible with democratisation. Democratic institutions provide

the opportunity for the creation of autonomous organisations over night who can reject

reform, he argues. Much like in Brazil, where “journalists and students organised first”

(Przeworski 1991, p.58). Przeworski (1991, p.138) argues, this will “in turn, under

democratic conditions, where the discontent can find political expression at the polls, lead

to even the most promising reform strategies being abandoned”. On the other hand, it may

lead to the return of an authoritarian regime which will push through the radical reforms,

undoing the process of democratisation. Przeworski’s hypothesis suggests that what

happened next in Eastern Europe is that the mass population, under democratic conditions,

rejected the radical reform from a centrally planned economy to a capitalist market

economy by voting against it or other forms of showing their opposition such as strikes. On

the other hand, we should expect to have seen that authoritarian regimes returned to

Eastern Europe and pushed through the radical reforms. However, this did not happen and

instead the reform process continued whilst democracy was consolidated.


Przeworski was proved empirically wrong. It is true that experiences within Central and

Eastern Europe varied during the transition process and each nation started from different

points. However, they all underwent radical reforms that were socially costly. This is

particularly evident by the fact that across the whole of the Eastern Europe, “on average

post communist transition implied a steep recession bottoming out in 1993 when collective

output was 21% below 1989 level” (Blazyca, 2003, p. 218). This came with other socially

costly consequences. For example, unemployment in many countries was immediate and

sharp with the exception of the Czech Republic where, “despite a significant output decline

similar to its neighbours it managed to retain full employment until it ran into a currency

crisis in 1997” (Blazyca, 2003, p. 222). Embracing the capitalist market economy also had

other costs, with rising inequality being one of them. The Gini Coefficient of East and Central

Europe was 0.23 for the period between 1987-90 but by 1996-98 this had risen to 0.33 (Cox,

2003). The radical reform process also made many people rich quickly but also many people

worse off and this is particularly evident by the fact that “the only nation to experience a

rise in average income over the transition period was Slovenia” (Cox, 2003, p.241). All of this

happened at the same as democracy was consolidated, much to the contrary to what

Przeworski hypothesised. There were free elections all over Eastern Europe beginning in

1990 in Croatia, Serbia, Slovenia and Romania and in Poland in 1991, where the mass

population had the opportunity to reject radical reform from a centrally planned to a

capitalist market economy.

Many scholars have attempted to identify why radical reform from a centrally planned to a

capitalist market economy was met with so little opposition, given the social costs it had on

the region and the fact they were democratising at the same time. Scholars have however


lacked significant agreement as to why there has been dissonance between Przeworski’s

theory and facts the occurred after. Scholars such as Greskovits look at some the legacies

left behind by communism which can help to explain why in spite of the social costs to large

parts of the population they did not oppose them. Other scholars such as Vachudova argue

strongly that the EU has been able to force Eastern Europe candidate states to radically

reform their economy and democratise at the same time as a result of ‘active leverage’.

Whereas others instead argue, such as Orenstein, that democratisation instead of blocking

the radical reform process improves it and this is a result of what Orenstein identifies to be

‘policy alternation’. The next part of this essay will deal directly with these explanations of

why Przeworski was proved wrong, concluding that Orenstein presents the strongest

explanation of the dissonance between the facts and Przeworski’s theory.

Greskovits argues that in Eastern Europe Przeworski failed to acknowledge some of the

legacies left behind by communism which meant citizens of Eastern Europe protested less

than in Latin America. It is important to highlight the fact, much like when explaining the

radical reform process across Eastern Europe, that despite nation states having potentially

small differences in communist legacies there are still large similarities across the region.

One of Greskovits’ strongest as to why the reform process, which hurt large groups, was in

fact compatible with democratisation is his work on Eastern European countries experiences

of democratic norms. He argues that countries on the whole had very little experience of

democratic norms, from “strikes to rallies and from partisan activity to voting, it is still

uncommon and unusual for emerging actors” (Greskovits, 1998, p.74). Evidence which

Greskovits himself provides suggest it is an enormous reason why democracy was in fact

compatible with the radical reform process. He highlights how for example in the Czech


Republic there were only 24 strikes between 1990-93 and in Hungary 61 between 1989-90.

It meant despite the costs of the reform process to parts of the population they did not

strike in a similar to way Latin America, where for example in Brazil there were 11,693

strikes between 1983-89.

Greskovits’ argument that in Eastern Europe communist legacies meant they did not have

the experience of democratic norms like in Latin America is reinforced by Pollert’s research

on Czech Republic’s trade unions. She emphasises how “since unions in the communist

period were part of the production bureaucracy members preferred that unions stay out of

such issues and confine themselves to areas such as health and safety” (Pollert, 1999, cited

in Crowley, 2004, p.421). It provides further evidence that suggests the importance of the

fact democratic ways of protesting such as unions or strikes were not normal in Eastern

Europe countries.

For Greskovits, Przeworski has missed a vital part of his understanding of radical reform

from a centrally planned to a capitalist market economy in a democratic Eastern Europe. In

Eastern Europe the mass population had no experience of democratic norms which may

have helped facilitate the reform process being halted. Greskovits’ evidence on strikes in

Eastern Europe suggests the lack of experience of democratic norms in Eastern Europe

played an important role in why democracy was in fact compatible with the radical reform

process, but other scholars argue strongly in favour of other reasons none more so than

Vachudova and her work on the EU.


One of the theories raised by other scholars is that the European Union had a significant

impact on why radical reform was in fact compatible with democratisation. Scholars such as

Vachudova argues that the EU used a form of ‘active leverage’ on Eastern European

countries wanting to join the EU, forcing these countries to comply with its requirements.

These requirements being a broad criterion which have the end goal of shaping a country

into liberal democracies and capitalist market economies. Other scholars such as Gabbe, in

her work on The EU’s transformative power, argues a very similar point however referring to

it throughout as a process of ‘Europeanisation’ which she defines as “a sense of the EU’s

impact on countries”. Where scholars such as these two may be inconsistent over the

terminology used, they are consistent over the fact they both argue that joining the EU was

the first and major foreign policy objective of many Eastern European countries and this led

to the adoption of radical reforms whilst democracy continued.

One of the stronger arguments from this school of thought is the argument that Vachudova

raises. She argues that as a result of wanting to join the EU being the most important

foreign policy goal of many Eastern European countries, an ‘asymmetrical power

relationship’ developed. This being the fact that these countries were entirely dependent on

the EU to accept them into the EU and it gave the EU, to begin with, ‘passive leverage’

which would later develop into ‘active leverage’. This passive leverage was simply the

attractiveness of the markets and institutions, it was the fact that “joining the EU offered a

much brighter economic and geopolitical prospect to Eastern European states than their

existence as the weak neighbours of powerful West European countries” (Vachudova, 2001,

p. 68). However, this then developed into a form of ‘active leverage’ which were deliberate

policies set out by the EU to shape Eastern European countries into capitalist market


economies and full functioning democracies. One of these forms of ‘active leverage’ being

the Copenhagen Criteria. Not only was this a “broad consensus in favour of liberal

democracy and market capitalism” (Vachudova, 2001, p.121), but it also “allowed the EU to

judge the quality of democracy and all other aspects” (Vachudova, 2001, p.122). It created

an external push in favour of radical reform and democratisation. If countries did not

comply then they would not be eligible for membership status and given the significant

economic benefits of joining the EU, such as increased Foreign Direct Investment, Eastern

European countries complied with the requirements of the European Union. Vachudova

highlights other forms of ‘active leverage’ such as the ‘Acquis Communautarie’, which

expresses all EU legislation. The Acquis could not be modified by any of the Eastern

European candidates and they could not opt out of any EU policies. This reinforced, for

Vachudova, the fact that it simply wasn’t a negotiation between the EU and Eastern

European countries, these countries had to democratise and radically reform their economy

at the same time if they wanted to achieve their number one foreign policy goal.

Scholars such as Vachudova who suggest that EU has been a major reason why radical

reform from a centrally planned economy to a capitalist market economy has been in fact

compatible with democratisation provide some solid reasons why Przeworski was proved.

However, compared to other theories it is a less convincing argument. It is true, as

Vachudova and other scholars highlight, that joining the EU was many Eastern European

countries number one foreign policy objective but did the EU really have transformative

power or were these countries going to democratise anyway. A much stronger theory as to

why radical reform and democratisation were in fact compatible is provided by Orenstein’s

work on Building Capitalism and Democracy in Post Communist Europe. Instead of


democracy potentially blocking radical reform and halting the process as Przeworski

hypothesised it provided an opportunity to correct any reform errors and it instead

improved the process.

Orenstein’s research on building capitalism and democracy in Post communist Europe

provides another explanation as to why Przeworski’s hypothesis was incorrect. Orenstein

suggests that instead of democracy blocking the radical reform process it was instead

helpful as it allowed for what he calls policy alternation, which helped facilitate the

correction of previous reforms. He highlights Poland as an example of this. Poland emerged

from communism and entered “a brief window of opportunity” (Orenstein, 2001, p.7). This

window of opportunity enabled leaders to push through radical reforms which would see

Poland function as a capitalist market economy. However, much to the contrary of

Przeworski, the fact that these reforms were rejected at the polls at the next election

instead of providing a hindrance to economic reform actually improved the process.

Orenstein (2001, p. 53) highlights how in 1993, democracy forced a major turning point in

Polish economic policy. A new strategy for Poland emerged which “proposed to lower the

cost of reform through more effective pension and welfare benefits and improved

conditions for farmers” (Orenstein, 2001, p.53). Democracy had seen Polish citizens reject

the radical reform from a centrally planned economy to a capitalist market economy but

instead, as Przeworski hypothesized, leaders potentially returning to authoritarianism and

pushing through the reform process, they learned and altered their policy. What happened

as a result of ‘policy alternation’, was that during the period of governance from 1993-97

the Polish economy had “dramatic growth of 6% per annum” (Orenstein, 2001, p.53).

Orenstein argues this does not fit the Przeworski hypothesis as Poland attained high


economic growth despite repeated policy alternation. Instead of being incompatible with

radical reform, democracy improved the process.

Orenstein’s argument provides not only a reason why radical reform was compatible with

democratisation but also suggests that it improved the process. One of the strongest

arguments Orenstein raises (2001, p.126) as to why democracy actually improved the

process of radical reforms is that “no on knew how to transform a socialist economy into a

capitalist economy”. Alongside this was the fact that the reform process created a period of

political instability and policy alternation in Eastern European nation states which enabled

leaders to learn from major reform errors.

One potential criticism of Orenstein’s argument is that Poland may be the only example,

where the theory that government instability causing policy alternation which improves and

corrects reform errors, holds true. However, as Orenstein highlights in the Czech Republic,

the same theory applies. Orenstein looked at the voucher privatisation scheme which was

rapid and later viewed as a mistake. This Orenstein argues was a result of the fact that they

did not go through the same process as in Poland, where government instability and policy

alternation combined to create much slower reform in the privatisation area. Instead in the

Czech Republic one party dominated the reform process. It meant rapid privatisation, for

example as Orenstein (2001, p.97) highlights, “by the end of 1995, the Czech Republic had

approved privatisation plans for 3,552 of the 4,800 state-owned enterprises”. It was only

after this period, during the years of the 1997 and 1998, that these policies began to be

corrected by a new government that had emerged, “after years of economic policy

domination by Klaus’s Civic Democratic Party” (Orenstein, 2001, p. 111). The Czech Republic


provides an example that suggests why Orenstein’s theory holds true for other countries. In

the Czech Republic there was a period of policy domination by a particular party instead of

policy alternation like in Poland. It was only when democratic processes gave a change to

the Czech Republic’s government that policy alternation began to occur and policy

domination by one particular party ended. It meant that the reform process errors which

were a result of one particular party dominating economic policy only began to be corrected

when a new government emerged and policy alternation took place.

Orenstein’s theory provides huge insight into how democracy enabled the radical reform

process from a centrally planned economy to a capitalist market economy to be improved

much to the contrary of Przeworski’s hypothesis. This can be explained by what he calls

‘policy alternation’ arising from political uncertainty. It meant for countries, where there

were several changes in government in the post communist period, errors in the radical

reform process could be corrected as democracy provided the opportunity for other parties

to suggest how they would reform the economy.

The work by Joel Hellmann on The Politics of Partial Reform also supports the idea that

Przeworski’s theory is not only wrong but that democracy improves the process of radical

reform. Hellmann does identify a different reason as to why democracy improves radical

reform but where Hellmann and Orenstein are inconsistent over what they identify; they

are consistent over the fact they both provide evidence to suggest democracy improves the

reform process in Eastern Europe. Hellmann argues that the radical reform process from a

centrally planned economy to a capitalist market economy creates short term winners who

want to keep the economy in partial reform and they provide the biggest obstacle to radical


reform, not the short term losers as Przeworski identified. These short term winners have an

incentive to halt the reform process but, as a result of what Hellmann (1998) identifies to be

the positive relationship between democracy and economic reform, by democratic

processes and increasing political participation of the short term losers, nation states in

Eastern Europe have been able to “place limits on the concentrated political power of the

winners and prevent them from sustaining partial reform equilibrium” (Hellmann, 1995,

p.19).

Orenstein and Hellmann’s work on democratisation and the radical reform process has

shown how a positive relationship emerged between the two after communist rule. Instead

of democracy providing the chance for the mass population to reject the radical reform and

this leading to either the return of an authoritarian regime to push through the radical

reform process or the process being stopped altogether, it provided reformers with not only

a chance to improve the reform process but also to stop the short term winners from

reform sustaining a partial reform equilibrium.

This essay has shown that Przeworski hypothesised in Eastern Europe that radical reform

from a centrally planned to a capitalist market economy was incompatible with

democratisation. He hypothesised this based around Latin America and his belief that the

social costs that occur as a result of the radical reform process would result in either

democracy being abandoned so an authoritarian regime can push through the reforms, or

democracy continuing with the reform process being halted or even both. However, this did

not happen and instead democracy continued and a number of scholars have tried to

suggest why this happened. The lack of agreement by scholars as to why there has been


dissonance between Przeworski’s theory and the facts has shown that there is no conclusive

answer to the question and the debate around this issue will continue for some time.

However, as shown in this essay, the most convincing argument thus far has been Orenstein

and Hellmann’s theory that Przeworski was proved empirically wrong because democracy

not only is compatible with radical reform from a centrally planned to a capitalist market

economy, but that it improves the process by allowing for policy alternations to occur which

corrects any reform errors and limits the ability of early winners from the process sustaining

a partial reform equilibrium.


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first draft east europe essay

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