INFN2001 Peer Essay Draft Review session. WELL DONE! INFN2001 Peer Essay Draft Review session.
First Draft East Europe Essay
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Transcript of 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
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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.
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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.
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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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