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 sametime. Countries that did undertake these radicalreforms 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 willthen 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 statecontrolled 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 liberalisationalsooccurred of the capital account, as the liberalisationof 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 clearlydefined 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 acentrally planned economy to a capitalistmarket economy by voting againstit 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 recessionbottoming out in 1993 when collectiveoutput
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 capitalistmarket 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 goalof 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 similarpoint 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 amuch 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 acentrally planned economy to a capitalistmarket economy has been in factcompatible
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 “abrief 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 canbe 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 radicalreform 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 alsoto stop the short term winners from reform sustaining
a partial reform equilibrium.
This essayhas shown that Przeworski hypothesised in Eastern Europe that radicalreform from
a centrally planned to a capitalist market economy was incompatible with democratisation.
He hypothesised this basedaround Latin America and his belief that the socialcosts 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.

Bibliography
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