FORMER CENTRALLY PLANNED ECONOMIES 25 YEARS AFTER THE FALL OF COMMUNISM.

• Author: Gwartney, James D.
• Position: Report

A little more than a quarter of a century has passed since the collapse of communism, which makes this an ideal time to evaluate the subsequent development of once communist nations. Which countries have moved the most toward economic liberalization? How have the former centrally planned (FCP) economies performed in recent decades? How have their political institutions evolved during the transition era and beyond? What lessons can be learned from the experience of these economies? This article will address each of those questions.

In some ways, the experience of the FCP countries constitutes a natural economic experiment. There is considerable diversity in the paths they have followed. Some moved rapidly toward economic reform and liberalization following the collapse of communism, but others moved more slowly, and still others have undertaken little or no reform. Some of the FCP countries had relatively high per capita incomes prior to the fall of communism, while others were exceedingly poor. Some experienced lengthy and painful transitions, while others made the move from central planning to markets more smoothly. Some of these countries are now highly democratic, while others are still governed by authoritarian political regimes. As we examine the experience of the FCP economies, we will do so with an eye to what can be learned about institutions, economic growth, and the development process.

The article is organized in the following manner. Section 1 examines the path of economic liberalization of 25 FCP economies from 1995 to 2015. Section 2 presents data on various indicators of economic performance during this same time frame. Section 3 focuses on the evolution of political institutions (e.g., protection of civil liberties, democracy, and control of corruption) in the FCP countries. Section 4 compares the income levels and growth rates of these economies relative to the world's high-income countries and other developing economies. Section 5 examines the determinants of economic growth and life satisfaction for 122 countries and considers the implications for the FCP economies. Section 6 analyzes areas where the FCP economies have made substantial moves toward economic liberalization, as well as a major deficiency--low-quality legal systems--that is likely to restrain their future progress. The concluding section summarizes and considers the implications of the analysis.

Economic Liberalization and the Former Centrally Planned Economies

The Economic Freedom of the World (EFW) project provides a measure of the degree to which the institutions and policies of various countries are consistent with economic freedom (Gwartney, Lawson, and Hall 2017). This measure uses more than 40 different variables to construct a summary index of economic freedom. The EFW index now covers 159 countries and the data are available for 123 countries since 1995. This data set makes it possible to identify cross-country differences in economic freedom and to track changes across time.

The EFW index is designed to measure the degree to which the institutions of a country are supportive of (1) personal choice, (2) voluntary exchange, (3) open entry into markets, and (4) protection of individuals and their property from aggression by others. Because economic freedom facilitates and encourages gains from trade, entrepreneurship, innovation, and capital formation, economic theory indicates that it is an important source of economic growth and development. Several empirical studies have found that this is indeed the case. (1) Moreover, economic freedom permits individuals to mold and shape their lives according to their preferences. Over and above the impact on income, this may enhance quality of life. (2) There are 25 former centrally planned economies for which the EFW data are now available. These data are available continuously throughout the 1995-2015 period for 14 of these countries.

Table 1 provides the EFW summary ratings and worldwide rankings (in parentheses) for these 25 countries (when available) for 1995, 2000, 2005, 2010, and 2015. Seven of the FCP economies (Georgia, Estonia, Lithuania, Latvia, Romania, Armenia, and Albania) had a 2015 EFW summary rating of 7,5 or higher. Worldwide, these seven countries all ranked in the top quartile among the 159 countries for which the EFW data were available. Moreover, these countries have achieved dramatic increases in economic freedom. While the Baltic states all ranked in the Top 20 in 2015, in 1995 Estonia was 57th, Lithuania 80th, and Latvia 75th. Romania ranked 20th in 2015, but it was a late reformer. Romania's worldwide ranking was 118th in 1995 and 107th in 2000 (among the 123 countries included in the index during those years). Albania has steadily improved both its rating and ranking, moving up from 96th in 1995 to 63rd in 2005 and 32nd in 2015. While the EFW data were unavailable for Georgia and Armenia in 1995 and 2000, the ratings and rankings of both have increased since 2005.

A group of nine other countries (Czech Republic, Bulgaria, Poland, Slovak Republic, Hungary, Kazakhstan, Macedonia, Croatia, and Slovenia) had 2015 EFW summary ratings between 7.0 and 7,5. Worldwide, the 2015 rankings of these countries ranged from 42nd for the Czech Republic to 73rd for Slovenia. Thus, each of these nine countries ranked in the second quartile among the 159 countries included in the EFVV data set in 2015. These nine countries make up the middle group in terms of economic liberalization among the 25 FCP economies.

The Czech Republic is the highest ranked country in the middle group, and it has shown significant improvement. It ranked 42nd in 2015, up from 72nd in 1995. Other countries in this group have registered even more impressive gains in economic freedom. For example, Bulgaria's 2015 worldwide ranking was 48th, up from 101st in 1995 and 104th in 2000. Poland ranked 51st in 2015, up from 90th in 1995 and 72nd in 2000. The ranking of the Slovak Republic rose from 83rd in 1995 to 20th in 2005, but it has subsequently receded to 53rd in 2015. The movements toward economic freedom of Hungary, Croatia, and Slovenia (luring 199.5-2015 were more modest.

Finally, there is another set of nine FCP economies with 2015 EFW summary ratings of less than 7.0. This set of countries is composed of the Kyrgyz Republic, Tajikistan, Montenegro, Serbia, Bosnia and Herzegovina, Russia, Moldova, Azerbaijan, and Ukraine. The worldwide rankings in 2015 of these countries ranged from 80th for the Kyrgyz Republic to 149th for Ukraine. Except for Ukraine, the 2015 ranking for each of these countries placed them in the third quartile worldwide. Ukraine was in the fourth quartile. In 2015, these nine countries were the least economically free among the FCP economies. Further, there is little evidence of improvement among the countries in this group. These countries ranked in the bottom half worldwide during 1995-2005, and this was still true in 2015. The case of Russia is typical. Russia ranked 107th in 1995, 98th in 2005, and 100th in 2015.

Indicators of Economic Performance: 1995-2015

How does the performance of the FCP economies that have made more substantial moves toward economic freedom compare with those that have been slow to liberalize? In order to provide insight on this question, this section will examine the income levels, growth rates, international trade sectors, and foreign investment of the FCP economies during 1995-2015.

Per Capita GDP and Growth

Table 2 shows the per capita GDP (2011 PPP dollars) for the high, middle, and low economic freedom FCP groups in the years 1995 (column 1) and 2015 (column 2). Within the most economically free group, the countries with the highest per capita 2015 GDP were Estonia, Lithuania, Latvia, and Romania. The 2015 per capita GDP for each of these countries exceeded $20,000. In the middle group, seven of the nine countries (Czech Republic, Poland, Slovak Republic, Hungary, Kazakhstan, Croatia, and Slovenia) all registered a 2015 per capita GDP of greater than $20,000. In this group, only Bulgaria and Macedonia failed to reach that benchmark. In the group with the lowest EFW ratings in 2015, only Russia achieved a 2015 per capita GDP of greater than $20,000. Four of the countries in this group (Kyrgyz Republic, Tajikistan, Moldova, and Ukraine) had a 2015 per capita GDP of less than $10,000.

With regard to the per capita GDP of the three groups, the simple and population weighted mean for the middle group was the highest, followed by the most-free group. The group with the lowest EFW ratings also had the lowest 2015 mean per capita income levels.

Table 2 also presents figures for the annual real growth rate of per capita GDP of the 25 countries during 1995-2015, 2000-15, and 2005-15. As column 3 shows, six of the seven countries in the most-free group had growth rates of 4 percent or higher during 1995-2015. The exception was Romania, which did not begin to liberalize until after 2000 (see Table 1). After adopting reforms supportive of economic freedom, Romania achieved an annual growth rate of per capita GDP of 4.56 percent during 2000-15. The per capita GDP annual growth rate for five of the seven countries in the most economically free group exceeded 5 percent during 1995-2015. The simple mean and population weighted growth rates for the most-free group were 5,36 percent and 4,54 percent respectively.

Among the countries in the middle group, the annual growth rates of Poland, Bulgaria, Slovak Republic, and Kazakhstan were the most impressive. However, only Poland and Kazakhstan were able to achieve an annual growth rate greater than 4 percent during 1995-2015. The simple mean annual growth of per capita GDP was 3.23 percent for the middle group, while the population weighted mean was 3.78 percent.

The simple and population weighted means for growth during 199.5-2015 of the least-free group were 4,50 percent and 3.30 percent...