The Political Economy of Simultaneous Transitions: An Empirical Test of Two Models

• Date: 01 June 2005
• Author: Branislav L. Slantchev
• Published date: 01 June 2005
• DOI: 10.1177/106591290505800208
• Subject Matter: Articles

279

During periods of strained economic circumstances,

voters who are most hurt by their government’s

policies will punish elected officials by removing

them from office and replacing them with ones more likely

to enact policies sympathetic to the voters’ plight. Because

the benefits of economic reforms are dispersed while the

costs are concentrated, disadvantaged voters are likely to be

effective in undermining economic reform efforts by desta-

bilizing their government under democratic regimes.

The alternative view holds that economic reforms gener-

ate a pattern of concentrated benefits and diffuse costs,

which enables the groups most favored by the reform to

capture the government and freeze the reform programs in

a state most beneficial to them.

Despite many case-studies and statistical analyses of

related questions, there has been no attempt to construct a

statistical test that will examine the hypotheses generated by

the two different models directly. This article bridges this gap

and addresses several questions: Are the losers from eco-

nomic reforms threatening to the progress of these reforms?

Does their influence vary across countries? What are the

policy implications that we can derive from the results? Can

a democracy sustain socially costly economic reforms?

The results from the statistical analysis of 25 former

communist countries are strong, internally consistent, and

startling: democracies do universally better than non-

democracies when unemployment is low; when unemploy-

ment is high, democracies do as well as nondemocracies in

short-term reforms, but consistently outperform non-

democracies in long-term reforms. Government stability has

no impact on the performance of democracies, but has a

weak beneficial impact on the performance of nondemocra-

cies. As a whole, the results provide strong support for the

view that losers from reform do not endanger the success of

reforms, and that it is possible (and probably necessary) to

create democratic institutions for these reforms to succeed.

These results have special relevance in theorizing about

simultaneous political and economic transitions in former

communist countries. Traditionally, it is assumed that build-

ing and maintaining a stable democratic regime require an

advanced capitalist society. The problem in former commu-

nist states is especially acute because their governments are

conducting a transition from command to market economy

while building democratic norms and institutions at the

same time. Depending on which of the two theoretical views

about the pattern of gains and losses is correct, one would

prescribe diametrically opposed policies. In the first case,

one would seek to isolate the government from the pressure

of reform losers to enable it to conduct economic policies

that hurt a substantial segment of voters. In the other case,

one would attempt to open the government to voter pres-

sure and minimize the influence of reform winners.

MODELS OF SIMULTANEOUS TRANSITIONS

Whatever the long-term implications for sustainable eco-

nomic growth and high living standards, the immediate

effect of reforms is unemployment, rampant inflation (Marer

and Zecchini 1991), resource misallocation1(Roland 1994),

volatility in income distribution (Milanovic 1995), declining

output (Kolodko 1999), and a faltering social safety net

(DeMelo, Denizer, and Gelb 1996). This is the starting point

for both models, which then diverge in their claims about

who is the most important agent of opposition to transition.

The JCM approach identifies the net losers as the culprit,

The Political Economy of Simultaneous Transitions:

An Empirical Test of Two Models

BRANISLAV L. SLANTCHEV, UNIVERSITY OF CALIFORNIA–SAN DIEGO

Traditional political economy emphasizes the difficulty of conducting simultaneous transitions toward market

economy and democratic government. There are two major theories that seek to explain why some reform pro-

grams are never fully implemented or are reversed shortly after their inception. The J-Curve model (JCM)

(Przeworski 1993) implicates the short-term losers from reform as the major opposition, and the Partial

Reform Equilibrium model (PREM) (Hellman 1998) implicates the winners. I subject the models to empiri-

cal analysis with data from 25 post-communist countries and find that the data do not support the contention

of the JCM. High unemployment rates do not threaten the survival of reform programs, and government insta-

bility does not necessarily translate into bad economic policies. These results suggest that the common con-

cern that socially costly economic reforms endanger the consolidation of democratic norms may be misplaced.

NOTE: I thank Curt Signorino, Renée Smith, David L. Weimer, and

Robert Walker for their comments. I am especially grateful to

Randy Stone for many discussions and for providing me with his

data. A previous version of this article was presented at the 2000

annual meeting of the Midwest Political Science Association.

Political Research Quarterly, Vol. 58, No. 2 (June 2005): pp. 279-294

1These are due to the absence of properly defined property rights

(Weimer 1997), continued presence of inefficient firms and monopolies,

and insufficiently developed human capital, all of which distort the

response to market incentives (Hellman 1998).

while the PREM analysis concludes that it is the net winners

who are most averse to continuing with the reform.

The J-Curve Model

Przeworski (1993) describes the reform process as a JCM

with regard to distributional costs and benefits. In the short

run, the transition generates substantial social costs in terms

of high unemployment, rising prices, inflation, and low pro-

ductivity as the economy adjusts to the market (Marer and

Zecchini 1991). During this period, the government faces

severe pressure from groups negatively affected by the tran-

sition because it can only offer promises for future gains in

exchange for political support and economic hardship today.

Anti-inflationary macroeconomic stabilization policies that

the government can undertake are further eroded by the lack

of credibility caused by the short time horizons that elected

officials have and by further price increases caused by infla-

tionary expectations that get built into new contracts. Stern

fiscal measures that usually include curtailment of benefits

and social services by the government, privatization with the

entailing layoffs, interest rate hikes to prevent the exit of cap-

ital, and price liberalization, make a sizeable fraction of the

population disaffected by the reform (Mygind 1999). Under

democratic rule, this group may have enough influence to

stem the process and even nullify some of the changes.

Why would people oppose a reform whose outcome is a

better living standard for some of them and a situation at

least as good (as the pre-reform status quo) for the rest? This

apparent paradox arises from the time inconsistency prob-

lem (Kydland and Prescott 1977, Mankiw 1988). Actors

must accept losses in exchange for promises of future gain.

Because the government is unable to make credible com-

mitments to maintain the reform until it delivers the prom-

ised gains, and to refrain from confiscating the gains once

actors realize them, it is rational to reject reforms even

before they are initiated.

The erratic nature of policymaking is further exacerbated

under less stable governments. As the security of their

tenure in office becomes less and less certain, incumbents

are tempted to dole out benefits to many different groups in

their constituency to win their support. Short time horizons

make bribing voters an attractive option for rational policy-

makers, leading them to sacrifice the rigidity of the neces-

sary reform programs to win the support of decisive socie-

tal actors. Governments that are more isolated from

distributive pressure provide for greater security of office for

the incumbents, and thus enable them to implement the

requisite policies.

Low inflation, free trade, and a stable currency are non-

excludable public goods. Even though the society as a

whole (or a very large group) stands to reap the benefits,

perverse incentives on the individual level make it impossi-

ble to sustain cooperative behavior. For example, curbing

high inflation requires workers to accept deindexation of

their wages. Their efforts to protect their income, however,

put them in opposition to such policies. The temptation to

free-ride destroys the norms of cooperative behavior neces-

sary to sustain the reform. Interest groups have incentives to

pursue private goods rather than public goods, which

results in distributive demands on the government. Because

costs of reform are concentrated upon groups favored by the

status quo and the benefits are dispersed, net losers have

selective incentives to engage in collective action to block

the policies that harm them.

The Partial Reform Equilibrium Model

Hellman (1998) introduced the partial reform equilib-

rium model. He argues that instead of looking at the popu-

lation as the (temporary) loser that may attempt to reverse

or halt reform, we should concentrate our attention on the

people who stand to win from the partially implemented

measures. These are managers of state owned enterprises,

commercial bankers, local government officials, and organ-

ized crime. These are the ones who will hinder the contin-

uation of the transition because they are a smaller group, are

better able to organize, and are in position to influence

politicians. Because the JCM analysis claims that the net

loser is the population at large, Olson’s theory of collective

action applies: it will be hard to mobilize such a group for

coherent political action. It is possible, however, that the

public will punish elected officials by voting them out of

office. The net winners, on the other hand, have both the

resources and incentive to organize and push through poli-

cies that will dampen the reform effort.

In the initial stages of reform, the benefits are concen-

trated and the costs are diffuse. The primary political chal-

lenge to reform comes from the net winners in the overall

process (Hellman 1998). As many informal analyses of post-

communist transitions have shown, certain economic poli-

cies meet with serious obstacles generated by segments in

society that can hardly be characterized as losers. These

include managers of state enterprises, commercial bankers,

officials in the state bureaucracy, and organized crime. The

early winners oppose hardening of budget constraints, and

the enforcement of property rights laws, as well as rules

dealing with market competition and exchange-rate stabi-

lization (Handleman 1998). The winners have incentives to

block any measure that would eliminate the distortions con-

ducive to their operations.

Because partial economic reforms enable those winners

to affect directly (holding office) or indirectly (bribes) poli-

cymaking during the transition, we should see evidence of

stalled reform efforts in countries where their influence is

more pronounced. Indeed, a cursory evaluation reveals that

states with “bandit capitalism” have done poorly compared

to the ones that were better able to limit the pressure of the

net winners (Hellman 1998; McKinnon 1991).

HYPOTHESES ON PROGRESS OF REFORMS

Both models make claims about the way in which gov-

ernment accountability to the median voter is important.

280 POLITICAL RESEARCH QUARTERLY