Challenging the Conventional Wisdom

By now, many developing and postcommunist countries have taken the first steps toward increasing the market orientation of their economies. Some have liberalized rapidly and decisively, while others have moved slowly, clinging to old economic strategies. Still others have jumped bravely into the icy waters of reform, only to be dragged partway back to shore by the strong undertow of vested interests in old policies. Recent debate about the politics of economic liberalization centers on disagreements over which political characteristics increase the likelihood of a government's carrying out economic reforms that are decisive but not unbearably painful to citizens.

Until recently, it was widely accepted that democracies—especially fragile, uninstitutionalized new democracies—have difficulty carrying out economic liberalization because its costs make it unpopular and hence politically suicidal to elected officials. Consequently, it was argued, authoritarian governments should be more capable of initiating and sustaining major economic reforms. A corollary to this claim is that the "best," in the sense of most decisive, economic reform strategy prescribes economic liberalization prior to political liberalization, as in the Chilean model.

In this essay, I assess the evidence on which the conventional wisdom about the relationship between regime type and economic reform was based; examine the implicit theory that made the conventional wisdom plausible, despite the absence of strong supporting evidence; and suggest a revision of that theory that emphasizes the importance of government actors, their interests, and their incentives for explaining differences in the extent and success of economic liberalization in various political settings.

Prior to the debt crisis that began in 1982, the easy availability of foreign resources (mostly in the form of loans) made it possible for developing countries to sustain a set of policies, often called inward-oriented or import-substitution industrialization, that routinely led to budget and trade deficits. Two elements of this general policy strategy, followed by many countries, created intense pressures to liberalize after the precipitous drop in foreign funding: heavy state spending and overvalued exchange rates. Heavy state spending coupled with an inadequate tax base led to large budget deficits. Overvalued exchange rates, which encouraged imports and discouraged exports, led to trade imbalances. These budget and trade imbalances had been sustained prior to the debt crisis by the inflow of foreign money. The debt crisis made the continuation of these policies impossible.

But economic liberalization—that is, exchange-rate reform, reductions in state spending and state intervention in the economy, decreased protection for domestic industry, and the like—is unpopular. Exchange-rate reform leads to higher prices for imports, including fuel, basic consumption items for the urban popular sector, and inputs for domestic manufacturing. Decreases in state spending lead to reductions in essential health and welfare services, food and fuel subsidies, employment and state-sector wages (which affect private-sector wages), investment in production and infrastructure, and maintenance of everything from roads to schools. Lower levels of protection for domestic industry lead to downward pressure on wages as well as bankruptcies and downsizing, and hence to increased unemployment. Economic theory and the experience of early liberalizers suggest that many of these costs are transitional. Yet transitional costs can and often do last long enough to be politically consequential, even devastating. In other words, the basic situation facing the governments of developing countries is one of very strong pressures to liberalize, both from the international economy and from international financial institutions, accompanied by strong domestic resistance to liberalization because of its short-run costs.

Assessing the Evidence

Given the immediate pain that economic liberalization inflicts, early observers expected authoritarian countries to have an advantage when it came to adopting these policies, for they would find it easier to ignore the complaints of groups hurt by reforms. Evidence that appeared to support a relationship between regime type and likelihood of economic liberalization came from some of the earliest liberalizers, especially Chile, South Korea, Taiwan, Mexico, and Ghana. Many of the studies of these cases are classic examples of what social scientists call "selection on the dependent variable": cases were chosen for examination because they had experienced the outcome the analyst sought to explain...