Linkages Between Politics and Economics

In the past dozen years, new elected governments in much of Latin America and (more recently) all of Eastern Europe have confronted urgent problems associated with economic reform. In both of these regions, the collapse of prior military or communist regimes was partly a result of long-festering economic difficulties. In both, the adoption and the implementation of programs to stabilize and more fundamentally reform economies have posed formidable political challenges. And in both, the ultimate success or failure of those programs is widely viewed as having a significant influence on the fate of democratic political systems.

This essay examines some of the major interactions between political opening and economic reform in countries where these have occurred more or less simultaneously.¹ It argues that the economic reform agenda changes significantly between the launch phase and later phases. The character of politics, moreover, also tends to change in partly predictable ways as the early posttransition period yields to more structured (but not necessarily more democratic) patterns. As both economic and political reforms evolve over the course of the posttransition period, the interactions between them change.

The essay begins with a discussion of the various aspects of democratic transitions and the immediate posttransition period that either encourage or impede the launching of economic reforms. The focus then changes to the later stages of economic reform, with an examination of how evolving democratic politics affects the sustainability of those later-phase economic reforms. Finally, the essay sketches some of the major channels through which both first-phase and later-phase economic reforms affect the consolidation of democracy.

Launching Economic Reforms

Economic reform has posed immense difficulties in all of the postcommunist countries. Some of these countries, including the Czech Republic, Hungary, Poland, and (less clearly) the Baltic states, have made great strides toward a market-based economy despite these problems, while others have managed to adopt only partial and indecisive measures or have seen economic reform stall entirely (as in Ukraine). In Latin America, the first elected civilian governments in Bolivia, Argentina, and Brazil either failed to launch economic reforms or launched packages that proved to be unsustainable. In contrast, second-round governments in both Bolivia and Argentina adopted draconian stabilization measures followed by broad and vigorous structural reforms.

The ability of new democratic governments to overcome the obstacles to economic reform is strongly affected by one key factor: the degree to which posttransition politics excludes and discredits major political actors from the old regime. Among postcommunist countries, the variability of this factor is striking. Broadly, in Central Europe and the Baltic states, the communist party, communist unions, and prominent communist officials were initially discredited, although restructured parties and unions have more recently made strong comebacks in several countries. In other countries, such as Bulgaria and Romania, the ex-communist party has remained a major actor; in much of the former Soviet Union as well, informal networks of managers and officials continue to exercise tremendous influence. In a few cases, such as Uzbekistan, the political transition has been strictly formal, leaving the old power structure virtually unchanged.

In much of the former Soviet empire, the dismantling of the communist monopoly on political power was accompanied by decolonization and the reassertion of national sovereignty. In Central Europe and the Baltic states, resurgent national sovereignty was coupled with a third layer of discontinuity: a shift from enforced orientation toward the East to reaffirmation of historical and cultural ties with the West. Fears that the Soviet Union (or, more recently, Russia) might try to reassert its dominance also spurred Central European reformers to move as quickly as possible.

In virtually all the countries of the former Soviet bloc that have managed to stabilize to the point of bringing inflation below 50 percent a year, the political break with the old regime was sharp and was reinforced by the reassertion of national sovereignty. In these countries, governments have been able to sever links with state enterprises and cut subsidies sufficiently to bring about stabilization.²

In other ways sharp political discontinuity would seem to be unconducive to economic reform. In most...