The Problems of Simultaneous Transitions

Almost everywhere, command economies and overtly authoritarian politics are in retreat. Constitutional democracy and market capitalism now hold sway, at least as ideals, even in places where these concepts were anathema less than a decade ago. This is as true for Central and Eastern Europe as it is for Latin America, sub-Saharan Africa, and much of East Asia. Although the reform process has taken different paths in different countries—some countries have initiated economic reform prior to democratization while others have begun with political reform—a growing number of countries have introduced and are currently sustaining both democratization and market-oriented economic reform.

These twin tendencies are widely assumed by policy makers in Washington and other capitals to be not only positive, but also linked. Indeed, the primary debate now taking place within governments and many international organizations centers not around whether democratization and market-oriented reforms are desirable, nor around whether they are mutually reinforcing, but rather around how they can be supported most effectively by external actors, and how best to secure and target the necessary resources.

Although some scholars—market libertarians and modernization theorists—have also argued that democratization and economic liberalization are complementary, most academic analysts have been inclined to believe the contrary, holding the two to be incompatible, at least under the conditions facing developing nations. Even those scholars who believe that the two processes are ultimately compatible tend to doubt that they can be carried out simultaneously. There are two versions of this "transitional incompatibility" thesis, one focusing on democratization's potential to undermine economic reform, and the other contending that the heavy cost of economic reform can turn crucial social actors against democratization.

Transitional Incompatibility

Democratization means giving a political voice to groups and individuals that previously had not been able to make their demands heard. Some such demands, whether symbolic (e.g., dignified treatment or a role in public definitions of the polity) or economic (e.g., legal protection of a certain ethnic group against discrimination), will require no additional expenditure by the state. Most demands relevant to public policy from newly enfranchised actors, however, will require additional expenditures, as in the case of the extension of any kind of government benefit or service (from public schools to sewage systems) to additional persons or communities. In the face of such demands, the incumbent government (which may be either a new democratic government or a reformed authoritarian regime) has three options: it can increase overall spending; it can reallocate current spending to meet new democratic demands; or it can ignore the demands that would require additional expenditures.

The first option is generally the most attractive to incumbent political leaders, as it does not entail taking benefits away from anyone. Choosing the second option would offend previously enfranchised (and economically favored) groups, while selecting the third would strain the loyalty of the newly included. Thus governments that recently have become more politically inclusive, including new democratic governments, often turn to economic populism—that is, politically motivated economic policies that expand total government expenditure for current consumption and investment.

If these governments simultaneously experienced an increase in available resources (e.g., an inflow of foreign investment), this strategy would not necessarily be problematic. Most of the new democracies established in the 1980s and 1990s, however, have encountered a much less congenial international economic environment than that prevailing in the 1970s, making large new capital inflows unlikely. Moreover, new democracies are highly vulnerable to capital flight, especially if existing investors expect political liberalization to lead to political instability.

New democracies (and protodemocracies) that embark upon economic reform face additional resource constraints from the process of regulatory change. In virtually all cases, market-oriented reform generates a short-term to medium-term drop in overall national income. "Structural adjustment" to a persistent trade deficit, for example, entails a shift from domestic absorption of external resources to a net absorption of significantly fewer resources than are generated locally. The availability of fewer resources to consume and invest entails a reduction in income. Trade...