Escaping the Under-Reform Trap

Most former Soviet republics have fallen into an economic and political under-reform trap. An intrusive state imposes high tax rates and drives entrepreneurs into the unofficial economy, which further aggravates the pressure on official businessmen. Tax revenues and public goods dwindle, further reducing incentives to register business activity. This economic under-reform trap has a political counterpart. Remarkably, Communist parties remain popular and opposed to establishing the rule of law precisely in those places where they were able to delay and derail reform. No electoral backlash prompts the reforms necessary to leave the under-reform trap. The best way out of the trap in countries such as Russia and Ukraine is increased economic and political competition among the elite. Copyright 2002, International Monetary Fund