Liberalization, democracy and economic performance during transition

This paper analyzes the inter-relations between economic and political processes during transition in 25 post-communist countries of Central and Eastern Europe and the former Soviet Union. The main findings are the following: First, economic liberalization generally has positive effect on growth even when controlling for initial conditions. The effect is U-shaped during the contraction and linear during the recovery, but in both periods complete liberalization is superior to no liberalization. Second, democracy has a negative effect on growth during the contraction, whereas its effect appears insignificant during the recovery. Third, economic performance is a strong determinant of support for the reform in elections: support for the reform falls with unemployment and increases with economic growth, output level relative to 1989, and, surprisingly, inflation. Finally, economic liberalization per se increases opposition against the reform, as the costs of the reform apparently go beyond deteriorating economic performance. The level of democracy, in contrast, increases the support for the reform.