Plan for Today Economic Reform & Democratization 1. Understand potential dangers for democracy in economic reform process. 2. Learn and assess between sides of debate on “authoritarian advantage” in economic reform/ performance. 3. Become familiar with typical “package” of reforms. 4. Learn and assess between sides of debate on shock therapy vs. gradual reform.

Democratization & Economic Reform

Dangers for democratic regime  Leaders may seek to “ram through” reforms to break political logjams.  Temptation to abandon democratic decisionmaking.

Common issues of conflict and controversy 1. Role of the state in economic development. 2. Distributional consequences of reform (who gets what?). 3. Government accountability.

“Authoritarian advantage”?

Pro-Authoritarian Argument 1. Democratic governments may lack capacity for quick action. 2. Workers’ demands in democracy reduce profits and investment for growth. 3. Democratic citizen demands for social programs divert monies from investment.

Pro-Democracy Argument 1. Authoritarian advantage depends on enlightened dictator. Why would dictator invest in country instead of squandering resources on self?

Pro-Democracy Argument 2. Democratic leaders face punishment at polls for failure.

Pro-Democracy Argument 3. Lack of rule of law in authoritarian regimes  investors fear to commit. Danger of losing property rights at any time.

Pro-Democracy Argument 4. Political freedom generates better information for decisionmaking.

Pro-Democracy Argument 5. Democratic governments are risk-averse. (Przeworski & Limongi) Tend not to invest in grandiose schemes.

The Historical Record 1. “Authoritarian advantage” based on limited time period and regions. (Maravall) 1960s-70s Latin America 1980s-90s East Asian “tigers”

The Historical Record 2. No difference between dictatorships & democracies in growth rates (Przeworski & Limongi)

Typical reform package

Typical Reform Package Step 1: Macroeconomic stabilization 1. Price liberalization. 2. Cut government spending. 3. Tighten up money supply (quit printing money). 4. Convertible national currency.

Typical Reform Package Step 2: Longer-term Liberalization 1. Reduce trade barriers. 2. Remove foreign investment barriers. 3. Privatization. 4. Laws to protect property rights. 5. Fight corruption. 6. Reform social safety net.

Now “Washington Confusion”?

Debate over best reform strategy SpeedRapidGradual DegreeRadicalModerate Option 1Option 2

Radical, Rapid, Neoliberal Reform  a.k.a. “Shock Therapy” or “Big Bang.”  Defenders: Haggard & Kaufman, Aslund, Sachs.

Arguments for Shock Therapy 1. Problems of economy so acute that radical action is required. Inflation, debt, balance-of- payments crisis.

Arguments for Shock Therapy 2. Better to get pain over with quickly.

Arguments for Shock Therapy 3. Rapid reforms more likely to succeed – “honeymoon period” of new regime.

Arguments for Shock Therapy 4. Best to proceed quickly before enemies mobilize.

Arguments for Shock Therapy 5. Limit rent-seeking behaviour by rapid reforms.

Arguments for Shock Therapy 6. Idea that living standards decline in reform is a myth. Due to erroneous statistics of previous regime.

Historical Evidence  Argue those who conducted radical reforms have more successful economies. Poland (radical) vs. Romania (gradual).

Gradual, Moderate Reform  Defenders include: Przeworski, Stiglitz.

Arguments for Gradual Reform 1. We still know very little about how free markets interact with democracy.

Arguments for Gradual Reform 2. Adverse social and political consequences of neoliberal reforms.

Arguments for Gradual Reform 3. The state must play a role in facilitating market economy. Enforcement of contracts. Providing collective goods. Equitable distribution of wealth.

Historical Evidence  “Alternative capitalisms” have succeeded quite well: East Asia European social democracies  Some neoliberal failures: Argentina Mexico Russia