1. The Winners and Losers from Discipline and Encouragement Zeynep ÖZTÜRK 36112969478

2. The economic reforms associated with discipline entail costs for the public in the short term. Generates losers in the short term as a result of higher unemployment, higher prices, and lower provision of subsidized social services. In contrast, the gains associated with the policies of encouragement accrue primarily over the long term as the institutions needed to promote entry and encourage competition—secure property rights, vigilant contract enforcement, good access to financing Introduction

3. The politics of economic reform thus begins with a paradox. Let’s start to explain this paradox; People are asked to support policies that impose clear costs in the short term for the promise of long-term gains inherently subject to high risks. To win broad support, the government must convince the public that the government will be able to sustain its commitment to reform to traverse what one author has called the “valley of transition” until the “higher hills” of an efficiently functioning market economy are reached (Przeworski 1991)

4. In theory such gains should be short-term, because as transition progresses many of these temporary economic distortions will be eliminated or competition will arise to dissipate the rents. But experience shows that these short-term winners of partial reform can convert a small share of their gains into political influence that can be used to restrict entry, undermine competition, and preserve the very distortions that generate these rents.

5. Who Wins and Who Loses ? A typical economy at the start of the transition can be divided into three basic constituencies: State sector workers: These are workers from state-owned enterprises but they have no skills to become new comers in competitive market. At first they face loses because of the discipline (unemployment, price increases) and are unlikely to realize any gains from encouragement. Potential new entrants: These are both workers and new entrepreneurs, from state-owned enterprises, who have the skills to become new entrants in the competitive market. They face loses from discipline. They are likely to see gains from entry into the market.

6. Insiders and oligarchs: These are actors who begin the transition with substantial de facto control rights over state assets and close ties. They affected from liberalization and privatization, because they convert their existing control over state assets into substantial gains. They can take more gains from rent seeking, arbitrage, and asset stripping, if liberalization and privatization are not combined with discipline and encouragement.

8. Figure 9.1 presents a stylized depiction of the income gains and losses for each of these three groups under different levels of economic reform. The state sector workers face a drop in income as a result of sector downsizing The potential new entrants face a classic J-curve pattern of income The oligarchs and insiders, by contrast, face an inverted U- curve income pattern.

9. For all these choices, gains and losses depend on radical the first move in the reform process is at the start of the transition. The more radical move occur the greater the initial adjustment costs to both state sector workers and potential new entrants. such reforms reduce the high concentration of initial gains to the oligarchs and insiders

10. The Government Must Be Credible and Able to Constrain Oligarchs and Insiders Different combinations of reforms produce different configurations of winners and losers, the discipline and encouragement framework suggests two political challenges in promoting economic reform: Securing up-front support from potential new entrants for comprehensive reforms

11. Preventing early winners of liberalization and privatization from trying to sustain a partially reformed equilibrium of rent seeking and theft by undermining further reforms To meet these challenges, governments must have the capacity to project credibility to potential new entrants and constrain the oligarchs and insiders. Answer is that, the government’s capacity to make a credible commitment to a wide range of groups is much greater in political systems that promote competition and contestability.

12. Conclusion Some differences in political systems are shaped by a broad range of factors often loosely referred to as “initial conditions,” which incorporate historical, cultural, geographical, and other variables that shape the transition path (de Melo and others 1997). But understanding how different political systems shape the configuration and choices of the winners and losers in reform provides important insights into the relationship between democracy and market-oriented reform.

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