Progress in post-communist Europe

Tomek writes*

Following the fall of Communism and the dissolution of the USSR in 1991, 15 new countries appeared on the world map. Russia, Ukraine, the Baltic states, and the rest joined freshly independent post-communist countries (including Poland, East Germany, and Romania) in transforming from centrally-planned to free-market economies.

Previously bound by a single administration, each state could go its own way. Some of them ended up as relatively healthy democracies (e.g., the Baltic states), some as flawed democracies (e.g., Ukraine), and some as autocratic/totalitarian regimes (e.g., Belarus, Russia). Their development also varied greatly, resulting in vast differences. In 2023, PPP-adjusted GDP per capita of the post-Soviet European countries ranged from 13,901 USD for Ukraine to 49,266 USD for Lithuania (International Monetary Fund). In 2021, the HDI index for these countries ranged from 0.759 for Moldova to 0.890 for Estonia (United Nations Development Programme, 2022).

It would be tempting to attribute these differences solely to historical factors. However, as a report by the World Bank reveals, there are surprising variations among countries with similar economic starting points. For instance, Moldova’s economy stagnated after the implementation of economic reforms, and Armenia’s nearly doubled, even though both suffered a similar initial drop after the transformation.

The report’s authors identified multiple alternative explanations, but some are particularly interesting. First, the speed of the transition matters. Countries where the reforms were implemented quickly (in the form of “shock therapy”), were generally better off than those where the process stretched over a longer time. This might seem counterintuitive – more incremental reforms give policymakers more time to react to unplanned outcomes. However, as the authors show, well-prepared “shock policies” let countries reap their benefits quicker, which lead to a quicker recovery from the initial drop.

However, not only does the speed of the transition matter but so does its extent. As the authors claim, simultaneously promoting growth in new sectors and protecting the old ones is impossible. Growth was significantly weaker in countries where private firms lacked access to loans (loans went to state enterprises), which hindered new firms from entering the market and disrupting the inefficient status quo. In Belarus, for example, private companies comprise only 26% of the market — significantly less than the Commonwealth of Independent States average. Economic transformation was also delayed by other “bumps” in the playing field, such as allowing inefficient state companies to delay paying for energy and covering the resulting losses by raising prices to private companies.

Bottom Line: Quick and extensive reforms in post-Soviet states have been more efficient and less costly in the long term than long and partial reforms. Those countries that implemented “shock policies” suffered a lot initially but then grew more quickly. Countries that moved more slowly stagnated without realizing their potential.


* Please help my Real Donut Economics** students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

** Why “Real”? In short, because (a) Raworth’s claims to being a “21st century economist” denies that all of her ideas were presented by others in the 20th century and (b) she presents no viable mechanisms (besides “be nice”) for achieving equality and sustainability. My students are more realistic. In long? Read this.

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

2 thoughts on “Progress in post-communist Europe”

  1. I think that the topic of your blogpost is interesting. I know that there is also some comparative politics literature on democratization that compares post-soviet states to Latin America. Maybe there are some useful insights to be taken from this literature? Besides that, I think it could be useful to explicitly identify some different indicators on the “similar economic starting points”. Further, you could then do a most-similar systems study or most different systems study, respectively identifying and analysing either two countries that are similar but have different outcomes or two countries that are different and have the same outcome. This would potentially focus your paper and improve your analysis.

  2. Hi Alex!
    Thanks for your comment and recommendations! I havent heard about the study comparing Latin America to Post-Soviet countries, I’ll definitely look into that!
    In my essay, I will definitely look into a few different macroeconomical factors (GDP, inflation, unemployment, etc.), I hope this will make it easier to establish the “similarity of starting points” 🙂
    And regarding comparative case studies – I was thinking of doing the “most-similar” systems study (since it lets me control for most confounding factors), but “most-different” one could also be interesting (maybe it could result in rejecting an existing theory in the field?)
    Overall, thanks so much for the feedback!!
    Tomek

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