Economic and Political Freedoms Diverge in Eastern Europe

Simeon Djankov (PIIE) and Owen Hauck (PIIE)
July 25, 2016 3:00 PM

Political analysts often assume that economic and political freedoms go together. Increase property rights and the opportunities for private business, and the emerging middle class will demand stronger political rights as well. This logic turns out to be wrong. Economic freedom often increases inequality and uncertainty over future prospects, creating political backlash and space for undemocratic leaders. This is illustrated by the experience of postcommunist countries.

More than a quarter-century since the fall of communism, the paths of postcommunist states have drastically diverged. Albania, Estonia, Kosovo, Poland, and Slovakia have seen a quadrupling of their income per capita in purchasing power parity. Slovenia leads the postcommunist countries in control over corruption and infant mortality, and on par with Western Europe. However, sustained growth has eluded Moldova, Tajikistan, and Ukraine, where income per capita and other indicators of standards of living remain about the same as in the last years of communism. Poland and Hungary, where early reforms were successful in increasing economic freedom, have recently regressed to authoritarian rule. Georgia presents an evolution puzzle as the only post-Soviet state to have restarted political transformation. 

On balance, economic transition has been more successful than political transformation. While postcommunist politicians more or less knew how to do economic reform, few had any idea how to build democracy. The result is that citizens of a half-dozen postcommunist countries still live in dictatorships, for example, in Azerbaijan, Belarus, and the countries of Central Asia. Others live in illiberal democracies, a term coined by Hungarian prime minister Viktor Orbán. These include Russia and Hungary, and more recently Poland. Institutional choices, such as adopting a strong parliamentarian system, appear to encourage economic reforms but do not contribute towards the evolution of democracy, contrary to what political scientists have found in other regions of the world.

The stalled process of democratization in several postcommunist countries has had at least three negative effects. First, it has extended the power of the old elites and transformed it into economic power, creating entrenched oligarchs who play a leading role in the economic and political life of their countries. Second, it has increased rent seeking and corruption. And third, democratic reversal in countries such as Russia has set an example for other countries to follow. The recent antidemocracy trend in Central Europe may be partially traced to the Russian precedent and the surprising resilience of 21st century authoritarian regimes.

Looking ahead, policies that bring about a thriving democracy in countries around the world need recalibration. Insights from postcommunist Europe can be applied to the practice of political evolution in other regions of the world, such as the Arab states, Cuba, North Korea, and much of Africa. The undemocratic trend in Turkey also highlights the tenuous relation between economic and political freedoms. In particular, concerns about stability in fledgling democracies often trump the desire for freedom.