Plan for Today
Democratization and
Economic Reform
1.
2.
3.
Conclude authoritarian advantage debate.
Become familiar with typical “package” of
reforms.
Learn and assess between sides of debate
on shock therapy vs. gradual economic
reform.
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 riskaverse. (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 19501990. (Przeworski & Limongi)
Typical reform package
Typical Reform Package
Step 1: Macroeconomic stabilization
1.
2.
3.
4.
Price liberalization.
Cut government spending.
Tighten up money supply (quit printing
money).
Convertible national currency.
Typical Reform Package
Step 2: Longer-term Liberalization
1.
2.
3.
4.
5.
6.
Reduce trade barriers.
Remove foreign investment barriers.
Privatization.
Laws to protect property rights.
Fight corruption.
Reform social safety net.
Now “Washington
Confusion”?
Debate over best reform strategy
Option 1
Option 2
Speed
Rapid
Gradual
Degree
Radical
Moderate
Radical, Rapid, Neoliberal Reform
 a.k.a.
“Shock Therapy” or “Big Bang.”
 Defenders: Haggard & Kaufman, Aslund,
Sachs.
 Key case: Poland 1989.
Arguments for Shock Therapy
Problems of economy so acute that
radical action is required.
1.
•
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.
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
State of Debate
 Debate
still continues on appropriate
approach to economic reform.
 Certainly proponents of most radical
free-market reforms have lost ground
in debate in recent years.