Plan for TodayDemocratization and Economic Reform1. Conclude authoritarian advantage debate.2. Become familiar with typical “package” of

reforms.3. 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 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 1950-1990. (Przeworski & Limongi)

“The Washington Consensus”(roughly) – John Williamson

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.

Growing disagreement about proper speed and degree of reforms

Now “Washington Confusion”?

Debate over best reform strategy

Speed Rapid Gradual

Degree Radical Moderate

Option 1 Option 2

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

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.

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 AsiaEuropean social democracies

Some neoliberal failures:ArgentinaMexicoRussia

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.