The 20th anniversary of the beginning of economic reforms in Eastern Europe and the Former Soviet Union provides a good opportunity to comment on the lessons of transition says Andrei Shleifer, a Professor of Economics at Harvard University. He made a top seven list, which might be useful to future reformers. Some of the issues are relevant not only for communist countries; the problems of heavily statist economies are similar.Post-communist transition and development issues, Eastern Europe, Caucasus and Central Asia, economic reforms

Andrei Shleifer

English

Research Papers in Economics

 
The opinions expressed in this publication are solely the author’s; they do not necessarily reflect the views of  
CASE - Center for Social and Economic Research, nor any of its partner organizations in the CASE Network.                                        CASE E-Brief Editor: Paulina Szyrmer 
  CASE Network E-briefs 
 No. 03/2012          February 2012 
 www.case-research.eu 
 
Seven lessons from post-communist transition 
Andrei Shleifer
 
The  20th  anniversary  of  the  beginning  of  economic 
reforms in Eastern Europe and the Former Soviet Union 
provides a good opportunity to comment on the lessons 
of transition. The comments below refer to the things that 
I learned – as an economist -- that are different from what 
I  had  believed  initially.  Such  a  recollection  free  from 
hindsight bias is challenging, but will I try
1. This list might 
be useful to future reformers, although there are not so 
many communist countries left. Some of the issues are 
relevant not only for communist countries; the problems 
of heavily statist economies are similar. So here is my top 
seven list.  
First, in all countries in Eastern Europe and the former 
Soviet Union, economic activity shrunk at the beginning of 
the transition, in some very sharply. In many countries, 
the economic decline started earlier, but still continued. 
In Russia, the severity and length of the decline (almost a 
decade) was a big surprise. The countries with the biggest 
trade  shocks,  such  as  Poland  and  Czechoslovakia, 
experienced  the  mildest  declines.  To  be  sure,  the  real 
declines  were  considerably  milder  than  the  measured 
ones,  because  unofficial  economies  expanded,  because 
communist countries exaggerated their GDPs, because of 
defense cuts, and so on, but this does not take away from 
the basic fact that declines occurred and that they were 
surprising.  These  declines  contradicted  the  simple 
economic  theory  that  a  move  to  free  prices  should 
immediately improve resource allocation. The main lesson 
of  this  experience  is  for  reformers  not  to  count  on  an 
immediate  return  to  growth.  Economic  transformation 
takes time.  
Second, after these declines, recovery and rapid growth 
occurred  nearly  everywhere.  The  decline  was  not 
permanent. Over 20 years, living standards in most 
                                                             
1 The text of this brief is based on my comments presented at the 
Conference on “Economies in Transition ― 20 Years After: What we 
understand now what we didn’t understand then” organized by the 
International Institute for Applied Systems Analysis and New Economic 
School, Laxenburg, Austria, January 13-14, 2012. 
transition  countries  have  increased  substantially  for 
most people, although the official GDP numbers show 
much milder improvements and are inconsistent with 
just  about  any  direct  measure  of  the  quality  of  life 
(again  raising  questions  about  communist  GDP 
calculations). As predicted, capitalism worked and living 
standards  improved  enormously.  One  must  say, 
however, that for a time things looked glum. So lesson 
learned: have faith – capitalism really does work.  
Third, the declines in output did not lead to populist 
revolts, as had been feared by many economists. Surely 
reform  governments  were  thrown  out  in  some 
countries,  but  not  by  populists.  Instead  of  populism, 
politics  in  many  countries  came  to  be  dominated  by 
new  economic  elites,  the  so-called  oligarchs,  who 
combined  wealth  with  substantial  political  influence. 
From  the  perspective  of  1992,  this  came  as  a  huge 
surprise. Ironically, in some countries in Eastern Europe, 
populism appeared 20 years after the transition started, 
after the major improvements in living standards were 
absolutely  obvious.  Indeed,  people  in  all  transition 
countries  were  unhappy  with  transition:  they  were 
unhappy  even  in  countries  with  a  rapidly  improving 
quality  of  life  (and  this  itself  is  another  surprise  and 
major puzzle – something for future reformers to keep 
in mind). But the lesson is clear: reformers should not 
fear populism but rather the capture of political power 
by the new elites.  
Fourth, economists and reformers overstated both their 
ability  to  sequence  reforms,  and  the  importance  of 
particular  tactical  choices,  e.g.,  in  privatization.  In 
retrospect,  many  of  the  theories  that  animated  the 
discussion of reform – whether institutions should be 
built first, whether companies should be prepared for 
privatization  by  the  government,  whether  voucher 
privatization  or  mutual  fund  privatization  is  better, 
whether case by case privatizations might work – look 
quaint.  Reformers  nearly  everywhere,  including  in 
Russia, had a vastly overstated sense of control. Politics  
The opinions expressed in this publication are solely the author’s; they do not necessarily reflect the views of  
CASE - Center for Social and Economic Research, nor any of its partner organizations in the CASE Network.                                        CASE E-Brief Editor: Paulina Szyrmer 
 www.case-research.eu 
 No. 03/2012          February 2012 
and  competence  frequently  intervened  and,  to  a  large 
extent, dictated most of the tactical choices. Still, most 
countries, despite different choices, ended up with largely 
similar outcomes (the notable and sad exceptions being 
Belarus, Uzbekistan, and Turkmenistan). In various forms, 
all had privatization, macroeconomic stabilization, as well 
as  legal  and  institutional  reform  to  support  a  market 
economy. Lesson learned: do not over-plan the move to 
markets, but, more importantly, do not delay it in hopes 
of having a tidier reform later.  
Fifth, economists have greatly exaggerated the benefits 
of  incentives,  without  putting  enough  emphasis  on 
changes in people. The economic theory of socialism put 
way too much weight on incentives, and way too little on 
human capital. Winners in the communist system turned 
out not to be so good in a market economy. Transition to 
markets  is  accomplished  by  new  people,  not  by  old 
people with better incentives. I realized this and wrote 
about it in the mid-1990s, but the lesson both in firms and 
in politics in profound: you cannot teach an old dog new 
tricks, even with incentives.  
Sixth, it is important not to overestimate the long run 
consequences  of  macroeconomic  crises  and  even  debt 
defaults. Russia experienced a major crisis in 1997-1998, 
which  some  extremely  knowledgeable  observers  said 
would set it back by 20 years, yet it began growing rapidly 
in 1999-2000. Similar stories apply elsewhere, from East 
Asia to Argentina. Debt restructurings do not necessarily 
leave permanent scars. This experience bears a profound 
lesson for reformers, who are always intimidated by the 
international  financial  community:  do  not  panic  about 
crises; they blow over fast.  
Seventh,  it  is  much  easier  to  forecast  economic 
evolution  than  political  evolution.  Although  nearly  all 
transition countries have eventually converged to some 
form  of  capitalism,  there  has  been  a  broader  range  of 
political experiences, from full democracies to primitive 
dictatorships to just about everything in between. There 
appears to be a strong geographic pattern in this, with 
countries further West, especially those involved with the 
European  Union,  becoming  clearly  democratic,  and 
countries  further  East  remaining,  generally  speaking, 
more authoritarian. For countries in the middle, including 
Russia and Ukraine, the political paths over the last 20 
years  have  wiggled  around.  Lesson  learned:  middle 
income countries eventually slouch toward democracy, 
but not nearly in as direct or consistent a way as they 
move toward capitalism. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
A Professor of Economics at 
Harvard University, Andrei Shleifer 
holds an undergraduate degree from 
Harvard and a Ph.D. from MIT.  
Shleifer has worked on corporate 
governance, law and finance, 
behavioral finance, and institutional 
economics. He has published five 
books, including The Grabbing Hand 
(with Robert Vishny) and Inefficient 
Markets: An Introduction to Behavioral Finance, as well as 
over a hundred articles. Shleifer has served as the Editor of 
the Quarterly Journal of Economics between 1989 and 1999 
and the Editor of the Journal of Economic Perspectives 
between 2003 and 2008. He is a fellow of the Econometric 
Society and of the American Academy of Arts and Sciences. In 
1999, Shleifer won the John Bates Clark medal of the 
American Economic Association. 

Seven lessons from post-communist transition

http://www.case-research.eu/sites/default/files/publications/2012-03_Shleifer.pdf

Seven lessons from post-communist transition

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics