An Examination of the Former Centrally Planned Economies 25 Years after the Fall of Communism

Abstract

This report analyzes the changes in economic freedom, political institutions, and performance of 25 former centrally planned (FCP) economies following the collapse of communism. The degree of economic freedom among these countries varied considerably. The FCP countries with higher levels of economic freedom in 2015 as measured by the Economic Freedom of the World summary ratings tended to grow more rapidly, achieve larger increases in international trade, and attract more foreign direct investment than their counterparts with less economic freedom. Differences among the FCP countries in the protection of civil liberties, democratic political institutions, and administration of government with less corruption are also identified and analyzed. A regression model of economic growth during 1995-2015 for 122 countries was developed and used to examine the determinants of growth and the performance of the FCP economies relative to high-income and other developing countries throughout the world. Regression analysis was also used to analyze the life satisfaction measure of the World Values Survey. The regression analysis indicates that economic freedom exerts a strong positive impact on both the growth of per capita GDP and the life satisfaction of individuals. Finally, the economic freedom area ratings were used to identify strengths and weaknesses of the FCP economies. Most of the FCP countries registered substantial increases in economic freedom in the areas of size of government, access to sound money, international trade, and regulation. But they have failed to improve their legal systems, and several FCP countries have even experienced recent deteriorations in this area. While the FCP countries achieved impressive growth and closed the income gap relative to high-income countries during 1995-2015, without improvements in the legal area, it is unlikely that this progress will continue. The addendum provides additional details for ten countries that have made the transition from communism to markets most successfully.

Keywords: Former Socialist Economies, Economic Freedom