Does Democracy Facilitate the Economic Transition? An Empirical Study of Central and Eastern Europe and the Former Soviet Union

Abstract

Empirical analysis shows that democracy has facilitated economic liberalization in 25 postcommunist countries of Central and Eastern Europe and the former Soviet Union. The existence of a vibrant civil society at the start of the transition has the most explanatory power in this team's regressions.

Dethier, Ghanem, and Zoli analyze whether political freedom and civil liberties help or hinder economic liberalization, using panel data from 25 postcommunist countries of Central and Eastern Europe and the former Soviet Union between 1992 and 1997.

Building on arguments and counter-arguments put forth in recent literature, they identify the channels through which political freedom affects economic liberalization during the transition. Then they test the arguments empirically with an econometric framework that takes into account possible problems with simultaneity between the economic and political transitions.

Their empirical findings clearly reveal that democracy has facilitated economic liberalization in countries of Central and Eastern Europe and the former Soviet Union.

This conclusion is confirmed under various model specifications, for both ordinary and two-stage least squares procedures and using two different measures of liberalization.

The econometric results reveal that the existence of a vibrant civil society at the start of the transition has the most explanatory power in the authors' regressions.

This paper - a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region - was presented at a seminar at the World Bank in April 1999. The authors may be contacted at Internet address [e-mail], [e-mail], or [e-mail].