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Frye Chapter2 - Oligarchs and Markets Chapter Two Chapter...

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Oligarchs and Markets 1/29/05 Chapter Two 1 Chapter Two The Political Logic of Economic Transformation This chapter develops a theoretical argument about how partisan control of the government and the balance of power between neocommunist and liberal political camps affects economic reform and performance. To begin, I generate hypotheses about the scope of economic reform. I also identify conditions under which economic reforms are consistent, that is, when they move in lockstep across different policy dimensions, and when they will be partial, that is, when they move at different paces and may allow economic agents to benefit from distortions in the reform process. Here partial reform refers to tax breaks and fire sale privatizations conducted under conditions of weak corporate governance that provide great benefits to managers in state-owned and privatized enterprises. This type of partial reform has been far more prevalent in some countries than in others. These different elements of economic reform are often conflated, but they represent distinct features of the reform process that many claim have important consequences for economic performance (Mckinnon 1991; Hellman 1998; Hoff and Stiglitz 2004). I then examine the political determinants of economic performance, again with an eye toward the impact of political polarization. To explore variation in the extensiveness and “partialness” of economic reform, I focus on two types of partisan elites and factions: neocommunist and liberal. I define these terms more extensively later in the chapter, but for now consider neocommunist political factions as headed by a leader who held high political office in 1989,
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Oligarchs and Markets 1/29/05 Chapter Two 2 campaigned with the backing of the largest ex-communist party after 1989, and advocates a dominant state role in the economy. The constituent base of such parties typically includes groups threatened by economic liberalization and rarely includes groups expecting to benefit from economic reform. Classic examples of neocommunist elites and factions include the Albanian Social Democratic Party, the Bulgarian Socialist Party, the National Salvation Front in Romania, and personalist neocommunist leaders like Islam Karimov in Uzbekistan and Heydar Aliev in Azerbaijan. It is important to note that reform communist parties in Poland, Hungary, Slovenia, and Lithuania that advocated market reforms and faced competition from parties to their left do not fit this description at any point in the transition. In contrast, liberal political factions are headed by elites who did not hold high office in the party or state apparatus in 1989, ran for office without the backing of the communist successor party after 1989, and advocate a dominant role for the private sector. A brief list of liberal elites and factions includes the United Democratic Front in Bulgaria, FIDESZ in Hungary, Freedom Union in Poland, and non-party liberal elites such as President Yeltsin in Russia and Askar Akaev in Kyrgyzstan.
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