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Plan for Today Economic Reform & Democratization

Plan for Today Economic Reform & Democratization. Understand potential dangers for democracy in economic reform process. Learn and assess between sides of debate on “authoritarian advantage” in economic reform/ performance. Become familiar with typical “package” of reforms.

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Plan for Today Economic Reform & Democratization

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  1. Plan for TodayEconomic Reform & Democratization • Understand potential dangers for democracy in economic reform process. • Learn and assess between sides of debate on “authoritarian advantage” in economic reform/ performance. • Become familiar with typical “package” of reforms. • Learn and assess between sides of debate on shock therapy vs. gradual reform.

  2. Democratization & Economic Reform

  3. Dangers for democratic regime • Leaders may seek to “ram through” reforms to break political logjams. • Temptation to abandon democratic decisionmaking.

  4. Common issues of conflict and controversy • Role of the state in economic development. • Distributional consequences of reform (who gets what?). • Government accountability.

  5. “Authoritarian advantage”? Debate over regime type and reform

  6. Pro-Authoritarian Argument • Democratic governments may lack capacity for quick action. • Workers’ demands in democracy reduce profits and investment for growth. • Democratic citizen demands for social programs divert monies from investment.

  7. Pro-Democracy Argument • Authoritarian advantage depends on enlightened dictator. • Why would dictator invest in country instead of squandering resources on self?

  8. Pro-Democracy Argument • Democratic leaders face punishment at polls for failure.

  9. Pro-Democracy Argument • Lack of rule of law in authoritarian regimes  investors fear to commit. • Danger of losing property rights at any time.

  10. Pro-Democracy Argument • Political freedom generates better information for decisionmaking.

  11. Pro-Democracy Argument • Democratic governments are risk-averse. (Przeworski & Limongi) • Tend not to invest in grandiose schemes.

  12. The Historical Record • “Authoritarian advantage” based on limited time period and regions. (Maravall) • 1960s-70s Latin America • 1980s-90s East Asian “tigers”

  13. The Historical Record • No difference between dictatorships & democracies in growth rates 1950-1990. (Przeworski & Limongi)

  14. Typical reform package “The Washington Consensus”(roughly) – John Williamson

  15. Typical Reform PackageStep 1: Macroeconomic stabilization • Price liberalization. • Cut government spending. • Tighten up money supply (quit printing money). • Convertible national currency.

  16. Typical Reform PackageStep 2: Longer-term Liberalization • Reduce trade barriers. • Remove foreign investment barriers. • Privatization. • Laws to protect property rights. • Fight corruption. • Reform social safety net.

  17. Now “Washington Confusion”? Growing disagreement about proper speed and degree of reforms

  18. Debate over best reform strategy Option 1 Option 2

  19. Radical, Rapid, Neoliberal Reform • a.k.a. “Shock Therapy” or “Big Bang.” • Defenders: Haggard & Kaufman, Aslund, Sachs.

  20. Arguments for Shock Therapy • Problems of economy so acute that radical action is required. • Inflation, debt, balance-of-payments crisis.

  21. Arguments for Shock Therapy • Better to get pain over with quickly.

  22. Arguments for Shock Therapy • Rapid reforms more likely to succeed – “honeymoon period” of new regime.

  23. Arguments for Shock Therapy • Best to proceed quickly before enemies mobilize.

  24. Arguments for Shock Therapy • Limit rent-seeking behaviour by rapid reforms.

  25. Arguments for Shock Therapy • Idea that living standards decline in reform is a myth. • Due to erroneous statistics of previous regime.

  26. Historical Evidence • Argue those who conducted radical reforms have more successful economies. • Poland (radical) vs. Romania (gradual).

  27. Gradual, Moderate Reform • Defenders include: Przeworski, Stiglitz.

  28. Arguments for Gradual Reform • We still know very little about how free markets interact with democracy.

  29. Arguments for Gradual Reform • Adverse social and political consequences of neoliberal reforms.

  30. Arguments for Gradual Reform • The state must play a role in facilitating market economy. • Enforcement of contracts. • Providing collective goods. • Equitable distribution of wealth.

  31. Historical Evidence • “Alternative capitalisms” have succeeded quite well: • East Asia • European social democracies • Some neoliberal failures: • Argentina • Mexico • Russia

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