The Perils of Polarization: Economic Performance in the Postcommunist World Author(s): Timothy Frye Source: World Politics, Vol. 54, No. 3 (Apr., 2002), pp. 308-337 Published by: Cambridge University Press Stable URL: http://www.jstor.org/stable/25054190 Accessed: 18/12/2009 09:12 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=cup. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected].

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THE PERILS OF POLARIZATION Economic

Performance

Postcommunist

in the

World

ByTIMOTHY FRYE*

visions of the politics of economic reform dominate the liter ature. The most widespread approach relies on the logic of the TWO of reform is temporal: re can be economic gains in the future but large overcome resis reforms achieved today. To only by imposing painfiil as labor, tance from groups in from the short reform such term, losing and state-sector need to concen governments pensioners, employees, are to reform, trate power in executives who committed ideologically and insulated from international financial backed by organizations,

J-curve,1 which forms promise

holds

that the central dilemma

to generate

this view recendy, many have criticized popular pressure. Although on economic still guides many academic and policy debates reform.2 A second view holds particular for the postcommunist relevance

world. Argued most persuasively by Joel Hellman, view winners

is that the main

obstacles

from distortions

to economic

in the transition

the "partial reform"

transformation economy

it

who

are the early then use their

*

I would like to thank Andrew Barnes, David Bearce, Carles Boix, Valerie Bunce, Greg Caldeira, Phil Roeder, Kira Sanbonmatsu, Kurtz, Ed Mansfield, Joel Hellman, Marcus Anthony Mughan, reviewers for excellent comments. Previous ver and three anonymous Kevin Sweeney, Kuba Zielinski, sions of this essay were presented at the Davis Center for Russian Studies at Harvard University, the of the American annual meeting Political Science Association, Cambridge, Mass., February 2001, and of Slavic Studies, Washington, the annual meeting of the American Association for the Advancement 2001. D.C., November 1 Przeworski, Democracy and theMarket: Political and Economic Reforms inEastern Europe and Latin America Press, 1991). Przeworski (New York Cambridge University cogendy describes the logic of "In Search of aManual for Technopols," the J-curve but does not endorse this view. John Williamson, in John Williamson, ed., The Political Economy ofPolicy Reform (Washington D.C.: Institute for Inter inDe national Economics, "Introduction: The Politics of Economic Adjustment 1994); Joan Nelson, in Joan Nelson, in ed., Economic Crisis and Policy Choice: The Politics ofAdjustment veloping Countries," the Third World (Princeton: Princeton University Press, 1990); Stephan Haggard, Pathways from the Pe inNewly Countries (Ithaca, N.Y.: Cornell University Industrializing riphery: The Politics of Growth Press, 1990). 2 see Most (Manu Joseph Stiglitz, "Whither Socialism? Ten Years of the Transition" prominendy, (New ed., Sustainable Democracy D.C., Bank, Washington, 1999); Adam Przeworski, script, World York: Cambridge

University

Press,

1995).

WorldPolitics 54 (April2002), 308-37

PERILSOF POLARIZATION gains to block further reform.3According economic

reform

309

to this view, in the short term

to

tends

concentrated for well benefits produce costs while the of transformation groups positioned dispersing the rest of society. The greatest threat to economic reform throughout comes therefore from a narrow group of industrial managers, bankers, state for their per and natural resource tycoons bent on the capturing interest

sonal benefit. diverse from

view suggests that robust political and competition are essential to coalitions the winners governing prevent early state and further reform. taking control of the sidetracking

This

This

article

an alternative

advocates

and anticommunist nomic

resources.4

tween

and political ex-communist

effect

on economic

have

It treats economic

approach.

as a reflection

of the political factions engaged

formance

struggle in a war

per ex-communist

between

of attrition

over

be Specifically, political polarization and anticommunist factions has had a devastating

these competing growth. Where political over to continue and power equal struggle

had

eco

roughly nomic rules of the game?as has been slow.Where either

factions the eco

or Ukraine?economic

in Bulgaria

growth factions

or anticommunist

ex-communist

scene?as or Uzbekistan?eco in Estonia the political nomic performance has been considerably better. Political outcomes economic in two ways. has polarization shaped it has about economic future conditions First, uncertainty heightened have dominated

because

businesses

expect

a

turnover

potential

to

in government

bring

sharp swings in policy. Facing this possibility, businesses have shied away from productive

long-term

investments,

preferring

asset

instead

stripping, intensive lobbying of state officials and highly profitable but deals. More semilegal business broadly, political polarization to make it difficult for governments credible commitments and future property existing rights.

has made to respect

Second, political polarization has led to awar of attrition inwhich

ex-communist herent

measures

and anticommunist to address

anticommunist tries, neoliberal reforms, tempted

some version

factions and

traditional

of gradual

failed to agree on co coun In the polarized some of version attempted

factions

the economic have

have

crisis.

ex-communist reform,

but neither

factions has been

at

have able

to

impose its preferred policy. The resulting war of attrition has led to in

coherent

policy

and slow growth.

3 "Winners Take All: The Politics of Partial Reform Hellman, Politics 50 (January 1998). 4 Alberto Alesina and Allen Drazen, "Why Are Stabilizations 81 (December 1991).

in Postcommunist

Delayed?"

Transitions,"

World

American Economic Review

WORLD POLITICS

310 on an

Based

analysis

of economic

growth

munist countries during the period 1990-98,1

in twenty-five

postcom

present three findings.

economic has hindered First, political growth, controlling polarization in polarized countries for a range of factors. Second, economic growth in such coun has followed the electoral calendar: as elections approach a rates in increase and economic the odds of tries, policy growth change of elections In the effect countries, by contrast, plummet. nonpolarized

on growth is absent. Third, political polarization

greater

policy

volatility,

a

that

finding

is consistent

is associated with with

the argument.

These findings have implications for studies of the postcommunist the political transformation, nomic reform more generally. This nomic

business

cycle,

and

the politics

of eco

on the of eco differs from existing literature politics in three respects. First, it in the postcommunist world Lib economic rather than economic liberalization.5 growth

article reform

measures

is an important of transformation but is not an component on cross-sectional in itself. Second, while many works analysis rely or focus on a subset of years within this article takes full the last decade, eralization end

time pe of available data and pools that data over a ten-year advantage an of literature scholars have developed riod.6 Finally, body impressive outcomes in often lack but these works countries, explaining particular a comparative perspective.7 a In Section In Section the argument. I, I develop II, I conduct and of effects the the of quantitative analysis polarization political electoral

calendar

on economic

impact of political

growth.

polarization

In Section

III, I examine

on policy volatility.

Section

the

IV

concludes.

5 Hellman nist World,"

in the Post-Commu of Economic Reform (fn. 3); M. Steven Fish, "The Determinants and David A. East European Politics and Society 12 (Winter 1998); Jeffrey S. Kopstein of the Postcommunist World," World Politics 53 and the Transformation Reilly, "Geographic Diffusion (October 2000). from Post-Com Peter Boone, and Simon Johnson, "How to Stabilize: Lessons 6Anders Aslund, no. 1 (1996); Fish (fn. 5); munist Countries," Brookings Papers on Economic Activity, Stanley Fischer, inTransition Economies: The Early Expe and Growth Ratna Sahay, and Carlos Vegh, "Stabilization and Reilly (fn. 5); Olivier Blan rience," Journal ofEconomic Perspectives 10 (Spring 1996); Kopstein Transition Press, 1997). (Oxford: Oxford University chard, The Economics of Post-Communist 7 MIT Press, 1995); Anders Aslund, to aMarket Jeffrey Sachs, Poland's Jump Economy (Cambridge: How Russia Became aMarket Economy (Washington, D.C.: Brookings Institution, 1995); Laszlo Bruszt and David Stark, Post-Socialist Pathways: Transforming Politics and Property in East Central Europe Press, 1997); David Bartlett, The Political Economy ofDual Tran (Cambridge: Cambridge University Reform and Democratization Shleifer and Daniel Treisman, 1997); Andrei Russia (Cambridge: MIT Press, 2000). sitions: Market

of Michigan inHungary Press, (Ann Arbor: University Without aMap: Political Tactics and Economic Reform in

PERILSOF POLARIZATION I.The Political

Roots

of Economic

311

Performance

over have received more attention politics the politics of economic reform. The wave of neoliberal reforms that swept Latin America, Western Europe, Africa, and eventually the postcommunist world interest in renewed sparked

Few

in

issues

comparative years than

the last fifteen

on economic the impact of The postcommunist performance. politics with their diverse and economic institutional countries, arrangements a environment offer rich for the outcomes, topic. Indeed, de exploring the homogenizing effects the differences globalization,

of Soviet-style socialism and economic across in economic post performance are to the Bank striking.8 According European

spite

communist

countries

for Reconstruction

the size of the economy

and Development,

in Hun

gary increased by 2.5 percent annually from 1992 to 1998; inMoldova it fell by 8.5 per year during the same period?a contraction of historic to

proximity

countries

Many

proportions.9

Europe,

have

defied

Given Ukraine's predictions. educated workforce, and balance

its large market,

of agriculture and industry,Deutsche Bank rated it the Soviet republic with

the greatest economic decline the economic

economic

basket

in 1990.

potential

over

the subsequent case of the 1980s,

But Ukraine

decade.10 Meanwhile, as a regional emerged

saw vast Poland, economic

power in the 1990s. on the economic reform points to a range of politics of economic view factors that may influence The J-curve performance. are to elite central that and power suggests presidential partisanship are com executives who economic strong By insulating performance. The

literature

to reform and backed countries community, by the international to withstand exerted the may pressure by groups bearing change policy costs of reform. In contrast, the partial reform view empha short-term sizes the importance of democracy and dispersed power for political it difficult economic These the short features make for performance.

mitted

term winners

from

the state and derail

distortions reforms.

in the transitional Others

have pointed

economy to state

to capture in spending,

8 of Post-Socialism," Slavic Review 58 (Winter 1999). Valerie Bunce, "The Political Economy 9 1 for descriptive statistics on polarization and growth. The EBRD's Transition Report See Appendix 1999 notes laconically that growth rates in the region "can lack precision." It also notes that some coun tries incorporate estimates of the size of the informal economy into their growth rates. The growth data are likely the best available and have been widely used. European Bank for Reconstruction presented here Transition Report (London: EBRD, 1999), 188. In the quantitative analysis, I introduce and Development, a correction to the growth data that attempts to account for the size of the informal economy. See fh. 60. 10 in Bartlomiej in the Post-Soviet "Economic Transformation Gertrude Schroeder, Republics," in Russia and theNew States of Eurasia (Armonk, N.Y.: M. E. Kaminski, ed., Economic Transition Sharpe,

1997).

312

WORLD

POLITICS

and ties to international legacies, geography, and the IMF, as important such as the European Union in transition societies. economic performance stitutional

organizations, of determinants

I adopt a different approach inwhich I analyze how the balance of

in postcommunist power political mance. More I argue specifically,

countries

affects

that political

economic

polarization

perfor exacerbates

the distributional effects and credible commitment problem of eco nomic

transformation

and

leads

to slower

growth.

Before

developing

the argument, I briefly discuss my treatment of political polarization. the term

in many ways.11 "political polarization" as used in this article, the two in factions major political Conceptually, are ex-communist and anticommunist fac systems polarized political Scholars

have

used

tions. Leaders of the former have typically held responsible positions within mitted

the state apparatus or communist a dominant to state supporting

com party, have been largely with sector, have campaigned the pos and have emphasized

the backing of the ex-communist party, to 1989. itive side of communist policy prior

In contrast,

the leaders

of

anticommunist parties have either left or never held positions in the communist party prior to 1989, have been highly critical of the activi run party prior to 1989, have against the largest a role for the private dominant ex-communist party, and have favored sector. This it reflects diver because is important cleavage particularly over structure of For the views the the economy. gent example, during the ex-communist Com in Russia, the traditional party, past decade ties of the communist

munist

Party

of the Russian

Federation,

promised

continued

state own

ership of land and a leading role for the state in finance and heavy a mas led by President Yeltsin promised industry; the anticommunists on sive restructuring of the economy based liberalized private property,

prices, and curtailed state subsidies for industry.12Not only do these 11 Giovanni Sartori defines a polarized party system by the ideological distance between parties, but are unavailable in the postcommunist world. Others measure polarization such precise measures using indices assume that cleavages are po indices of social cleavages, such as ethnic fractionalization. These The salience of the ex litically salient, but many cleavages do not translate into political movements. cases seems to be quite communist/anticommunist high. Other types of cleavage in the postcommunist as ethnic divisions, also do not translate readily into economic policy. For example, na cleavages, such in of a market economy continued the construction tionalist rhetoric aside, Prime Minister Meciar Slovakia. Sartori, Parties and Party Systems (New York: Cambridge University Press, 1976); William Quarterly Journal Easterly and Ross Levine, "Africa's Growth Tragedy: Policies and Ethnic Divisions," and Prop ofEconomics 82 (November 1997); Philip Keefer and Stephen Knack, "Polarization, Politics, Bank, Washington, D.C., 2000). For a critique of these indices, see erty Rights" (Manuscript, World for Constructing Ethnic Frac of Constructivism David Laitin and Daniel Posner, "The Implications tionalization Indices," APSA-CPNewsletter for the Organized Section in Comparative Politics oftheAPSA 12

(Winter2001).

12 Zyuganov, My Russia: The Political Autobiography ofGennady Gennady Medish (fn. 7). (Armonk, N.Y.: M. E. Sharpe, 1997), pt. 4; Aslund

Zyuganov,

ed. Vadim

PERILSOF POLARIZATION

313

competing platforms have little in common, but they also produce dif ferent winners Not

and losers.

all ex-communist

parties

fall

into

the "traditional"

category.

John Ishiyama and others have argued that the Hungarian,

Polish,

are far more ex-communist and Slovenian Lithuanian, parties are ted to market-oriented reforms than other ex-communist the region.13 These parties social-democratic European more

left-wing

adopted

parties in to roughly akin

economic

parties and often factions. Given

ex-communist

commit

platforms faced competition their histories,

from

however,

these parties lacked credibility, particularly with private business. Here I treat

these

My

in two ways. Ini parties ex-communist parties. ex-communist parties.

ex-communist

reform-oriented

I treat them tially, I then place them

as distinct

from

in one group with

"traditional" other

treatment of political polarization is similar to that of Stephan

Haggard

and Robert

Kaufman,

who

use

antisystem

parties, which

they

describe as "left and populist parties that have historically mobilized as indicators or of po anti-oligarchic protests," anti-capitalist true for traditional ex-communist This depiction par rings as used here may in ties.14 Political bring sharp swings polarization

around

larization.

policy. In addition, however, it raises the possibility of change in the underlying

The War

structural

features

of the economy.

of Attrition

tends to undermine polarization Alesina and Allen least two ways. Alberto

Political

economic Drazen

in at performance in that argue politi

cally polarized settings it is difficult for politicians to agree on economic costs on but impose distributional social welfare that promote a costs of transformation in be The may variety paid specific groups.15 or of ways: by levying taxes on capital, by sacking state workers, by end sectors. The to key is that each group prefers loss-making ing subsidies these costs are to be that some other group pay these costs. Where

policies

divided among competing political groups that have very different pol icy preferences

and where

these groups

do not know who

will

concede

the political battle by agreeing to pay the costs of transforming the 13 successor creates three categories of communist liberal, and dem parties?standpatter, Ishiyama on their policy positions in three areas: the economy, the communist past, and ocratic reformist?based the value of democratic Structures, Leaders, Ishiyama, "Communist Parties inTransition: competition. in Eastern Europe," Comparative Politics 27 (January 1995); idem, and Processes of Democratization of Ex-Communist "The Sickle or the Rose: Previous Regime Types and the Evolution Parties," Com Political Studies 30 (June 1997). parative 14 and Kaufman, The Political Economy Haggard versity Press, 1995), 167. 15 and Drazen Alesina (fn. 4).

ofDemocratic

Transitions

(Princeton: Princeton

Uni

314

WORLD

economy,

(awar

stalemate

political

POLITICS of attrition)

is

likely

to ensue. Dur

ing this stalemate both parties seek to shift the costs of the new policy to their opponents, political economic policies

a situation

a

Consider

country

that inhibits

the introduction

to promote necessary growth.16 two groups: one earns revenue from

coherent

with

of

capital

and the other from labor.17Although both will benefit by transforming the economy, each prefers that the other group bear the distributional associated with The transformation. faction capital-oriented to end the liberalize prices, and open in constraint, prefers soft-budget costs

to labor-oriented faction prefers a gradual re dustry foreign trade. The taxes on the form with elements of protection, significant private sector, to workers to cushion and redistribution the costs of transformation. Where of these

over the distribution prevents agreement political polarization to introduce difficult coherent costs, it is exceedingly policies

that promise to improve the economy. In a highly polarized setting each group tion ensues.

expects

the other

to concede

first and a costly war

of attri

one faction wins the Only when political struggle?for example after an election we the loser?should expect coherent govern marginalizes a ment the sector, and improved response by policy, productive private economic The consolidation of forces around a performance.18 political war of attrition similar ends the and allows the winners roughly policy to shift the costs of transformation onto the losers. the war of Ending attrition is essential for the of coherent and quickly adoption policies the resumption of growth. awar of attrition The of logic

set in a postcommunist special bite the scope of economic the potential ting. Given change, gains for win ners and costs for losers are In because addition, especially high. political are often in flux, the in transition institutions economies early winners has

16 Alberto Alesina and Howard Rosenthal, Partisan Politics, Divided Government and the Economy (New York: Cambridge University Press, 1995); Morris Fiorina, Divided Government (Boston: Alwyn Bacon, 1996). 17 over an asset and choose to or not More formally, two players bargain fight fight. If neither fights, each receives 0. Fighting w. is costly so each player must pay a cost, c, and the winner receives a prize, Each is uncertain about the costs the other side can bear. As long as w > 0 > c, each party prefers to rather than not fight. Given these incentives, each chooses to fight in hopes of fight and receive w-c, to their opponents. The result is awar of attrition. shifting the costs of transformation

Not Fight

Not

18 Alesina

^

Fight

0,0

S

FiSht

w-c,

and Drazen

(fn. 4).

Player

1

Fight -c, w-c

-c

-c, -c

PERILS OF POLARIZATION

315

have an incentive to delay political consolidation around one political faction they

can

shape political

Credible

thereby credible

amassed

Once great wealth. having to lock in their economic institutions

done

so,

gains.19

Commitment to

In addition increases

they have

until

the war

of attrition, polarization political in economic the probability of sharp changes and policy to make a in the government's confidence undermines ability over to commitment time.20 Potential transfers property rights exacerbating

in polarized of political power are often decisive moments sys political tems because all groups expect great swings in economic policy. Losers can winners and vice versa. At a minimum, these become quickly a maximum, in they changes may bring about rapid changes policy. At In either case, political in the economy. may lead to structural changes increases uncertainty and leads firms to discount their ex polarization pected

returns

on investment

and to lobby

the state as an insurance

pol

icy against political change. incur institutions that offer few protections against judicial a state in environment increase sions by the polarized postcommunist can in the size of potential governments swings Incoming policy. Weak

manipula rights using creeping ^nationalizations, change property to tions of tax policy, of property sup reassignments rights political so. have their rivals.21 And done porters, and threats to incarcerate they to respect the cannot Because governments credibly commit incoming

property rights of their rivals in a polarized setting, the latter have little incentive

to make

long-term

ers of the current vorable

even the Moreover, support for fa that their opportunities last only so long as their allies

government recognize state officials will by so to invest. Think incentives of a they, too, have weak an in is considering in polarized Russia who making

treatment

are in power,

investments.

businessperson vestment after the introduction

of an economic

reform

program.

Facing

19 and Democracy: Hellman (fn. 3); Timothy Insights from the Post Frye, "Presidents, Parliaments in Andrew Reynolds, communist World," ed., The Architecture ofDemocracy: Constitutional Design, and Democracy (New York: Oxford University Press, 2002). Management, Conflict 20 and Government "A Positive Theory and Guido Tabellini, of Fiscal Deficits Alberto Alesina Debt," Review ofEconomic Studies 57 (July 1990); Jakub Svensson, "Investment, Property Rights, and and Evidence," European Economic Review 42, no. 7 (1998). Political Instability: Theory 21 this dynamic. A Russian oligarch recounted to a journalist that in early One anecdote highlights at the Davos meetings Economic Soros told him: "'Boys, of theWorld Forum, George February 1996 [Soros's] argument was your time is over. You've had a few good years but now your time is up.' His he said, should be careful that the communists were definitely going to win. We Russian businessmen, to get to our jets in time and not lose our lives." Chrystia Freeland, The Sale of the that we managed to (New York: Random House, 2000), 192. Capitalism Century: Russia's Wild Ride from Communism

316

WORLD that the current

the probability

POLITICS may

government

give way

to a govern

ment with far different preferences thatwill put any such investment at to invest.22 risk, he or she will be reluctant in In contrast, Slovenia who think of a businessperson nonpolarized can invest with not that economic will the confidence change policy in This of the environment.23 dramatically, regardless changes political is central

confidence

to investment

reform more

for economic

decisions

in particular

and support

generally.24

The effects of political polarization are likely to be especially strong prior

to elections.

As

elections

the probability

approach,

of a large

swing in policy increases, making it especially difficult for the govern ment

sector to invest in activities. the private productive over future economic lead busi policy may uncertainty are in. Politi results their funds abroad until the election

to convince

Heightened nesses to cians may to actually

park in an election seek to promote growth a from response generate progrowth

year, but their ability sector in a the private

setting will be limited. In polarized political

polarized therefore

economic

from

and lowest

expect an election

systems, we

to be in the years farthest highest growth in election years.25 leads to slower that political polarization

In sum, we should find rates of economic in that growth systems is polarized political growth, to the time to the next election, and that related po political inversely larization leads to more volatile policy. cases

Particular

suggest the ex-communist

Bulgaria munist United

Democratic

the plausibility

In of the argument. polarized Socialist Party and the anticom

Bulgarian in the coun Front, the two leading factions economic different reforms. have proposed very

try over the last decade, to sustain an has gained sufficient Neither, however, power political over time such that it could costs of trans the economic impose policy formation

on

the other,

so each

faction

has

instead

used

its time

in

22 On Russia, see Aslund (fh. 7); Vladimir Mau, Russian Economic Reforms as Seen by an Insider: Suc cess orFailure? (London: Chatham House, 2000); Jerry Hough, The Logic ofEconomic Reform in Russia Institution, 2001). (Washington, D.C.: Brookings 23 Studies 45, On Slovenia, see Sabrina Petra Ramet, "Slovenia's Road to Democracy," Europe-Asia no. 5 (1993); Joze Mencinger, "The Slovene Economy," Nationalities Papers 21 (Spring 1993); Jeffrey in Slovenia," inOlivier and Economic Reform "Political Independence Sachs and Boris Pleskovic, in Eastern Europe, vol. 1, Kenneth A. Froot, and Jeffrey D. Sachs, eds., The Transition Blanchard, of Chicago Press, 1994). Studies (Chicago: University Country 24 Przeworski (fn. 1). 25 and Vladimir Gim For a treatment of the political business cycle in Russia, see Daniel Treisman or the of Chudar," British Manipulations pelson, "Political Business Cycles and Russian Elections, Journal of Political Science 31 (April 2001). See also Timothy Frye and Edward Mansfield, "Timing is in the Post-Communist World" and Trade Liberalization Elections (Manuscript, Ohio Everything: of Pennsylvania, November and University State University 2001). D.

PERILSOF POLARIZATION 317 The Countries*

Polarized Average

Growth

TABLE 1 at a Glance

Cases

Countries

Nonpolarized

Rate

-7.9%

(1.1)

Average

Albania

Growth

Rate

-1.2%

(. 71)

Armenia Belarus

Azerbaijan

Croatia

Bulgaria

KyrgysstanCzech Republic Moldova

Estonia Romania Russia

Ukraine

Hungary Kazakhstan

Latvia

Lithuania Macedonia

Poland Slovakia Slovenia

Tajikistan Turkmenistan Uzbekistan

N = 249; T= 4.65; standard deviation in parentheses countries

aThese

office

have had polarized

to redistribute

political

economic

systems

resources

than to promote growth. Consequendy, a few industrial large conglomerates,

for at least half

the years

in the sample.

to its own

rather supporters has been weak. Indeed, growth such asMultiGroup, have weak

in the state.26 By contrast, the economy by looting nonpolarized as anticommunist such Estonia and and ex countries, Uzbekistan, communist have dominated and quickly factions, politics respectively, ened

imposed Political

the economic

costs about

uncertainty and economic countries, Some quantitative evidence

these

of transformation economic

policy

on their opponents.27 has been much lower in

much better. performance is also consistent with the argument.

In

Table 1,1 divide the cases into countries that had polarized political sys 26 and Bruce Parrot, On Bulgaria, see John D. Bell, "Post-Communist Bulgaria?" in Karen Dawisha in South-Eastern York: Cambridge eds., Politics, Power, and the Struggle for Democracy Europe (New (Cheltenham, U.K.: Ed Press, 1997); John Bristow, The Bulgarian Economy in Transition University as State Breakers in Postcom ward Elgar, 1996); Venelin Ganev, "The Dorian Gray Effect: Winners Studies 34 (January 2001). munism," Communist andPost-Communist 27 see Gerald M. Easter, "Preference for Presidentialism: Postcommunist On Uzbekistan, Regime in Russia and the NIS," World Politics 49 (January 1997); Asad Alam and Arup Bannerji, Change and Kazakhstan: A Tale of Two Transition Paths" (Manuscript, World Bank, Washing see Ole and Lars Johannsen, The Baltic States after Independ ton, D.C., 2000); on Estonia, Norgaard ence Mass.: Edward Elgar, 1999); Terry Cox and Bob Mason, Social and Economic (Northampton, inEast Central Europe (Cheltenham, U.K.: Edward Elgar, 1999). Transformation "Uzbekistan

WORLD POLITICS

318

terns for at least half the period under study and those that did not. I eraging because

are

countries

many

polarized we count figures for the

rates

growth

Nonetheless,

two growth for these groups.28 Av over time information forfeits and polarization

the rates of economic

then compare

annual

average countries and -1.2 countries

were

nonpolarized

percent reform communist

at the

tistically significant the gate relationship

.05 level. Thus,

between

assess

cludes

factions

as

are

there

GDPGrowit

I estimate the arguments, the following model, and factors often for political polarization of growth. =

?0

+ +

+

+

^Polarization?

+ ^GDPGrowiM)

+

+

in

which cited

as de

^^Democracy^

$3GovernmentSpendingit $sGDPperCapitai(t_1}

closely.

Analysis

variables

terminants

to investi

grounds and growth more

polarization

II.Quantitative To

for only part of the decade. was -7.8 in the percent growth in the If countries. nonpolarized

these polarized, -2.2 for countries and the percent percent polarized are sta In either case, these differences countries. with

-5.9

polarized economic

+

fy?penness^) $7LogInfiation

^6Warit+

?{$9Country?

i(t_1}

+ Z($10Yearit)+ eit (1)

is the real rate of year-to-year variable, GDPGrow.f, dependent / GDP in country in 1998 U.S. dollars. The / in in measured year change rate in GDP in the countries of annual economic average real growth economic Scholars have measured under study is -3.8 percent. perfor The

Jose Maria ways, but as Luiz Carlos Bresser-Perreira, note: economic crite "The ultimate Przeworski and Adam Maravall, a coun success can rion for evaluating of reforms the only be whether at of inflation.,,29 levels stable and moderate resumed try growth mance

in many

The main independent variable of interest is political polarization. the seat share of the largest ex-communist (an an anticommunist holds (ex-communist) ticommunist) in Bulgaria in 1994 the anticommunist the executive. For example, won Forces 29 of the seats and formed Union Democratic of percent Polarization.

measures faction

when

to the the largest party opposed prime minister its polarization Socialist Party. Thus, Bulgarian

from

the ex-communist

score was

29.

28 Here I treat a polarized country as having at least 20 percent of the seats held by a traditional the executive is held by an anticommunist ex-communist (ex-commu (anticommunist) party when nist) in a given year. 29 inNew Democracies: A Social Economic Reforms and Przeworski, Maravall, Bresser-Perreira, Democratic Approach (New York: Cambridge University Press, 1993).

PERILSOF POLARIZATION

319

on little consensus have produced is there but economic strong type regime growth, has gone hand in hand with de sentiment that economic performance in the is consistent with the par world.30 This mocracy postcommunist better than other should perform tial reform view that democracies a value of 1 for each year that Freedom takes countries. Democracy\ rates a country as "free," that is, a lor 2 on its scale of House 7-point from

Studies

other

whether

rights;

political

it takes a value

otherwise

of 0.31

levels of government spending may cushion the distributional

High effects

regions influences

of free markets

and

theorists

thereby

en promote Similarly, growth.32 that targeted government spending

argue However, may generate spending high levels of government growth.33 more resources at the ex to pursue also rulers may give personal wealth is the ratio of pense of economic performance. GovernmentSpendingit as a of gross domestic government percentage product.34 spending to the world is often cited as critical to economic economy Openness includes an an the statistical model growth.35 To capture this notion, dogenous

growth

nual index of external liberalization compiled byWorld mists

and country autarkic economic

experts. system

Bank econo

. ranges from 0 for a completely Openness to 100 for an economic system fully open to

trade.36

foreign I include country including

a dummy variable, War^ in awar. I control is involved the gross

domestic

product

that equals for the wealth per

capita,

1 for each year that a of each country by GDPper

Capita.,..

30 Crisis: The Latin American Karen L. Remmer, and Economic Experience," World "Democracy Is the Third "The Politics of Economic Transformation: Politics 42 (April 1990); Joan M. Nelson, in Eastern Europe?" World Politics 45 (April 1993); Aslund, Boone, and World Relevant Experience (fn. 3). Johnson (fn. 6); Hellman 31 is nonetheless somewhat arbitrary. I estimate model 1 after This threshold, although a convention, as (a) 3 and lower, (b) 4 and lower. so does not alter the Doing redefining the threshold for democracy are available at Freedom Annual results. Data Scores, House, Country Survey of Freedom III Similar results are obtained using updated POLITY 1972/73-1998/99 (www.Freedomhouse.org). are then treated as a dummy variable with the technique advocated by scores for democracy, which Third Wave with the Keith Jaggers and Ted Robert Gurr; Jaggers and Gurr, "Tracking Democracy's 1995). Polity III Data," Journal ofPeace Research 32 (November 32 as a and Przeworski (fn. 29). That government Bresser-Pereira, Maravall, portion of spending ofthat spending. GDP is relatively high indicates nothing about the content or beneficiaries 33 and Peter Howitt, Endogenous Growth Theory (Cambridge: MIT Press, 1998). Phillipe 34EBRD Aghion (fn. 9). 35 "Economic Reform and the Process of Global Integration," Jeffrey D. Sachs and Andrew Warner, onEconomic 1, no. 1 (1995); Robert Barro, Determinants ofEconomic Growth Activity Brookings Papers David Romer, "Does Trade Cause Growth?" (Cambridge: MIT Press, 1997); Jeffrey A. Frankel and 89 (June 1999). American Economic Review 36 in the former Soviet re (fn. 6) argue that economic performance Aslund, Boone, and Johnson states in the region due to "different underlying structural factors, publics may differ from that in other a such as the greater reliance on military-industrial greater longer history of communism, production, in the ruble zone when control over the communist reliance on trade within bloc, and membership money creation disintegrated."

320

WORLD POLITICS

to exhibit economies stronger expect wealthier might perfor a to would mance.37 Alternatively, neoclassical growth approach predict that poorer countries would exhibit higher rates of growth.381 also in to ac cluded a lagged value of the dependent variable, GDPGrow., _1} count for in the data.39 temporal dependence

One

The

includes

sample

twenty-five

countries

postcommunist

during

the period 1990-98.40 After pooling these data, I report an ordinary least squares (OLS) model for the annual rate of economic growth.41 Be the sample has fewer than 250 observations and the data are

cause

in a

arranged consistent Long To

panel, covariance

and Laurie

tests

statistical matrix

on a

are based

(HCCM) as suggested

heteroskedasticity by J. Scott

recently

Ervin.42

I also in economic conditions, exogenous as in countries This is for each year. dummy important, to similar exogenous the region were from the interna shocks exposed tional economy. To control for unmeasured factors specific to individual of the econ such as institutional countries, legacies and the composition control

clude

for unmeasured variables

omy, I also add a dummy variable for each country. Including fixed-effect variables

dummy gives ported model

reduces

confidence

greater but are available are

lagged

concerns

for omitted

variable

in the results. These from

the author. The

a year to reduce by

fixed economic

the likelihood

bias and thereby are not re

effects

variables

of reverse

in the

causation.

Results Results Controlling

from model

1 in Table

2 are consistent

for a range of factors, Polarization.

the argument. is negatively and signif with

37 and Howitt (fn. 33). 38Aghion Barro (fn. 35). 39 on the Achen grounds Christopher critiques this strategy for addressing temporal dependence, that the lagged endogenous variable may substantially deflate the impact of other independent vari ables. The results of the argument are stronger when the lagged dependent variable is dropped. Achen, Variables Can Suppress the Explanatory Power of Other Independent Vari "Why Lagged Dependent ables" (Paper presented at the annual meeting of the Political Methodology Section of the American Los Angeles, Political Science Association, July 2000). 40 The former Soviet countries enter the data set in 1992 after the fall of the Soviet Union. 41 the years in the data by more than 2:1,1 do not employ the correc Because the units outnumber tion suggested by Nathaniel Beck and Jonathan Katz; Beck and Katz, "What to Do (and Not to Do) with Time-Series-Cross-Section Data in Comparative Politics," American Political Science Review 89 1995). (September 42 Long and Ervin show that in samples of fewer than 250 observations Ordinary Least Squares standard errors. They propose a correction that ismore ap (OLS) regression may produce inconsistent are more this for small Results from propriate samples. analysis slighdy stronger when opting for the traditional approach of using robust standard errors with clustering on country. I am thankful to an reviewer for alerting me to this article. Long and Ervin, "Using Heteroscedasticity Con anonymous sistent Standard Errors in the Linear Regression Model," American Statistician 54 (August 2000).

Table Polarization

2 and Growth1

Model Polarization

-.26**

continuous

(.12)

Polarization continuous

-.23**

AllCP

(.10)

Polarization

(2.73)

(3.07) -4.31**

Polarization

dummy all CP

(2.17) 1.98

Democracy

(2.28)

spending

1.98

(2.25)

GDP per capita

(2.32)

-.03

-.06

.03

.07

(.11)

.52

2.61

(.10)

(.10) 3.06

1.83

(5.75)

(5.70)

(5.12)

(5.32)

(5.06)

-.0047**

-.0046**

-.0038**

-.0041**

-.0040**

-6.86*

(4.11) Inflation (log)

2.69

(2.29)

(.11)

(.0017) War

2.22

(2.33)

.03

1.48

Openness

2.47

(.11)

Government

-1.41**

(.60) GDPGrow Lag

(.0017) -6.85*

(4.73) -1.59**

(.64)

.22**

(.09) Time

-9.66**

-7.36**

dummy

(.0015) -7.86**

(3.69) -1.28**

(S5)

-7.52*

(.10)

(.0015) -7.81**

(4.1) -1.52**

(3.54) -1.28**

(.62) .15

.23**

.17*

.22**

(.10)

(.0016)

(.11)

(.10) -.31

to election

(.69) Time

to election*

2.11*

polarization

(1.21) 18.31**

Constant

(7.94)

.71

R2

*p