After State Socialism: Regime Change and Transformational Recessions

Transitions from state socialism generated a startling array of early economic outcomes, ranging from severe economic crises to steady economic growth, and igniting debates about the causal role of policy choices, institutional design, and initial economic circumstances. We depart from prior explanations in two ways. First, we distinguish between causes of initial recessions and causes of variation in subsequent growth rates. Second, we link early recessions to regime change, which presented unusual risks for state socialist economies. Because communist parties enforced state control over assets, regime change created economy-wide uncertainty about ownership. The most severe recessions occurred in new states that emerged after a prolonged deterioration of communist party authority, creating widespread uncertainty over ownership, prolonged conflict over the control of assets, a sharp decline in tax revenues, and weakened state regulatory capacity. More abrupt political transformations—regardless of their form—created a shorter window of uncertainty and more limited dislocations. Comparative accounts of regime change and economic reform frame an analysis of panel data from 31 countries from 1989 to 2007. The prior decline of party capacity had a large impact on the depth and duration of initial economic downturns, even after controlling for other disruptive dimensions of regime change: interstate military conflict, civil war, and hyperinflation due to the division national states.