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

This paper analyzes empirically whether political freedom and civil liberties help or hinder economic liberalization, using panel data from 25 post-communist countries of Central and Eastern Europe (CEE) and Former Soviet Union (FSU), between 1992 and 1997. Building on analytical arguments and counter-arguments put forward by the recent literature, the paper identifies the channels through which political freedom affects economic liberalization during the transition, then tests the arguments empirically with an econometric framework that takes into account possible simultaneity problems between economic and political transition. Our empirical findings reveal clearly that democracy has facilitated economic liberalization in CEE and FSU countries. This conclusion is confirmed under various model specifications, for both OLS and 2SLS procedures and using two different measures of liberalization. The econometric results reveal that it is the existence of a vibrant civil society at the start of the transition that has the most explanatory power in our regressions.