and CEPR London

This paper analyzes the inter-relations between economic and political processes during transition in 25 post-communist countries of Central and Eastern Europe and the former Soviet Union. Both economic liberalization and democracy are found to have generally a positive effect on growth. The effect of democracy goes mainly via reinforcing economic liberalization, in contrast, democracy that is not accompanied by economic liberalization appears to have a negative effect on growth during the initial transition period. The progress in democratization in turn depends on past economic performance in a surprising manner—the relationship between past growth and democracy is negative. Nevertheless, economic performance is a strong determinant of support for the reform in elections: support for the reform falls with unemployment and increases with economic growth, output level relative to 1989, and, surprisingly, inflation. Finally, economic liberalization per se increases opposition against the reform, as the costs of the reform apparently go beyond deteriorating economic performance. The level of democracy, in contrast, increases the support for the reform