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316. Where Have All the Illiberal Democracies Gone? Privatization as a Catalyst to Regime Change in Postcommunist Europe

John A. Gould is John D. & Catherine T. MacArthur Assistant Professor of Political Science at Colorado College. He spoke at an EES noon discussion on May 4, 2005. The following is a summary of his presentation. Meeting Report 316

Scholars of postcommunist change are beginning to take analytical note of a recent wave of regime liberalizations. What do we make of it? As scholars, we have misdiagnosed the trend. While we have rightly focused on the collapse of moderately authoritarian regimes in the face of mass resistance movements, we must begin to do more comparative analysis that includes illiberal countries that have become more authoritarian during the same period. Behind the headlines about liberal oppositions facing down corrupt, illiberal incumbents, the analytically salient pattern might be the instability of illiberal democracies and their movement in either a more democratic or authoritarian direction.

A quick glance at Freedom House categorizations of postcommunist countries makes the broader point clear. Between 1999 and 2004, the center category of "partially free" countries diminished from 13 to seven cases. Of those, Bulgaria, Croatia and Serbia and Montenegro moved into the "free" category while Russia, Kyrgyzstan and Azerbaijan moved into the "not free" category. Given developments in Georgia and Ukraine, the center category may soon be reduced by two additional cases. This is possibly offset by recent revolt in authoritarian Kyrgyzstan, but for reasons that may become clear below, a more liberal future for Kyrgyzstan is by no means assured.

This essay asks two questions. First, why do illiberal democracies appear to be more vulnerable to regime change than liberal democracies and authoritarian regimes? Second, when illiberal democratic regimes fail, what determines whether the movement will be in a liberal or an authoritarian direction? As a political economist, I believe I can only give a partial answer, but it is one that I hope will move past the recent western triumphalism that has followed in the wake of revolutions in Serbia, Georgia and Ukraine. By including illiberal democracies that have become more authoritarian in the sample, I hope to develop a broader understanding of the phenomena taking place.

Illiberal postcommunist trajectories carry significant, common political-economic dynamics that undermine the bases for regime stability. The following analysis focuses on postcommunist privatization as a symptom of this trajectory. Privatization is not the primary causal variable. Privatization processes are endogenous and, at best, catalytic to contingent trajectories set in motion during the initial transition from communism.
Following Guillermo O'Donnell and others, liberal democracies are regimes that possess a combination of constitutional freedoms, vertical accountability of office holders to the electorate and robust horizontal accountability of office holders to other centers of authority. Together, these institutions help ensure that no individual or elite group can indefinitely stand above the rule of law. As Adam Przeworski would point out, rule-bounded uncertainty about political outcomes characterizes political life.

By contrast, illiberal democracies may have regular elections and many of the institutions associated with them, but will lack the full attributes of a liberal democracy. Illiberal democratic traits include poor accountability of the executive to other centers of authority, the inconsistent and partial application of the rule of law, low access to alternative sources of information, qualified ability to associate, and so on. A variety of subtypes of illiberal democracies inhabit what Thomas Carothers calls "the grey zone"—states that are neither fully liberal nor fully authoritarian. Finally, a regime becomes authoritarian when freedoms are missing, corrupt electoral contests guarantee results beforehand and power holders change procedures at whim.

Why have postcommunist illiberal democratic regimes been so fragile since 1999?
A good place to start is with literature that argues that liberal democracies are more likely to be stable than other regime types. As numerous analysts have argued, the regime type provides an institutional safety valve against social frustration—people revolt at the ballot box rather than the barricade. Mitchell Orenstein has recently added that the role of elections is to dislodge stakeholders who seek to continue bad policies—enabling real change and improvement through peaceful alternations of governments rather than change in regime rules and institutions. In addition, the relatively more transparent and powerful competitive nature of the policy-making environment helps prevent politicians from pursuing policies that can do real damage to their people. This helps explain Amartya Sen's argument that no democracy has ever inflicted a famine on its people. Finally, there is a virtuous affinity between liberal democracy and wealth. Self-limiting democratic governments are reassuring to capitalists. They consequently stick around to invest. As Adam Przeworski and his colleagues demonstrate, history may be in the process of "accumulating democracies"—no democracy with a mid-level of income per capita has ever undergone regime failure.

Authoritarian regimes, by contrast, are not as stable as liberal democracies and, as Kyrgyzstan and Uzbekistan demonstrate, are more likely to experience periods of social and political instability. However, there are several reasons why, as regime types, they will be more resilient than illiberal, "grey zone" democracies. Authoritarians can respond to crises through increased repression. They thus prolong and deepen crises, but save the regime in the short term. Yet, I expect repression may also increase chances of violent insurrection and lead to further repression. Even where successful, people who came to power through violent insurrections are quite likely to employ violence themselves to stay in power. The result is a new authoritarian government rather than a more liberal regime type. Authoritarian governments therefore may change—often through irregular and violent means—but it could be that the regime type is more likely to remain intact.

In between these two cases we have "grey zone" illiberal democracies. By definition, illiberal democracies handle distributive conflicts through highly constrained, biased political processes that limit, but do not eliminate, uncertainty in political outcomes. As crises emerge, this limited open political space is likely to become highly charged and hyper-competitive. Where incumbent elites remain unified in the face of crisis, they may succeed in responding to the crisis, but it will require a crackdown on the opposition as well as any institutional sources of access to the political process that they may have. Increased repression eliminates vestige institutions of democracy and moves the regime-type in an authoritarian direction.

On the other side of the coin is the democratization dynamic, first noted by O'Donnell and Philippe Schmitter. An initial precondition of regime collapse is division among incumbent elites—a lack of cohesiveness and determination—providing the opposition an opportunity to mobilize and create greater room for nonviolent political action. In the face of an incumbent elite's indecision, regime opponents can exercise rights to organize and assemble, inform and advocate, contest and participate and, finally, monitor and publicize the performance of the government in permitting and honoring a free and fair election. In short, liberalization of the political space simply realizes in practice formal democratic institutions already in place. Should challengers succeed in displacing incumbent elites, chances are they will continue to push this political liberalization process. Openness invariably casts light on the old regime and discredits it. Either way, the illiberal democratic regime is subject to change.

What is the political economy of illiberal regime instability and collapse?
Economic management and mismanagement plays a catalytic role in the destabilization of illiberal "grey zone" regimes. One can cut into the economic story in several places, but I find a comparative analysis of privatization policies helpful as a symptomatic indicator of broader trends. Examined from the field of political economy, privatization serves as a proxy for postcommunist trajectories. Put simply, it tells us the direction and strength of the prevailing winds.

Yet postcommunist privatization also carries enormous distributional consequences and thus might have a catalytic (wind accelerating) effect on broader trends. This warrants elaboration. First, while privatization can take up to a decade to complete, it is one of the postcommunist era's two highest-stake economic contests (the other is the political fight for and against hyperinflation). With anywhere from 70 to 96 percent of a country's economic assets ultimately at stake, actors will fight extraordinarily hard to write the rules of the privatization game. As Croatian economist Nevenka Cuckovic reminds us, privatization is an unprecedented, "one-off chance to get rich." The design of a privatization's formal and informal governing institutions is thus likely to be hotly contested.

Despite clear reasons to expect interactive effects between political institutions and the creation and control of privatization programs, many technocrats still see privatization as somehow separable from politics. Privatization, these economists argue, is a good reform even if influenced by corruption and an associated lack of political accountability. They argue—with good reason—that private owners are generally better than state owners. Their goal is to make a profit. Technocrats expect new owners to restructure their firms, making them more productive and efficient. Thus, the argument goes, everyone will benefit in the long run.

Technocrats use modernization theory to justify working with corrupt, quasi-repressive regimes. Economic development today will lead to the creation of entrepreneurs who tomorrow will demand the rule of law that only a self-limiting democratic government can provide. While certainly some economic reform is better than none, the postcommunist experience—and IMF research—shows that better political institutions are often a prerequisite to the intensity and quality of economic reforms. My research on privatization in illiberal postcommunist regimes reinforces this recent finding. Since privatization reflects the prevailing winds, it interacts with political regime type in predictable ways that can shape the ultimate benefit of the privatization program.

How? In authoritarian regimes and illiberal democracies, incumbent elites ‘managed' the transition from socialist systems. They and their allies used privatization as a means of transforming their insider political position into private assets in a property-based economy. The limited political space given to their opponents ensured their exclusion from the really important privatization processes and decisions. Indeed, in practice, privatization under illiberal conditions turned out to be primarily about the ruling elite appropriating riches and power. It often had little to do with improving corporate efficiency. Where privatization policies began to reveal serious economic shortcomings, the property ‘winners' generally worked to secure their personal wealth first and enhance their firms' efficiency second, if at all.

In postcommunist countries with more liberal political institutions, by contrast, the outcomes of the political process were less certain. New challengers for state property had a better chance at winning—especially where the transition displaced and discredited incumbent elites. In some cases, however, segments of incumbent elites emerged from the transition with political credibility and were able to block or determine aspects of the privatization process. As a rule of thumb, where these groups were associated with attempts to overthrow or reform communism, as in Slovenia or Poland, they were better equipped to preserve their interests in the design of the privatization process. As a result, we find greater diversity of privatization outcomes among more liberal democratic systems. We also find that where privatization policies proved dysfunctional—as they frequently were—subsequent governments made significant policy changes.

Privatization and the distributive conflict accompanying it help us to understand the basic instability of illiberal or "grey zone" democracies. In authoritarian countries, rulers have little difficulty excluding their opponents from major privatization processes. At the other end of the spectrum, liberal democratic institutions easily handle privatization's distributive conflict. In the "grey zone" illiberal democracies, the battle over privatization may thus spill over to intensify a wider, preexisting conflict over political institutions. Incumbents may seek to exclude their opponents by attacking liberal and democratic institutions. Their opponents, by contrast, may seek to enhance their access by widening and strengthening them. Indeed, privatization in Croatia and Slovakia in the mid-1990s took on many of these characteristics. Vladimir Meciar and especially Franjo Tudjman admittedly had authoritarian leanings, but putting the economic assets of the country on the table certainly enhanced these instincts.

Technocrats would respond that, regardless of how property is privatized, the new owners will seek a profit by restructuring their inefficient enterprises. I would respond by saying, perhaps. Certainly, privatization was a necessary and vital economic reform, but the winds shaping the direction of privatization do not stop blowing with its completion. For Adam Smith, after all, the biggest enemies of the market (after the state) are its "merchants and manufacturers," for whom it is second nature to "conspire" to restrict markets and raise prices.

Smith did not mention political context, but we can assume that these actors prefer not to conspire in the open. As Joel Hellman has demonstrated, a lack of political transparency and accountability allow conspiracies to proliferate in illiberal postcommunist countries. New private owners who might have great difficulty making a profit in fully open markets find it easier to use their political connections to control state policies, with all sorts of diverse profit-guaranteeing scams the result. The implication is that technocrats should give democratic reforms priority over state property transfers to politically connected elites. In addition to seeking a disciplinary, hard budget constraint on firms, technocrats should also fight for what Orenstein calls the "hard political constraints" characteristic of liberal democracy.

Across the postcommunist region, privatization polices produced dysfunctional ownership structures and reinforced dysfunctional political economies. Even the best-governed states made mistakes in their privatization policies. The telling difference was that, during the 1990s, the economic performance of illiberal and liberal regime types diverged drastically. True to form, citizens of more liberal regimes had the tools to see when they were being ripped off and were able to do something about it. Illiberal regimes, by contrast, lacked the ability to self-correct. Hellman referred to this as a "partial reform equilibrium." However, experience shows that as illiberal democratic regimes fall deeper and deeper into an economic funk, their equilibrium gives way to regime instability.

Indeed, we can now perhaps understand why illiberal democracies have been imploding recently. Since the mid 1990s, the political economy of "grey zone" illiberal democracies has been one of slowly unfolding crises, accelerated by privatization's empowerment of a politically connected rent-seeking industrial class. This allows us to elaborate on the all-too-familiar vicious cycle first discussed by Joel Hellman:

The Political Economy of Privatization in "Grey Zone" Regimes:

1. Incumbents survive the transition from communism.
2. Illiberal privatization fuses economic and political interests.
3. Rent-seeking practiced by politically-connected elites.
4. Elites use privileged political access to block additional change.
5. Growth favors large, politically-connected enterprises and financial institutions. Often, it also comes at the expense of fiscal stability. Small, independent entrepreneurs are starved of capital and swamped by bureaucracy, corruption and mafia.
6. Underlying social discontent.
7. Critical political junctures emerge during ‘relegitimating' elections.

However oppressed, elections give the opposition an opportunity to replace incumbents and liberalize the regime. Incumbents naturally consider responding with a crack down on opposition and the institutions and freedoms they are using as political vehicles in their bid for power. In short, the regime is ripe for change—but in which direction? A number of hypotheses appear pertinent. It is beyond the scope of this essay to test these in depth, but a few themes emerge.

Some Western self-congratulations for liberal regime change are appropriate. As recent paranoid statements from the Belarusian KGB and Russian FSB indicate, western donor-based democracy building programs have played an important role in liberal regime change. By simply promoting the values of informed individual political choice, the West has assisted well over 50 million people in peaceably freeing themselves from authoritarian rule. In contrast with our policy in Iraq, the total cost has been less than a parking lot full of armored Humvees. These efforts should be continued and deepened. However, if we focus on such these efforts alone, we miss an opportunity to understand the salient factors that create, build and eventually undermine illiberal regimes. However gratifying artistry-based explanations are, they fail to fully explain 1) why illiberal democracies appear ripe for regime change, and 2) the timing and direction of regime change.

Civil society explanations help us to understand why some revolutions fail or never materialize, but this explanation would have to show significant variations between cases. On the surface, civil society appears weak and shallow across most of these cases. A good civil society explanation might nevertheless focus on Western funded NGOs and opposition parties as skeleton networks for election-related bursts of civic enthusiasm against a prior landscape of apathy and frustration.

In a similar vein, creating conditions in which opposition parties and movements can create a united front against the illiberal regime might be seen as the keystone in why some civil society outcomes are better than others in helping to bring about democratic change. Serbian opposition to Slobodan Milosevic was mobilized in 1996 and maintained a high level of civic activism in the lead-up to the October 2000 elections. This explanation would highlight opposition disunity in previous failures and would attribute the success of the 2000 mobilization to the united front achieved in 2000. Similarly, opposition unity made a big difference over previous elections in Slovakia (1998), Croatia (2000), Georgia (2003) and Ukraine (2004-5). This explanation would also point to opposition disunity in the failed regime change movements (Azerbaijan and Russia).

Another influence on regime change might be international commitment: was the international community truly outraged at Ilham Aliyev's crackdown on opponents in 2003? This explanation emphasizes the geo-strategic importance of Azerbaijan and helps explain official letters of congratulations issued by the US and other countries and a visit to Baku by Donald Rumsfeld despite the Aliyev's illiberal actions. In this case, in contrast to Serbia, Georgia and Ukraine, in Azerbaijan, and to a lesser extent Russia, democracy building and Western geo-political strategic and economic interests simply diverged.

Finally, David Hume and Adam Smith were right to emphasize that the rule of law is necessary for economic prosperity in market democracies. Revisiting modernization theory, we can expect that the corrupt, rent-based political economy of grey zone regimes might eventually become frustrating to privatization winners. If you fail to respect property rights and contracts, capital exits the market. As a result, local investment declines and growth slows. Politically connected entrepreneurs will eventually realize that there is only so much revenue to be squeezed from state control. Basing one's economic future on one "party of power" is also politically risky. Given popular mobilization and opposition unity, international condemnation and a few elite defections, they may abandon the incumbent "party of power" and seek an accommodation with the opposition. Hence, in Serbia, Georgia and Ukraine, select tycoons and the mid-level entrepreneurs broke ranks with the incumbents at a crucial time—most importantly allowing critical coverage of the government in their media outlets and providing needed financial support to opposition activists and parties.

In Azerbaijan and Russia, by contrast, the economic elite may have moved in the opposite direction. Those who resisted state power were simply expropriated, driven into exile or both. Other elites have since taken the message to heart and continued to approach the state on the executive's terms. Vladimir Putin and Aliyev have gotten away with this because they realize that you do not need the rule of law for economic survival if you control the oil sector. Like feudal lords of the past, you simply need top-down local control and the promise of enough revenue to keep a crucial subset of foreign energy investors happy on your terms. If this drives away investment in other sectors, there is no problem—ample revenue can be drawn from the single, state-controlled sector (as long as energy prices remain high). In 2003, it was little surprise that Azerbaijani elites closed ranks around the Aliyev family while its security forces physically broke the back of its opponents.

In the paragraphs above, I have offered a few opening speculations about what determines the direction of "grey zone" illiberal regime failure as a basis for further consideration. Another possibility is that with a sampling of less than 13 and a mere six-year time span, the halving of the postcommunist illiberal democracy category is an artifact of a randomly connected series of events. Yet there are strong logical reasons to suspect that something more general is indeed happening. By focusing on the revolutions that failed or did not occur as well as those that did, we can gain a greater appreciation of what is really going on.

About the Author

John A. Gould

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