Free Markets, Free Politics and Growth

February 2, 1990

Report Outline
Special Focus

Introduction

Does a country need a democratic government and a free-market economy to achieve economic well-being? The dramatic political and economic transformation of Eastern Europe has led many in the West to believe so. But the record of newly industrializing countries calls into question whether democratic politics and fully free markets are the proper prescription for developing nations—including those in Eastern Europe.

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Overview

The U.S. media, and much of the European media as well, have hailed the recent transformation of Eastern Europe as a double victory for the West, a victory at once political and economic. Along with the wildfire of demands for democratic government sweeping the region is a wave of economic transformation. Virtually every country in the region is either contemplating or has already undertaken reforms aimed at abandoning central planning in favor of an economy based on market principles. Some, like Poland, are jumping ahead with both feet—and with fingers crossed. Others, like the Soviet Union, are proceeding more cautiously.

The media have generally portrayed democracy and free-market economics as intertwined, necessary conditions for economic growth and well-being. “If free economics is to take root,” advises The Economist, “it must be grounded in free politics, as well as the other way around.” But economists are far from agreement on how free politics, free markets and economic growth are connected. And for good reason. There is plenty of evidence around the world to challenge any oversimplification of the relationship.

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