NCPA - National Center for Policy Analysis

Moving Toward Freer Markets

June 27, 1996

Some former communist nations have been more successful than others in progressing toward economic freedom, according to the annual report of the World Bank, to be released today.

The report identifies certain vital factors in achieving freer markets and rates the success of 28 former communist countries in moving toward capitalism. To create the index, the World Bank looked at the degree to which prices are set without government controls, whether a country has lowered trade barriers and tariffs, the degree of privatization and -- perhaps most importantly -- the breadth and consistency of reforms.

Using these and other criteria the 28 countries were lumped into four major groups, ranging from those which had moved farthest toward capitalism to those that had moved least from their Marxist path.

  • After a slow start, the strongest economic gains were made among those countries which had been most aggressive in moving toward capitalism.
  • From 1989 to 1995, Gross Domestic Product (GDP) actually shrank in the most reform-oriented countries by 1.6 percent a year, on average, and inflation rose by 106 percent annually.
  • But in 1995, GDP grew on average 4.3 percent and inflation had been tempered to a relatively mild 18.7 percent.
  • Most significantly, average life expectancy in the aggressive reform group rose 0.7 percent and infant mortality declined 1.8 percent during the transition.

For countries that largely retained state economic controls -- primarily nations that were spun off from the former Soviet Union, including Russia -- things actually got much worse.

  • Average annual GDP fell 6.7 to 9.6 percent among those countries which made little if any effort to reform from 1989 to 1995.
  • And inflation surged at a yearly 809.6 percent rate.
  • In 1995, GDP plunged 11.4 percent among Group 3 and 12.5 percent among Group 4, while inflation ran wild at an average 1,176.5 percent.
  • Worse still, life expectancy fell anywhere from 4.4 percent to 1.6 percent -- with infant mortality rising in same nations and falling in others.

An earlier study by David R. Henderson, published by the Center for the Study of American Business, identifies some economic policy lessons which can be applied to all countries -- rich, poor, communist, noncommunist. He writes, 'The basic lesson to be learned from the postwar evidence on countries' economic growth is that growth's major enemy is heavy government intervention -- whether through tariffs, price controls, high taxes, lavish government spending or detailed regulation."

Source: Perspective, "Making Miracles," Investor's Business Daily, June 27, 1996.

 

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