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ized. With the exception of the four outliers, then, we might dare to suggest that sufficient liberalization to form a market economy has been undertaken, although this is only a tentative empirical conclusion. Yet even if much remains to be deregulated, the paradigm has changed to that of a market economy. We might also note that with regard to liberalization, the danger of going too far seems remote, while the risk of not going far enough is very high.

The third criterion for the transition to capitalism is expansion of the private sector, whether through privatization or the opening of new private enterprises. These two approaches are often presented as alternatives, but in reality tend to be complementary. Moreover, private-sector development is generally greater in countries with more financial stablization and liberalization (Åslund et al., 1996:245-248).

To develop the private sector takes longer than to undertake financial stabilization or liberalization. Unfortunately, statistics on ownership are of particularly poor quality. EBRD (1995:11) offers the most complete picture, but provides only estimates, which tend to be very conservative. No Western country has more than about 35 percent public employment or public share of GDP produced. Thus, the threshold for capitalism might be set at 65 percent. By 1996, all of the Central European countries, apart from Bulgaria and Romania, appear to have approached that level, and only the three Baltic states, Russia, and Kazakstan in the New Independent States.

There is a remarkable correlation among the above three criteria for capitalism. Two countries—Tajikistan and Turkmenistan—have not met any of the criteria. Bulgaria and Belarus have met only the liberalization criterion, and Azerbaijan has achieved only financial stabilization. Ten countries—Poland, the Czech Republic, Slovakia, Hungary, Albania, Estonia, Latvia, Lithuania, Russia, and Kazakstan—have met all three criteria. The 7 remaining countries—Romania, Moldova, Ukraine, Armenia, Georgia, the Kyrgyz Republic, and Uzbekistan—have not achieved privatization. However, reforms have progressed in all 7 countries, with the possible exception of Uzbekistan, and several of them may have passed the threshold for privatization in 1996. Therefore, of the 22 countries, 5—Azerbaijan, Belarus, Bulgaria, Tajikistan, and Turkmenistan—are failures to date, and 17 countries seem to be achieving capitalism.

Is it sufficient to examine only these three key criteria? Institutional development has sometimes been contrasted with them. The relationship is difficult to measure, but the attempts that have been made show a strong positive correlation between these three key criteria for the transition to capitalism and institutional development (de Melo et al., 1996).

There has been widespread concern that the transition from communism to capitalism has been marked by considerable social hardships (see the chapters in Section IV of this volume). Initially, anticipated high social costs in the form of a sharp decline in output, leading to a drastically falling standard of



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