took gradual reforms, as did four of the nonsocialist governments. Hungary and Lithuania did so as well, because their regimes were more nationalist than liberal. Bulgaria and Russia attempted radical reforms, but their governments were too politically weak to be able to sustain these efforts for even a year. In short, the capable nonsocialist regimes opted for radical reform, while all the lingering socialist regimes preferred gradual reform. Typically, those states that have failed to transform have been ruled by former socialists. These regimes are not very democratic, and they have been ruled in ways that enrich and further entrench the old elite. This poses a danger not only to the successful formation of a market economy, but also to democracy. The case is most obvious in Belarus, which is surrounded by democracies and more reformist countries.
As we explore what dangers the post-communist countries are likely to encounter in the future, four threats are apparent. First, nation building itself may fail, leading to general chaos. Second, a country may not accomplish elementary transition, but end up with persistent high inflation. Third, a country may not liberalize and privatize enough, or privatization may lead to excessive concentration so that it gets mired in corrupt, crony capitalism. Fourth, a country may become caught in the entitlement trap, with excessive taxes and social transfers.
The worst case is the first—that the newly independent state fails in its nation building, and does not even establish basic law and order and elementary state institutions. The obvious example is Tajikistan, which has collapsed in every sense of the word. Georgia appeared to be as badly off, but it seems to be recovering, even if the peace there seems fragile.
To date, only three countries—Bulgaria, Belarus, and Turkmenistan—seem really to have failed in their economic transition policies, as argued above. They continue to pursue irresponsible policies, leading to high inflation, continued regulation, and little privatization. In Bulgaria, the democrats lost power because of internal division after a short time in power, and their fragmentation facilitated the electoral victories of the old communists. A small group of former communists controls the big enterprises, which they run badly, causing losses. These losses are covered by state banks, which are controlled by roughly the same people who run the government, which recapitalizes the banks and runs a large budget deficit of about 7 percent of GDP in spite of a very larger foreign debt. Fortunately, the whole drama came to a head in 1996, as Bulgaria ran out of international finance; many of the banks collapsed when the government could no longer afford to refinance them. Ordinary citizens had little choice but to withdraw their bank deposits and exchange their leva for hard currency; the exchange rate of the leva collapsed,