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and inflation increased. The government responded by price regulation, which led to food shortages. GDP fell sharply in 1996. Fortunately, popular protests have grown so strong that the government has been altered, and early parliamentary elections seem plausible. This is a good example of how democracy offers a new opportunity for radical market reform. The presidential election in Ukraine in July 1994 is another example.

Belarus is ruled by a truly populist and authoritarian president who does not bother with economic laws, and his entourage makes money on illicit deals facilitated by economic chaos. Popular protests have been strong, but apparently not strong enough. Democracy effectively ended in Belarus in 1996 as a new authoritarian constitution was adopted, and the old parliament was reduced to presidential supporters. Similarly, Turkmenistan is run by the most totalitarian leader in any former communist state, who could not care less about economics. Naturally, a long period of economic mismanagement is bound to undermine the legitimacy of the regime, and the question is whether civil discontent will be strong enough to oust the flawed regime, or it will defend itself by nondemocratic means.

Crony capitalism, however, seems to have become a far more common problem. All over the former communist world, extensive corruption prevails as the government retains control over large resources—enterprises and real estate—and the state remains highly interventionist and arbitrary. To any observer of the Russian economy, it is obvious that the market economy does not function very well there as yet. Prices and mark-ups remain high; regional price differentials remain sizeable; the number of registered private enterprises is very small and declining; although bank and interenterprise arrears have stagnated, wage arrears and tax arrears have mounted; and stock prices are very low in comparison with the asset values of the companies. Any foreigner is still overwhelmed by the degree of regulation. Russia continues to license virtually all economic activities, and in many cases multiple licensing is required because of various branch legislation. Russia is the promised land of inspectors of all kinds. Rather than imposing strict legislation, the state inspectors tend to require bribes. The situation appears to be similar all over the New Independent States, in sharp contrast with Central Europe.

There is a real danger that several countries will remain mired for a long time in crony capitalism, so that even big capitalists will stay heavily dependent on the state. Several Latin American countries and India until the early 1990s are examples of such states, and their economies have not been very dynamic. The most apparent problem is that far too much property remains in public ownership. A related concern is that privatization will be directed to protégés of the regime to such an extent that private monopolies having a cozy relationship with a regulative state will evolve. This is also a concern for some countries that have done very well in terms of stabilization and liberalization. Such an economic policy could easily endanger democracy as well.



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