Introduction

The goal of recent economic reforms, undertaken in several countries around the globe, is to organize an economy that rationally allocates resources and in which the state is financially solvent.

These are market-oriented reforms. Rationalizing the allocation of resources requires organizing new markets, deregulating prices, attenuating monopolies, and lowering protection. Making the state solvent entails reducing public expenditures, increasing revenues, and at times selling public assets.

Such reforms necessarily cause a temporary fall in aggregate consumption. They are socially costly and politically risky. Perhaps in the long run reforms do accomplish all one former Polish minister of the economy announced they would: motivate, generate market clearing, and satisfy social justice (Baka 1986: 46). Yet meanwhile they hurt large social groups and evoke opposition from important political forces. And if that happens, democracy may be undermined or reforms abandoned, or both.

Even if governments that launch such reforms often hate to admit it, a temporary economic deterioration is inevitable. Inflation must flare up when prices are deregulated. Unemployment of capital and labor must increase when competition is intensified. Allocative efficiency must temporarily decline when the entire economic structure is being transformed. Structural transformations of economic systems are costly.

Can such transformations be accomplished under democratic conditions?