If privatization displaces too many workers without compensation, a majority of citizens could come to see it as illegitimate, potentially undermining their support for private ownership of productive property. This is exactly what has happened in more than a few post-communist nations, where privatization has become a dirty word.
The damage caused by certain unpopular reforms lasted far longer than the reforms themselves. In many post-communist nations, the pain they caused created the political conditions for populist strongmen to take over and when some of these new leaders reversed the reforms, they also removed institutional checks on their power, to make it harder to challenge their decisions. Once they consolidated their hold on power, they redistributed the nation’s wealth to their cronies. Not surprisingly, income inequality in many of these nations is worse today than it was when they abandoned privatization and other reforms.
This is why democratic institutions are so important: They enable those who have been harmed by reforms to receive compensation.
With “one person, one vote,” the “losers” count as much as the “winners” because truly democratic policies must be inclusive. Implementing reforms in a democracy takes time and effort, but the painful process of building broad pro-reform coalitions also ensures that those policies endure.
In the long run, inclusive reforms stick, while quick and dirty reforms do not. The tortoise of democracy beats the hare of benevolent dictatorship.
Sergei Guriev is chief economist at the European Bank for Reconstruction and Development.
Copyright: Project Syndicate