Romania is the former communist country that has recorded the most significant improvement in economic freedom in the 30 years since the Fall of the Berlin Wall, shows this analysis by Tanja Porčnik, Senior Fellow of the Fraser Institute.

The fall of the Berlin Wall on November 9, 1989, was not only the beginning of the reunification of German as the people of Berlin brought down a monstrous physical barrier that cut through their city since 1961, it was also one of several events that in the months and years to come would have more than 100 million people turn their back to communism, also because of their fortitude to steer their economies out of socialism toward the market.

Prior to the fall of the Iron Curtain, the former socialist economies—to the East of the now infamous barrier dividing Europe—varied considerably in their degree of openness, soundness of their institutions, economic growth and the development process. Similarly, these countries opted for different paths of market liberalization, some of them moving rapidly and with great strides to reform and liberalize their economies, while others were only undertaking gradual and few transitional steps. Today, thirty years later, unsurprisingly, public policies and political institutions of the former socialist economies do not equally support economic freedom. However, notably, they support it to a greater extent than they did before the 1990s.

Providing a quantitative assessment of the degree of market liberalism, the Fraser Institute Economic Freedom of the World index displays that the highest levels of economic freedom in Eastern Europe, Caucus and Central Asia in 2017, the most recent data available, were in Georgia, Estonia, Lithuania, the Czech Republic and Latvia, while the lowest levels of economic freedom were in Ukraine, Tajikistan, Azerbaijan, Belarus and Moldova (see Figure).

Economic Freedom, Former Socialist Economies, 1995-2017

As the data show, all the former socialist economies in Eastern Europe, Caucasus and Central Asia have strengthened their market features since the fall of the Iron Curtain. This sizeable and wide-spread transformation reflects the region’s wholehearted embrace of private property, the rule of law, entrepreneurship, free trade, foreign direct investment and globalization. Actually, in the last few decades, economic liberalization has spread across the former socialist region at a higher pace than in the world, with the average degree of market liberalism in the former socialist economies (FSE) increasing from 5.47 in 1995 to 7.20 in 2017, while the average level of economic freedom in the world went from 6.06 in 1995 to 6.59 in 2017.

The notable transition of the former socialist economies is also reflected in the fact that while in 1995 none of them ranked in the top economic freedom quartile, when in 2017 ten of them (Georgia, Estonia, Lithuania, the Czech Republic, Latvia, Armenia, Romania, Albania, Bulgaria and the Slovak Republic) were in the top quartile. By contrast, only two countries (Tajikistan and Ukraine) rank in the fourth quartile of economic freedom, while in 1995, six (Romania, Albania, Bulgaria, Croatia, Tajikistan and Ukraine) out of fourteen former socialist countries ranked in the fourth quartile.

Several of the former socialist economies have embraced the economic freedom to such an extent and with such a robustness that they have become world-known success stories of market liberalization by way of opening their markets, decreasing barriers to trade, lowering tax burden, stabilizing monetary system, engaging in deregulation and strengthening the legal system. The most significant move toward economic liberalization during the 1995-2017 period is observed in Romania, which improved its economic freedom score by 3.56 points and climbed from the 114th to the 28th rank on the EFW index. By contrast, other former socialist economies have been reserved to a change, finding it challenging or unwilling to increase their level of economic freedom. As an example, Hungary observed the smallest move from socialism toward the markets during the 1995-2017 period; however, it still increased the economic freedom score by 0.90.

At a time when nationalism and protectionism are emerging in many countries across the world, which only adds to downward pressure on the global economy, countries in Eastern Europe, Caucuses and Central Asia should draw from their own experience and continue to reform and liberalize their economies, which shall not only have positive impact on economic growth, foreign direct investment and wellbeing of the citizens, but will also reduce poverty levels and economic inequalities more successfully than any other economic system.

by Tanja Porčnik, Senior Fellow, Fraser Institute

The Fraser Institute is an independent non-partisan research and educational organization based in Canada. The Institute's annual Economic Freedom of the World index ranks the world's countries based on their degrees of economic freedom (the degree to which the policies and institutions of countries are supportive of economic freedom).