This paper analyzes the influence of financial integration on institutional quality. We construct a dynamic political-economic model of an autocracy in which a ruling elite uses its political power to expropriate the general population. Although financial integration reduces capital costs for entrepreneurs and thereby raises gross incomes in the private sector, the elite may counteract this effect by increasing the rate of expropriation. Since de facto political power is linked to economic resources, financial integration also has long run consequences for the distribution of power and for the rise of an entrepreneurial class.
The recent history of Eastern Europe can best be understood as a transition to a new social contract between the postcommunist state that emerged from its communist predecessor and the postcommunist citizen who evolved from the communist subject. It is the relationship between state and society under communism that best explains the divergent paths taken by the former communist countries after 1989. Where societies had been weak, these networks managed to capture full social control during the transition, using their influence to appropriate former state assets. Where the gap had been widest between the level of state power and the level of social autonomy during communism, the most difficult transitions ensued, as there was no ground on which to build a social contract.
Few Europeans had heard of Moldova, a tiny state on the EU’s eastern flank, before seeing images of the strife that broke out there in early April 2009 after the Communist Party (PCRM) won reelection in a landslide. Except for their international context, the events in Moldova did not differ substantially from those that sparked the color revolutions in Serbia, Georgia, and Ukraine, but this difference in context led to a different outcome. What was missing in Moldova? The short answer is a unified opposition that could put itself in the driver’s seat.
In the textbooks on democratic transition, Central and Eastern Europe provides the model of success. Yet in Brussels concern over the politics of the new EU members has been mounting. The day after accession, when conditionality has faded, the influence of the EU vanished like a short-term anesthetic. Political parties needed to behave during accession in order to reach this highly popular objective, but once freed from these constraints, they returned to their usual ways. Now we see Central and Eastern Europe as it really is—a region that has come far but still has a way to go.
Political corruption poses a serious threat to democracy and its consolidation. Many anticorruption initiatives fail because they are nonpolitical in nature, while most of the corruption in developing and postcommunist countries is inherently political. Successfully fighting this kind of corruption requires far more than instituting best practices from advanced democracies. Electoral revolutions can lead to consolidated democracies only if they are followed by revolutions against particularism. Nothing short of such a revolution will succeed in curbing corruption in countries where particularism prevails.