Mani Basharzad // 8 August 2025

One of the most iconic opening lines in literature is from Charles Dickens’ A Tale of Two Cities: ‘It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness…’ The case of post-Soviet Eastern Europe, however, could just as easily be titled A Tale of Two Reforms. After the collapse of the USSR, some countries experienced the best of times: economic freedom, low inflation, high growth, democratic institutions, and closer ties with the West. Others fell into the worst of times: runaway inflation, economic collapse, relapse into authoritarian regimes, and continued dependence on Moscow.

Perhaps the contrast is clearest when we consider Poland and Belarus. According to International Monetary Fund (IMF) estimates, Poland is on track to surpass Japan in terms of living standards this year. It recently held free elections and enjoys a dynamic, free economy. Belarus, in contrast, remains under the rule of Alexander Lukashenko, Europe’s longest-serving dictator. Remarkably, both countries started from nearly the same economic position. In 1990, Belarus had a per capita GDP of $1,706, while Poland’s was $1,736 – nearly identical. Fast-forward to 2025: Poland’s GDP per capita is projected to reach $24,810, while Belarus’s stands at just $8,008 (World Bank, 2024). The Polish economy is now more than three times richer.

How did two countries, each burdened by decades of communism and authoritarianism, end up on such radically different paths? The answer lies in their reform strategies after the fall of the Soviet Union.

Shock therapy vs gradualism

Between 1989 and 1991, countries emerging from communism faced a critical choice: whether to implement reforms quickly and comprehensively or slowly and incrementally. The former approach – derisively labelled ‘shock therapy’ by its critic Naomi Klein – was adopted by Poland, Estonia, Slovenia, the Czech Republic, and Hungary. Others, like Belarus, Ukraine, Turkmenistan, and Uzbekistan, opted for gradualism.

A detailed World Bank (1996) report titled Patterns of Transition from Plan to Market compared the performance of these two groups during the transition period (de Melo et al. 1996). The difference is stark. Between 1989 and 1994, gradualist countries experienced an average inflation rate of 1,968%. In the countries that adopted ‘shock therapy’, inflation averaged just 23%. In terms of economic growth, the gradualists saw their economies shrink by an average of 13.2% annually. The ‘shock therapy’ countries, on the other hand, managed an average growth of 1.7% each year.

These differences weren’t just short-term. Over time, the benefits of ‘shock therapy’ compounded. Most of the countries that implemented fast reforms are today liberal democracies with thriving market economies. Meanwhile, many gradualist countries are still plagued by state capture, entrenched oligarchies, and authoritarian politics. The divergence between Poland and Belarus is emblematic of this larger pattern.

But what explains the success of ‘shock therapy’ and the failure of gradualism? The answer lies in the principles of political economy.

The political economy of ‘shock therapy’

Anders Åslund, a leading expert on post-communist transitions, offers one of the clearest explanations. In his book, How Capitalism Was Built (2007), he argues that the speed of reform was a critical factor (Åslund 2007). As he writes, ‘If the rent seekers were not beaten early on, they tended to win.’(p. 6) When reforms are delayed, powerful interest groups – that benefit from subsidies, government protection, and corruption – leverage opportunities to solidify their positions. These groups then resist any future reforms that threaten their privileges.

Åslund continues: ‘The slower reforms were, the greater was the danger that rent-seeking interests would become entrenched and block democratization and the combat of corruption, of which they were the main beneficiaries.’ (p. 6) In other words, the longer you wait, the harder it becomes to change course.

The mistake the gradualist countries made was that they prioritised short-term political comfort over long-term economic and institutional transformation. Ironically, ‘shock therapy’ not only delivered superior results in the long run, but it also performed better in the short term. The fear that rapid liberalisation would cause unbearable social pain turned out to be unfounded. It was the gradualists who experienced deeper and longer-lasting hardship.

The golden window

The transition period was more than just a moment of economic change. It was a one-time political opportunity. When authoritarian regimes fall, there is a brief period when the country is open to bold structural reforms. This ‘golden window’ is when entrenched interests are weakest and when reformers have the political capital to make sweeping changes.

But this window does not stay open for long. What follows is ‘reform fatigue’, a natural decline in political will and social patience. As reforms drag on, the public grows weary, especially if results aren’t immediately visible. Interest groups regain power, while populist backlash becomes more likely. Even well-meaning citizens can become disillusioned and unwittingly empower the very same authoritarian form of government that they once helped to topple.

One common psychological trap is the belief that once an old dictatorship falls, freedom and prosperity will automatically follow. That’s only partly true. Removing the regime is a necessary, but not sufficient, condition for amelioration. What happens in the critical years that follow determines whether the break from the past is real or merely symbolic. If reform is too slow, the old system can return – not always under the same name, but replicating the same economic model and power structure.

‘Shock therapy’ works because it understands the urgency to act within the ‘golden window’. Reform is fast, front-loaded, and politically costly, but it succeeds. Gradualism, by contrast, mistakes caution for prudence, underestimating how quickly rent-seeking and authoritarianism can make a comeback.

What this means for Europe

As Epicenter’s Reviving Europe’s Competitive Edge (2025) report argues, the European Union’s share of the global economy has declined significantly – from 25.8% in 2004 to just 17.6% in 2024 (Phillipe at al. 2025). Faced with the dual burdens of overregulation and paternalism on one side, and mounting pressures from Trump-era tariffs and energy market uncertainty on the other, there is a growing consensus that bold economic reforms are urgently needed. The lesson from the post-Soviet transition is clear: if Europe wants to reclaim its competitive edge, it must pursue swift and decisive liberalising reforms. It must dismantle entrenched interest groups before they can adapt and resist and ensure that new ones do not form in the process. Time is of the essence, for, as Stephen King put it, ‘The world moves on, with or without you.’

These wide-ranging liberalisation reforms should ensure that liberty is imbued in the entire system – not just parts of it. For instance, if a country pursues privatisation without first liberalising prices or deregulating markets, the result is often rent-seeking and inefficiency rather than prosperity. Partial reform invites failure. That is why Adam Smith referred to his classical vision as a ‘grand plan’ for liberty, equality, and justice.

Mani Basharzad is an Economic Journalist and Intern at the Institute of Economic Affairs.