Should Market Liberalization Precede Democracy? The Citizens' Point of View

Abstract

This paper is dedicated to the relationship between market development and democracy. Hinging on a new survey (Life In Transition Survey) conducted in 2006 by the European Bank for Reconstruction and Development and the World Bank in 28 post-transition countries, our identification strategy consists of relying on the specific situation of frontier-zones. We distinguish contexts and preferences and find that democracy enhances the support for market development whereas the reverse is not true. Hence, the relativist argument according to which the demand for democracy is an endogenous by-product of market development is not supported by our data.

Full text

Should Market Liberalization Precede Democracy?
The Citizens’ Point of View
Pauline Grosjean+ and Claudia Senik*
+University of California Berkeley, pgrosjean@are.berkeley.edu
*Paris School of Economics
January 30, 2007
Abstract
This paper is dedicated to the relationship between market development and democracy. Hinging on
a new survey (Life In Transition Survey) conducted in 2006 by the European Bank for
Reconstruction and Development and the World Bank in 28 post-transition countries, our
identification strategy consists of relying on the specific situation of frontier-zones. We distinguish
contexts and preferences and find that democracy enhances the support for market development
whereas the reverse is not true. Hence, the relativist argument according to which the demand for
democracy is an endogenous by-product of market development is not supported by our data.
Keywords: market and democracy, sequencing of development, transition economies, attitudinal
variables, cross-countries survey.
JEL Codes: H1, H5, P2, P3, P5, O1, O12, O57.

Introduction
One of the unexpected side-effects of China’s spectacular emergence is the diffusion of a new
conventional wisdom concerning the sequencing of political and economic reforms in developing
countries. Essentially, the idea is that democratization in the early stages of a country’s economic
development can be harmful. The continued hold of the Chinese Communist Party over political
power is taken to be a positive ingredient in the construction of a viable market economy, as
opposed to the erratic reform path experienced by central and eastern European countries of the
former socialist bloc, which predominantly chose rapid economic and political liberalization in the
1990’s (Dewatripont and Roland, 1992; Godoy and Stiglitz, 2006; Roland and Verdier, 2003).
Another example is Latin America, where pervasive economic crises seem to illustrate the danger
that democracy can be an obstacle to the development of the market when leaders have to impose
unpopular reforms while being responsible in front of their constituencies. It follows that the
optimal route is to develop market institutions in a first stage of development, and consider
democratization at a later stage.
Pushing the argument one step further, some authors have argued that the desire for political
freedom and democratic institutions does not arise until countries reach a certain degree of material
comfort and market liberalization (Lipset, 1959; Miller et al., 1994, 1996). Hence, the argument
goes, not only is it preferable to postpone democracy until advanced stages of a country’s economic
development, but this sequence also meets citizens’ preferences.
Some observers may find it difficult to reconcile this relativist statement with the recent vivid
public demonstrations in favor of democratization in countries of the Commonwealth of
Independent States (CIS), e.g. Belarus, Georgia, Ukraine, and in China. In terms of scientific
evidence, the empirical literature devoted to the relationship between market and democracy
remains rather inconclusive. Most studies are unable to draw a clear direction of causality because
of the interdependent dynamics followed by the two variables along the history of any given
country. Hence, in spite of the strong vitality of this research field, the scientific consensus on these
issues is still in the making.
This paper tries to contribute to the understanding of the relationship between political preferences
and development. It exploits a new set of micro evidence from an original survey of 28 transition
economies, the Life in Transition Survey, which was implemented in the summer of 2006 (see
EBRD, 2007).

We first try to isolate the causal relationship that runs from actual democratization to the demand
for market liberalization. Our empirical identification strategy relies on the specificities of frontier-
zones. Our main assumption is that people who live in an integrated frontier-zone share the same
experience of the market and, often, the same historically inherited “cultural attitudes” towards the
market and democracy, on both sides of the frontier. This is particularly plausible for the often
artificial frontiers of the former USSR and for some formerly integrated regions such as the
Ottoman Empire or the Austro-Hungarian Empire. This assumption is tantamount to keeping
constant the usually omitted variables that bias estimations of the relationship between market
development and the support for democracy.
Reciprocally, we try to assess the relationship that runs from actual market development to popular
demand for democracy. Here, we exploit within-country regional variations. We rely on the fact
that the degree of market development is heterogeneous across different regions of the countries
included in the survey; whereas people who live in the same country share a common experience of
democracy. We build an index of regional market development, reflecting the share of the modern
sector of the economy, composed of private and smaller size firms. We then compare the support
for democracy in the various frontier-zones inside a given country, on the grounds that market
development at borders is partly exogenous, as it is influenced by that of the neighboring region.
The main result of this paper is that democracy appears to generate some popular support for the
market, while economic liberalization does not clearly enhance support for democracy. To be sure,
this finding only suggests that democracy increases subjective support for the market; it does not
mean that democracy does not complicate the task of reformers, with the risk of impeding market
liberalization. Our results also cast doubt on the idea that democracy would naturally emerge as a
by-product of capitalism (Schumpeter, 1942). Even if the demand for democracy increases with
individual income, market liberalization as such does not seem to be sufficient to trigger the
demand for democracy. A minima, the take-home message of this paper is that one cannot advocate
the preferences of citizens to postpone the construction of democratic institutions.
Section I discusses the background literature in the reciprocal linkages between economic and
political liberalization. Section II presents the identification strategies for each direction of the
relationship between democratization and market liberalization. Section III presents the data and
Section IV discusses the results. Section V concludes.

I. Background
The conventional wisdom concerning the linkages between political and economic systems has
considerably changed over time. While the early 19th century was predominantly skeptical about
the compatibility between democracy and capitalism (see K. Marx, 1867 or J.S. Mill, 1860), the
consensus today is that development leads to both a market economy and political democracy1 with
anteriority of the market. The idea that “modern democracy is a by-product of the capitalist
process” (Schumpeter, 1942) dates back to de Tocqueville (1839), who stressed that market
development is conducive to democracy because it provides the “social space within which
individuals, groups and entire institutional complexes can develop independent of state control”.
Lipset (1959) further claims that: “industrialization, urbanization, high educational standards and a
steady increase in the overall wealth of society [are] basic conditions sustaining democracy”.
Historically, market economies have existed in the contexts of democracy and autocratic regimes,
but there is no example of a socialist economy within a democratic regime. This observation lies at
the foundation of a certain “instrumental” view of political regimes. In the context of the political
economy of transition (Aslund et al., 2001; Dewatripont and Roland, 1992; Roland, 2001; Roland
and Verdier, 2003), researchers have focused on the question of how to overcome political
opposition to reforms, and in particular opposition to economic liberalization. This literature
discusses the relative pros and cons of democracy versus authoritarianism from the point of view of
facilitating economic reforms and growth; it thus focuses on the causality that runs from the
political regime to the development of the market.
Beyond these theoretical models, what can we learn from empirical studies? To date, the existing
empirical literature does not offer clear-cut results.
A series of papers have tried to capture the relationship between democracy and economic growth.
In 1993, Przeworski and Limongi (1993) in a meta-analysis, concluded that the evidence was not
univocal (see also, among many, Barro, 1996; Burkhart and Lewis-Beck, 1994; Helliwel, 1994;
Leblang, 1997; Przeworski, 2004). As pointed out by Persson and Tabellini (2007b), “the findings
are, essentially, all over the place”. The study of the reverse causality (from economic development
to democracy) is similarly unconvincing. Cross-section correlations between democracy and
indicators of development, such as education or income, are likely to be due to an omitted variable
bias (Acemoglu et al., 2005a, 2005b). This omitted variable can namely consist of the initial
institutions that have presided over the country’s development (Acemoglu et al., 2001). Some
authors have tried to overcome this obstacle using matching, propensity scores and differences in
differences methods, exploiting both the cross-country and time series variations in aggregate panel
datasets. Giavazzi and Tabellini (2005), Persson and Tabellini (2006, 2007a, 2007b) and Rodrick

and Wacziarg (2005) find a positive relationship between democratic regimes and growth.
Few papers address directly the question of the interplay between democratization and economic
liberalization using aggregate data. Fidrmuc (2003), in the case of 25 transition economies, find that
democracy facilitates economic liberalization. The author rules out the reverse causality issue, on
the grounds that democratization largely precedes the resumption of growth in post-communist
countries, but does not address the omitted variable issue that could bias his result. Giavazzi and
Tabellini (2005) find that both kinds of reforms have mutual feedbacks on one another, and that
causality is more likely to run from democratization to economic liberalization, although feedback
effects going in both directions cannot completely be ruled out2.
Another set of studies has focused on the support for democracy and market economy based on
individual data. Again, conclusions regarding the direction of causality are “all over the place”.
Based on survey data, most studies related to central and eastern Europe, with the exception of
Finifter and Mickiewicz (1992), confirm the prediction that individuals who support a free market
economy are more likely to embrace democratic principles. Concerning the reverse causality, Hayo
(2004) and Fidrmuc (2003), using respectively survey and election data, find a positive effect of
democratization on the support for the market reforms. However, studies based on individual data
are also exposed to an identification problem. This is contained in the very idea of the
modernization theory (Lipset, 1959) that the same development dynamics favor both democracy
and market development. Assessing the direction of causality between the advancement of
economic freedom and the degree of political freedom appears to be an almost impossible exercise
in the absence of a valid exogenous instrument, which needs to be traced back as far as legal or
colonial origins (Acemoglu et al., 2001).
In this paper, we try to overcome this simultaneity bias. We do not pretend to explain the long run
causality between democracy and market development; instead we restrict our interest to the
causality running from the state of market development to the demand for democracy, and,
conversely, from political democracy to the support for the market. We ask whether the demand for
democracy only emerges after a certain degree of market development is reached, and whether,
conversely, democratization is more likely to be an obstacle or an ingredient to citizens’ support for
market liberalization.

II. Identification strategy
In order to discern the direction of causality between market and democracy, one should ideally rely
on a situation in which one variable is exogenously “frozen” while the other randomly takes
different values across countries. Of course, in the real world there are many reasons why this ideal
setting could never exist. On the contrary, market liberalization and democracy are processes that
follow highly intertwined dynamic evolutions and depend on countries’ historical background.
Even in the case of transition countries, where democracy and the market have both been abolished
by the communist experience for at least half a century, these institutions have evolved in parallel
since 1989, probably under the influence of common factors. As an illustration, Figure 1 shows the
strong general cross-country relationship between the average support for the market and the
average support for democracy in the 28 countries covered by the Life in Transition Survey (LITS).
Regional differences are also visible. In particular, countries of central and eastern Europe and the
Baltic states, which are the closest both to a free market and to a full-blown democracy, are the
most supportive of the two processes.
Figure 1 about here
Obviously, using the pooled cross-section data of LITS and running a naive regression of support
for democracy on an index of market development, or of support for the market on a democratic
index, would come across serious identification problems. The relationship put in evidence would
not readily be interpretable in terms of causality because of the influence of omitted variables
affecting both market development and democracy. We propose two different identification
strategies in order to isolate the direction of causality from market development to the support for
democracy and vice-versa.
A. Democracy and demand for the market
The first question that we wish to address is whether a higher degree of democracy is more likely to
be a positive or a negative ingredient in the support for market development. To address this
question, one needs to overcome the problem that subjective support for the market may be due
both to the degree of democracy and to the degree of market development itself, both variables
being likely to develop at a parallel pace. More generally, it can be suspected that common “cultural
factors” influence the national attitudes towards both the market and democracy.
In other words, one would like to estimate the naive equation (1), regressing the support for the
market of individual i in country j on the degree of democracy in country j:

Support for market ij = a0 + a1 degree of development of democracy j + a2 Xij + a3Cj + ui (1)
but suspects that the true relationship is (1’):
Support for market ij = a0 + a1 degree of development of democracy j + a2 degree of development of
market j + a3 cultural factors j + a4 Xij + a5 Cj + ui (1’)
where Xij stands for the socio-demographic characteristics of respondent i in country j, Cj is a vector
of country dummies and ui the error term.
Our strategy consists of trying to find a way of keeping the second and third terms of equation (1’)
constant. As our analysis is based on individual data, we need to find people who, in an exogenous
way, are exposed to different levels of democracy but to the same degree of market development
and who share the same “culture” regarding the politico-economic system.
The idea is to match observations in frontier-zones. We assume that, because of spatial integration,
people who live in open frontier-zones share the same culture and the same perception of market
development even though they live on both sides of the frontier.
This relies on three types of arguments. The first is the well-documented high level of interregional
trade in frontier zones. Secondly, it is well known that in such regions, when it is possible, people
do not hesitate to cross the frontier to work, buy their daily shopping, or buy cheaper appliances.
Hence regional integration is a fact of their everyday lives, what certainly influences their
perception of the market. Thirdly, in the specific case of the 15 former Soviet republics, regional
integration was a hard fact until the early 1990’s: under the socialist system, the economy of the
Soviet republics was submitted to the centralized organization of material resources by the Soviet
plan based in Moscow. Many countries, particularly in Central Asia and the Caucasus, have
inherited from the Soviet Union integrated infrastructure networks, which is a positive factor of
trade and regional integration (Broadman, 2006). We thus assume that inhabitants of certain
frontier-zones share the same experience of the market even when they live in different countries
with different political institutions.
Clearly, the validity of our assumption relies on the level of market integration across the borders of
the surveyed countries. We thus distinguish open frontiers from those that are closed or restricted
because of political conflicts or geographical obstacles. We also check that the degree of market
development is more similar in adjacent frontier-zones than it is in pairs of adjacent countries.
Market integration at frontier-zones is useful to eliminate the risk that the support for market
liberalization that is measured reflects the actual market development. But what about the “cultural”

omitted variable? A first element is that the citizens of the former Socialist bloc, and in particular
the Soviet Union, have been living for 45 to 70 years in a common political system marked by
strong official ideological values concerning the market. So, we can assume that they have a
common heritage in terms of attitudes towards the market (Alesina and Fuchs-Schundeln, 2007).
Beyond this remark, we rely on the fact that current frontiers of many transition countries,
especially countries of the Commonwealth of Independent States (CIS), are more or less artificial
divisions of formerly integrated jurisdictions, whose citizens have developed common attitudes
concerning both market development and political freedom (e.g. the Austro-Hungarian Empire, the
Ottoman Empire, etc.). The very idea of “culture” and more specifically “national culture” is that
countries’ past experience continues to have long-term effects3. We therefore rely on the idea that
citizens of countries that have belonged to formerly highly integrated zones have a common culture,
i.e. common inherited general attitudes towards the market and democracy.
There are some subsets of the transition countries in which this assumption is particularly
appealing. Countries that have belonged to the Ottoman Empire (Albania, Armenia, Bosnia and
Herzegovina, Bulgaria, FYR Macedonia, Montenegro, Romania and Serbia) developed under the
same rule for several centuries (1299-1922). The same can be said about countries of the Austro-
Hungarian Empire (Croatia, the Czech Republic, Hungary, the Slovak Republic and Slovenia, 1867-
1918), countries of the former Polish Empire (which included Poland, Ukraine, Lithuania, Belarus
and parts of Russia, 1569-1795), countries of the USSR (1922-1991), or countries of the Former
Yugoslavia (Bosnia and Herzegovina, Croatia, FYR Macedonia, Montenegro, Serbia and Slovenia)
who shared the same rule for several decades (1918-1991). We thus retain these cultural grouping in
order to deal with the potential impact of cultural factors on the demand for democracy.
Using the LITS survey, we identify frontier-zones as groups of Primary Sample Units (PSUs) that
are quasi-adjacent and located on both sides of a frontier (less than 30 km from each other). In order
to measure the degree of democratization of a country, we use the democracy score established by
the Freedom House survey (Freedom House, 2006a).
Our test therefore consists, for all pairs of observations at frontier-zones, of regressing individual
support for the market on the index of democratic development, controlling for frontier-zone
dummies and other socio-demographic characteristics of respondents. The assumptions of (i)
market integration and (ii) common culture at the frontier between two formerly integrated
countries mean that the third and fourth terms of equation (1’) are constant and so need not be
included in the regression. We thus estimate equation (1’’) on the sub-samples of frontier zones: we
regress the support for democracy of individual i living in frontier-zone k of country j, on the level
of democracy of country j:

Support for market ijk = a0 + a1 Democracy Level j + a4 Xijk + a5 Zk + ui (1’’)
where Democracy Levelj corresponds to the democracy score of country j, Xijk stands for the socio-
demographic characteristics of respondent i, Zk is a vector of frontier-zone dummies and ui is the
error term. In an alternative specification, we run the same regression on a dummy variable
indicating whether the country of residence of an individual is more democratic than the adjacent
country (i.e. we dichotomize the variable measuring the score of democracy).
B. Demand for democracy
To isolate the causation running from market liberalization to the support for democracy, we need
to overcome the symmetrical problem, i.e. to avoid the contamination of the actual degree of
democracy and the influence of “cultural factors”. This implies keeping constant the second and
third terms of equation (2):
Support for democracy ij = b0 + b1 degree of development of market j + b2 degree of development of
democracy j + b3 cultural factors j + b4 Xij + b5 Cj + ui (2)
Here, we hinge both on frontier-zones and on regional variations. We rely on the considerable
within-country regional variations in terms of market development (Zhuravskaia, 2006; EBRD,
2006). We build indices that reflect the regional development of private, small and medium
enterprises and the formal sector (see section III.C). We start by assuming that political institutions
and “culture” are the same in a given country. We thus match individuals of a given country who
live in regions that experience unequal degrees of market development and we regress the support
for democracy of individual i living in region r of country j on the degree of market development of
region r in country j, controlling for the socio-demographic features of this individual and for
country dummies:
Support for democracy ijr = b0 + b1 degree of development of regional market jr + b4 X ijr + b5 Cj +
ui (2’)
However, the estimation of equation (2’) relies on the admittedly strong assumption that the uneven
development of the market across the regions of a country is not due to some local variable that
would also influence the political attitudes of the inhabitants of the region. In order to lift this
assumption, we use two strategies. First, we control for the type of living area of respondents
(metropolitan, urban or rural areas). Second, we again rely on borders’ specificities. We rely on the
fact that due to the high regional economic integration at borders, the level of market development
on one side of the frontier is strongly influenced by that of the adjacent country (cf. section II.A).
This means that market development at the borders varies in a way that is partly exogenous.

Concretely, we match individuals of the same country, who live in different frontier-zones, and we
regress individual support for democracy on the level of market development in the different
frontier-zones. To go one step further, we use as a proxy for market development in the frontier
zone zj of country j the industrial liberalization score of the adjacent frontier-zone zk across the
border, in country k. We thus estimate the following regressions:
Support for democracy ijk = b0 + b1 degree of development of regional marketzl + b4 Xij + b5 Cj + ui
(3’)
With l=j,k, and where z refers to the frontier-zone of, alternatively, country j and k.
Again, we do not pretend that these identifications strategies allow escaping the influence of long
term determinants of economic and political development. Neutralizing these long term trends
would imply finding an instrument that could approximate the exogenous ultimate origin of these
differences. This limits the validity of our conclusions to short term relevance.
III. Data
Our study hinges on the Life in Transition Survey (LITS), a survey conducted by the European
Bank for Reconstruction and Development and the World Bank in 2006, in 28 post-transition
countries and Turkey4. Respondents to the survey were drawn randomly, using a two stage
sampling method, with census enumeration areas as Primary Sampling Units (PSUs), and
households as secondary sampling units. The survey includes 1000 observations per country,
making a total of 29000 observations. The sample of respondents is equally balanced in terms of
gender, but is biased in favor of older people: the age of the respondents varies from 17 to 97 years,
with a means of 46. All descriptive statistics are presented in the Annex.
A. Support for the market and for democracy
Support for the market was analyzed using the following question:
Q3.10. Which of the following statements do you agree with most?
- A market economy is preferable to any other form of economic system.
- Under some circumstances, a planned economy may be preferable to a market economy.
- For people like me, it does not matter whether the economic system is organized as a market
economy or as a planned economy.
We analyze the probability of choosing any of the three modalities of questions q3.10.

Concerning the support for democracy, we analyze the probability of choosing either modalities of
the question:
Q.3.11: Which of the following statements do you agree with most?
- Democracy is preferable to any other form of political system.
- Under some circumstances, an authoritarian government may be preferable to a democratic
one.
- For people like me, it does not matter whether a government is democratic or authoritarian.
We also study the determinants of the demand for more specific aspects of democracy, such as free
and fair elections, independence of the press or of the courts system (Q.3.12). Finally, we verify that
the support for democracy comes with trust in democratic institutions, using question Q.3.03 (see
section IV.B).
B. Frontier-zones
The LITS is based on PSUs5, each containing 20 observations (surveyed persons). We use the
geographical map of the survey to identify groups of PSUs that are located on both sides and in the
immediate vicinity of a political frontier. We identified 37 valid frontier-zones that contain between
40 and 460 observations, concentrated in 2 (Slovak Republic-Ukraine) to 24 (Croatia-Slovenia)
PSUs.
The validity of our identification assumption relies on the intensity of market integration on either
side of borders. This makes little doubt for the new ten EU members, among which persons and
goods are free to circulate. This is also true of neighboring countries in most part of central, eastern
Europe and south eastern Europe (for example the Slovak Republic and the Czech Republic;
Albania, FYR Macedonia and Montenegro6; Bulgaria and FYR Macedonia or Moldova and
Romania). Many countries of the sample are integrated in Euroregions, the purpose of which is to
promote trans-frontier cooperation7. Two CIS countries: Belarus and Ukraine are also integrated
into Euroregions8. This implies deeper cross border integration between these neighboring
countries, despite their relative closeness. These countries are also largely integrated with Russia,
historically and formally, in the Neman Euroregion that also includes Lithuania and Poland.
In the case of Central Asia and the Caucasus, patterns of trade have changed less rapidly than in
eastern Europe (Babetskii et al, 2003; Broadman, 2006). While the costs of intra-regional trade have
likely increased with the creation of independent countries (Djankov and Freund, 2000) and with
the recent nationalist stance of some countries, such as Uzbekistan, these countries appear to be

“overtrading” among themselves9.
We leave out of our sample frontiers that are impaired by geographical obstacles or either restricted
or closed because of political tensions and disputed territories. We thus exclude the frontiers
between Georgia and Russia, Armenia and Azerbaijan, Moldova and Ukraine, as well as all Uzbek
borders.
We verify that the degree of market development is more similar between two adjacent frontier-
zones than it is on average between two adjacent countries. We calculate the index of market
development (defined infra in section III.C) in each frontier-zone (zi and zj) and in each country i
and j on average. Table 1 shows that on average, the correlation between indices of industrial
market development is twice as high between adjacent frontier-zones of the sample (zi and zj) as it is
between adjacent countries (i and j) of the sample. If one restricts the analysis to subsets of
formerly more integrated countries, the proximity between adjacent frontier-zones appears even
higher. For instance, in Central Asia, the correlation between two adjacent frontier-zones is 0.78
against 0.34 in two adjacent countries (row 5 of Table 1).
Table 1 about here
C. Indices of market liberalization
Using questions about the respondents’ first, second and third jobs10, we build a regional industrial
score of market liberalization. The score is the regional proportion of respondents who declare that
they either: work in a small enterprise, work in a medium enterprise, work in a private firm, work in
a newly created enterprise (since 1989), are self-employed with more than five employees or have a
formal employment contract.
During the socialist era, Soviet economies were distinguished by their exceptionally low proportion
of small and medium sized enterprises (SMEs). The necessities of central planning favored the
organization of production and distribution in large units. We thus interpret the presence of SMEs
as an indicator of market development. The presence of private and of newly created firms is also a
sign of progress in transition towards a market economy, an essential aspect of which is the process
of privatization of the formerly dominant state-owned sector and the elimination of former
monopolies under the pressure of new competitive firms (Berkowitz and Jackson, 2005). Self-
employed persons with at least five employees are also part of this new economic pattern that is
typical of a market economy and was absent from the landscape of planned economies. We do not
count self-employed persons without employees on the grounds that those are unlikely to be small
firms but rather forms of quasi unofficial economy or what is sometimes called “disguised
unemployment” (Earle and Sakova, 2000). Finally, we interpret the existence of an employment

contract as a sign that the person is working in the official sector rather than in the informal sector, a
sign of development of the market. This industrial regional score varies from 0 to 5 with an average
of 2.37.
The quality of such indices of market liberalization is limited by the lack of representativeness of
the data at the regional level. However, there is no alternative regional index of private sector
development or market liberalization that is available for the whole set of countries.
D. Scores of democracy
The index of democratization is built using additional statistical sources. We mainly hinge on the
Freedom House democracy index (Freedom House, 2006a), which takes values from 1 to 7, with 1
representing the highest level of democratic progress and 7 the lowest; we have recoded it in order
to present the score of democracy in an ascending order.
In an alternative specification, we dichotomize this score and for each pair of adjacent countries, we
build a dummy variable that takes value 1 in the PSUs located in the most democratic country of
each pair, and 0 in PSUs located in the country which fares worse.
For robustness, we verify that our results hold when using other political scales, such as Polity IV
(CIDCM, 2006) (see Table A4 in the Annex).
IV. Results
Although simple correlations show that supporting the market and supporting democracy are highly
correlated attitudes (the correlation coefficient between the first modality of question Q3.10 and
question Q3.11 is 0.45), our identification strategies leads to a different picture. We find that
democracy does increase support for market liberalization, but that the reverse relationship is not as
clear-cut.
This pattern is apparent even in descriptive statistics. Table A2 shows that at frontier-zones, the
support for a market economy tends to be higher on the border of the country that enjoys a higher
level of democracy (according to the Freedom House ranking). Table A3 however shows that,
within a given country, the taste for democracy is not significantly higher in those frontier-zones
where market development is most advanced.
A. Democracy increases support for the market
Table 2 presents the general regressions of the support for the market (equation 1’’) on scores of
democratization. Columns 1 to 3 present the regression on the Freedom House democracy score;

whereas columns 4 to 6 contain the regressions on a dummy variable representing the relative
advancement of democracy (cf section III.D). All regressions are performed on the sub-sample of
people living in frontier-zones11. We control for frontier-zone dummies and we adjust standard
errors for clustering on frontier-zones. Finally, in Table A7 (Annex), the regressions are performed
within each border-zone.
Columns 1 and 4 in Table 2 analyze the determinants of the probability of declaring that “a market
economy is preferable to any other form of economic system”. The coefficients on both the
democratic index and the “more democracy” dummy variable are significant. Column 1 displays the
marginal effect of a change in the Freedom House democratic score, while the coefficient on the
variable “more democracy” represents the effect of a discrete change of this dummy variable from 0
to 1 (on the probability to support the market). Hence, column 4 in Table 2 shows that conditionally
on living in a frontier-zone, living on the “more democratic” side of the frontier increases the
probability of supporting the market by about 8.4%.
Columns 2 and 5 analyze the determinants of the probability to declare that “under some
circumstances, a planned economy may be preferable to a market economy”. Column 2 shows that
an incremental change in the democracy score does not significantly affect preferences for a
planned economy. However, the coefficient on the “more democracy” dummy variable is
significant at 5%, as it captures more significant progress towards democracy. Column 5 thus
indicates that conditionally on living in a frontier zone, experiencing a more democratic regime
reduces the probability of favoring a planned economy by roughly 6.7%.
Finally, columns 3 and 6 analyze the probability of declaring that “for people like me, it does not
matter whether the economic system is organized as a market economy or a planned economy”.
This attitude appears not to be significantly influenced by the degree of democracy.
Other rows of Table 2 display the other correlates of attitudes towards the market. We distinguish
three income categories (the richest, middle and poorest quantiles inside each country), six
educational levels, occupational categories, and employment status (self-employed versus
employees). Self-employed workers tend to be more supportive of the market, while elder people
and the poorest 30% of the population are less so.
Table 2 about here
If one accepts the assumption that people living in a common frontier-zone share the same practical
experience of market development (and the same background culture), the lesson of Table 2 is that
living in a country with a higher degree of democracy exerts a positive influence on the declared
support for the market.

As a robustness check, we have run the same regression as column 4 of Table 2 within each
frontier-zone. The positive effect of democratic institutions on the support for the market proves
particularly strong and significant at borders that are well integrated both culturally and
economically (see Table A6 in the Annex for the quality of market integration at frontier-zones).
This is notably the case for the frontier between Moldova and Romania frontier or between Estonia
and Latvia. The effect is also strong for the Belarus-Lithuania, Belarus-Poland and Ukraine-Russia
frontier-zones, all formerly part of the Polish Empire and currently highly integrated. The effect is
globally well respected except for most Hungarian frontiers and the Bulgaria-Romania, Croatia-
Serbia and Poland-Ukraine frontier-zones. The unexpected results for Hungary may be explained by
the difficult situation in the country, which, at the time of the LITS, was going through a deep
confidence crisis. Concerning the Bulgaria-Romania frontier, the fact that the development of
democracy in the two countries is very close, as shown by the identical ranking of these countries
by other democracy indices, such as Polity IV, might explain why the sign of the coefficient of
“More Democracy” is reversed. The same reason may explain why many coefficients are
insignificant at the borders of countries that experience similar level of democracy, such as the
Czech Republic and Poland (which obtain the same ratings by both Freedom in the World and
Polity IV), Bulgaria and FYR Macedonia or Bosnia and Herzegovina and Croatia. At certain
borders, e.g. Croatia and Serbia where heavy restrictions were lifted only in 2003, it can be the case
that economic integration is only partial.
As our identification strategy is based on the assumption of regional integration, we expect that the
results do not hold in the frontiers that were excluded from our sample for being closed or severely
restricted. Indeed, we verify that the coefficient inside the Armenia-Azerbaijan border zone is -
0.070 (0.128); it is of -0.328 (0.207) in the Kazak-Uzbek frontier-zone; of -0.097* (0.051) in the
Kyrgyz-Uzbek and of 0.004 (0.696) in the Moldova-Ukraine zone. Considering all the closed
border-zones together (and controlling for border-zones dummies), the coefficient on the Freedom
house democracy index is 0.039 (0.053) in the regression of support for the market. Hence the
relationship is not significant in closed frontier-zones, which is consistent with our interpretation of
regional integration.
To go one step further in the attempt to control for “cultural” omitted factors, we now estimate
equation (1’’) within various sub-samples of frontier-zones belonging to historically integrated
regions. Table 3 presents the regressions by “cultural zones” as defined in section III.B. Market
development still exerts a positive and significant influence on the demand for democracy among
countries of the former USSR, countries of the former Yugoslavia, countries of the former Polish
Empire and countries of the CIS, as well as among the subset of Central Asia. The effect is
particularly strong in countries that have experienced a strong degree of integration in the past12,

such as the USSR, and a fortiori the CIS and Central Asia, where, in addition, today’s frontiers are
often arbitrary. By contrast, it is not significant for the countries of the former Austro-Hungarian
Empire. A possible interpretation of this is that the relationship between democratic institutions and
the support for the market is particularly strong for less developed countries. Another possible
interpretation is that the countries of the former Austro-Hungarian Empire are too close in terms of
democratic development for the effect to be sizeable.
Table 3 about here
As a robustness check, we also test different indicators of democracy (see Annex). The result that
the development of democracy positively and significantly influences the demand for the market is
preserved using the Freedom of the World (Freedom House, 2006b), BTI indicators (Bertelsmann
Stiftung, 2005) or Polity IV (CIDCM, 2006).
B. Market liberalization does not raise the support for democracy
We now address the symmetric question whether market liberalization increases the support for
democracy. We need to make sure that the attitude toward democracy that is observed is not caused
by the degree of democratization already reached in the country of the respondent. So, we need to
find some groups of citizens who experience a common political environment with different
degrees of market liberalization. As explained in section II, we rely on the evidence that there are
wide regional differences within the countries of the former Soviet bloc and eastern and southern
Europe. We build an index of market progress at the regional level based on the regional market
structure.
Table 4 displays the regressions of support for democracy on indices of regional market
development. Because the impact of market development on attitudes towards democracy could be
driven by metropolitan regions in which market liberalization is well in advance of other regions,
and where people are also likely to have different political attitudes, we include a control for the
type of area (metropolitan/urban/rural) in all regressions. We checked that the results are essentially
unchanged when these controls are not performed and when metropolitan regions are dropped from
the sample.
Columns 1 to 3 present the regressions of individual preferences for the political regime on the
index of market development across all regions of a given country. Columns 4 to 6 present an
alternative specification where we restrict the sample to open frontier-zones. Lastly, columns 7 to 9
display the result of a third specification where the degree of market development of a frontier-zone
j is proxied by the degree of market development of the adjacent region k across the frontier (cf
section II.B). As explained in section II.B, the two latter specifications are useful in order to avoid

the risk that the observed relationship between market development and support for democracy is
due to reverse causality.
Columns 1, 4 and 7 analyze the determinants of the probability of declaring that “democracy is
preferable to any other form of political system”. Surprisingly, the index of market development has
no impact on this variable, in either of the specifications. Identically, the probability of choosing the
modality “for people like me, it does not matter whether a government is democratic or
authoritarian” (columns 3, 6 and 9) does not depend on the index of market development.
Columns 2, 5 and 8 analyze the determinants of the probability to declare that “under some
circumstances, an authoritarian government may be preferable to a democratic one”. Here, market
development has a negative and significant effect when the sample is restricted to frontier-zones.
Hence, conditionally on living in a frontier-zone, living close to a country where the market is more
advanced, and enjoying such market development thanks to cross border market integration reduces
individual support for authoritarian regimes. However, this effect is not significant when all regions
of the country are considered (columns 2, 5 and 8).
Market liberalization does thus not appear to reinforce democratic values. Other effects indicate that
the richer, better educated, younger, self-employed people and surprisingly, farmers and farm-
workers, are more supportive of democracy. On the contrary, the poor, those who have not
completed compulsory education and women are less supportive of democracy and more likely to
declare that the political system does not matter to them.
Table 4 about here
As the estimates of Table 4 are based on regional variations, it may seem confusing to pool the data
of the various countries of the sample together. Therefore, we run the same estimation of support
for democracy within each country of the survey. Country-wise regressions corroborate the finding
that support for democracy does not increase with the market development indicator. Finally, we
estimate the support for democracy within each zone of deeper cultural integration (Tables 5.a and
5.b). Table 5.a displays the regressions on the entire sample; the industrial index measures the score
of market development at the regional level. Table 5.b shows the regression on the sub-sample of
frontier-zones. The industrial index measures the score of market development in the adjacent
frontier-zone. Essentially, regional market development again appears to have no impact on the
support for democracy. The industrial index of market development is only significant for the
regions of the former Austro-Hungarian Empire; by contrast, the impact of the index is significantly
negative in regions of Central Asia. Hence, the link between market development and preferences
for democracy only appears in countries that are more affluent and face a higher degree of actual

democracy.
Lindblom (1995) provides a possible interpretation of these findings. He defines markets and
democracy as two distinct methods of popular controls over the elites. The former aims at outcomes
(resources allocation) but gives no control over the processes that generate outcomes;
symmetrically, the latter provides popular control over processes. In this framework, an
interpretation of our findings is that the need to control processes becomes more pressing in
situations where people have already secured the control over outcomes. It may also be the case that
the relationship is non linear, in other words, for people to care about processes, they need to have
already reached a certain degree of empowerment. This would explain why the demand for
democracy is stronger in societies that are already more advanced in terms of market liberalization
and democratization.
Tables 5.a and 5.b about here
Finally, as robustness checks, we use alternative indicators of the explained variable (support for
democracy) and of the explanatory variable (market development). First, we build an index of
adhesion to democratic principles based on questions of the LITS. This index is based on the
following question:
Q3.12. To what extent do you agree that the following are important for your country?
- Free and fair elections
- Law and order
- Freedom of speech
- Peace and stability
- A press that is independent from the government.
- A strong political opposition
- A courts system that defends individual rights against abuse by the state.
- A courts system that treats all citizens equally, rather than favoring some over others.
- Protection of minority rights (religious, ethnics, etc…)
- Freedom to travel abroad
(Scale: Strongly disagree, Disagree, Neither agree nor disagree, Agree, Strongly Agree, Difficult to
say)

The “value of democracy” index sums the number of times a person “agrees” or “strongly agrees”
that the items listed in the above table are important. The index varies from 0 to 9, with an average
of 4.5.
Table 6 shows the ordered probit regression of the “value of democracy” index. Column 1 displays
the regression on the entire sample; the industrial index measures the score of market development
at the regional level. Column 2 shows the regression on the sub-sample of frontier-zones. The
industrial index measures the score of market development of the adjacent frontier-zone (zk).
Table 6 about here
Again, regional market indices do not influence the importance that citizens attach to democracy.
The impact even seems to be significantly negative in regions of the CIS and the former Polish
Empire.
Of course, the indices of market development that we use may be misconstrued and it is possible
that better measures of market liberalization would be found to influence support for democracy.
We regret that indices of industrial concentration are not available at the regional level for the
whole set of countries in the sample13.
As an alternative to the market development index, we use an indicator of relative wealth. We
calculate the average aggregate regional income based on the real expenditures declared by the
households of the survey, relative to the national average14. This is based on the idea that aggregate
income is an outcome of market development. This relative wealth index is thus more specifically
an indicator of the success of market development. Again, as shown by Table 7, this indicator does
not have any significant impact on the attitudes to democracy or authoritarian regimes15. Hence, our
individual data do not confirm the relationship between income and democracy that was observed
at the aggregate level by Barro (1996) or Minier (2001).
Table 7 about here
In summary, the degree of market development does not seem to have a sizable impact on the
political support for democracy, or on the rejection of authoritarian regimes. In contradiction with
current priors, developing market institutions is not a guarantee or a sufficient condition of the
subsequent emergence of democracy, even when the market is successful in raising income. .

V. Conclusion
The main result of this paper is that in transition countries, democracy appears to generate some
popular support for the market, while economic liberalization does not clearly increase support for
democracy. These observations are consistent with the empirical fact that market economies can
live without democracy, whereas there is no historical evidence of a democratic society without a
market economy.
This paper suggests that democracy raises the subjective support for the market. The relationship
between democracy and support for the market is particularly strong in the CIS, Central Asia and
south eastern Europe, as opposed to other countries of the European Union (e.g. central Europe).
Hence, the link seems to be particularly relevant for “developing” countries, i.e. countries that are
still in an earlier stage of democratic development. To be sure, this does not mean that democracy is
not likely to complicate the task of reformers, with the risk of impeding market liberalization.
Concerning the reverse relationship, our results cast doubt on the idea that democracy needs
naturally emerge as a by-product of capitalism, particularly in less developed countries. The data do
not support the idea that market liberalization as such is sufficient to trigger the demand for
democracy; identically, citizens of countries with less developed markets do not appear to be less
supportive of democracy. Therefore, one cannot advocate the preferences of citizens to postpone the
construction of democratic institutions.
In summary, our data do not support a widespread view concerning the optimal sequencing of
reforms for developing countries: it seems that building democratic institutions can act as an
ingredient in favor of market liberalization, whereas early market development is no guarantee of
popular support for democracy further down the line.

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Endnotes
1. Hence the concept of the “End of History” (Fukuyama, 1992).
2. However, from the point of view of growth, the authors conclude that a sequencing based on market liberalization
first is most favorable: “Countries that first liberalize and then become democracies do much better than countries that
pursue the opposite sequence” (Giavazzi and Tabellini, 2005).
3. In Bisin and Verdier (2000) or Fernandez and Fogli (2005), culture is defined as long term inertia in preferences.
4. Turkmenistan was not included in the survey, neither was Kosovo. We exclude Turkey from our sample, because of
its very specific political situation.
5. PSUs were selected randomly, with probability proportional to size.
6. As well as Kosovo, but Kosovo was excluded from our sample.
7. For example, Albania, Bosnia and Herzegovina, Croatia, Montenegro and Slovenia are part of the Adriatic
Euroregion; Latvia, Lithuania, Poland and Russia are part of the Baltic Euroregion (alongside with Sweden and
Denmark); the Czech Republic, Poland, the Slovak Republic constitute the Beskydy Mountains Euroregion; and trade
among Hungary, Romania, and Serbia is facilitated in the Danube - Kris - Mures - Tisza Euroregion.
8. Białowieża Forest Euroregion between Poland and Belarus, the BUG Euroregion between Belarus, Poland, Ukraine,
or the Carpathian Euroregion between Hungary, Poland, Romania, the Slovak Republic.
9. Using relative prices of a bundle of goods to complement official trade data, Grafe et al. (2005) show that the impact
of borders on trade between Kazakhstan, Kyrgyzstan, Uzbekistan and Tajikistan is much smaller than what the view of
cumbersome crossing border procedures and licensing systems would imply. The authors attribute this result to the
large development of shuttle trade in this region.
10. Multiple jobs are frequent in transition countries.
11. Results are robust to clustering at different levels, i.e. country or country-frontier-zone.
12. As these countries have shared a common experience of a planned economy; it would be farfetched to suspect some
reverse causality running from people’s current attitudes towards the market to the current degree of democracy.
13. In our view, indices of this type would be best suited, if they were available, than some often used indicators based
on governance, the protection of legal rights, the protection of minority shareholders or indices of price liberalization.
The latter have two important drawbacks: firstly, they are only available at the national level and secondly, they often
reflect the progress of the rule of law, i.e. of democracy itself, rather than that of the freedom of transactions on the
market.
14. Household expenditures were adjusted for household size using the modified OECD equivalence scale.
15. Here we do not use frontier-zones integration as there is no point in supposing that inhabitants of a given region
experience the level of wealth of neighboring regions.

TABLES AND FIGURES
Figure 1. Support for the Market and for Democracy
(Percentage of respondents who chose the market (respectively democracy) as the best system of
organization of the economic (respectively political) system, see section III).
Czech Republic
Slovak Republic
Estonia
Slovenia
Lithuania
Romania
Latvia
Hungary
Montenegro
Croatia
Serbia
FYR Macedonia
Poland
Bulgaria
Albania
Bosnia and Herzegovina Kyrgyz Republic
Azerbaijan
Belar us
Georgia
Kazakhstan
Ukraine
Russia
Armenia
Tajikistan
Uzbekistan
Moldova
Mongolia
40 50 60 70 80
Support for democracy
30 40 50 60 70
Support for the market
Central and eastern Europe and the Baltic states South-eastern Europe
Commonwealth of Independent states
Table 1: Industrial market development indices at frontier zones
Correlation between industrial market development
indices Adjacent
frontiers Adjacent
countries
Whole sample 0.68 0.46
CIS 0.25 -0.02
Baltic countries 0.87 0.49
European Union 0.78 0.34
Central Asia 0.78 0.11
Former Yugoslavia 0.08 -0.28
Former Ottoman Empire 0.11 -0.31
Notes to Table 1:
Number of observations (frontier zones): whole sample: 65; CIS (Armenia, Azerbaijan, Belarus, Georgia,
Kazakhstan, Kyrgyz Republic, Moldova, Russia, Ukraine and Tajikistan): 28; Baltic states: 8; European Union: 28;
Central Asia (Kazakhstan, Kyrgyz Republic and Tajikistan): 5; Former Yugoslavia (Bosnia and Herzegovina,
Croatia, FYR Macedonia, Montenegro, Serbia and Slovenia): 12; Former Ottoman Empire (Albania, Armenia,
Bosnia and Herzegovina, Bulgaria, FYR Macedonia, Montenegro and Serbia): 14.
For each pair of frontier zones between two countries i and j, the average industrial indices of market liberalization
(cf infra) are calculated at the level of frontier zone i and frontier zone j and of country i and country j.

Table 2. Democracy Increases the Support to Market Development
dprobit Regressions of Support to the Market
-1 -2 -3 -4 -5 -6
Market is
preferable Plan is
preferable Does not
matter Market is
preferable Plan is
preferable Does not
matter
Democracy index 0.040*** -0.026 -0.012
[0.015] [0.019] [0.017]
More democracy 0.084** -0.066** -0.015
[0.034] [0.028] [0.026]
Adult (35-19) -0.068*** 0.052*** 0.018 -0.069*** 0.053*** 0.016
[0.015] [0.016] [0.018] [0.015] [0.016] [0.018]
Mid-age (50-65) -0.094*** 0.056*** 0.042* -0.094*** 0.056*** 0.041*
[0.021] [0.020] [0.024] [0.020] [0.020] [0.023]
Old (>65) -0.153*** 0.060** 0.089*** -0.158*** 0.063** 0.089***
[0.024] [0.030] [0.025] [0.024] [0.030] [0.024]
Poor -0.066*** -0.01 0.071*** -0.063*** -0.011 0.071***
[0.018] [0.016] [0.016] [0.018] [0.015] [0.016]
Rich 0.015 -0.004 -0.012 0.011 -0.001 -0.01
[0.021] [0.015] [0.014] [0.020] [0.014] [0.013]
Male -0.018 0.096*** -0.053 -0.014 0.100*** -0.060**
[0.032] [0.033] [0.032] [0.031] [0.031] [0.030]
Compulsory education 0.04 0.132*** -0.129*** 0.047 0.131*** -0.135***
[0.035] [0.034] [0.035] [0.034] [0.032] [0.033]
Secondary education 0.056* 0.126*** -0.141*** 0.062** 0.125*** -0.144***
[0.032] [0.028] [0.030] [0.031] [0.028] [0.027]
Professional education 0.109*** 0.191*** -0.229*** 0.115*** 0.188*** -0.231***
[0.034] [0.034] [0.026] [0.033] [0.033] [0.024]
University education 0.027 0.199*** -0.147*** 0.042 0.190** -0.151***
[0.076] [0.076] [0.045] [0.078] [0.077] [0.042]
Postgraduate education 0.051*** -0.002 -0.048*** 0.053*** -0.003 -0.049***
[0.010] [0.011] [0.011] [0.010] [0.011] [0.011]
Unemployed 0.003 -0.01 0.008 0.008 -0.014 0.009
[0.027] [0.028] [0.025] [0.027] [0.027] [0.024]
Self employed 0.101*** -0.089*** -0.009 0.116*** -0.098*** -0.013
[0.027] [0.018] [0.025] [0.027] [0.018] [0.023]
White collar worker 0.052 0.005 -0.069** 0.058 -0.004 -0.063**
[0.036] [0.027] [0.032] [0.036] [0.027] [0.031]
Blue collar worker 0.003 0.027 -0.029 0.001 0.024 -0.021
[0.033] [0.028] [0.029] [0.032] [0.027] [0.028]
Service worker 0.035 -0.009 -0.028 0.045 -0.017 -0.026
[0.033] [0.025] [0.033] [0.033] [0.024] [0.032]
Farmer, farm worker 0.04 0.012 -0.044 0.059 -0.003 -0.05
[0.051] [0.032] [0.047] [0.050] [0.031] [0.045]
Pensioner -0.012 0.005 0.001 -0.002 -0.003 0.003
[0.036] [0.021] [0.028] [0.036] [0.022] [0.028]
Student 0.025 0.008 -0.033 0.031 0.001 -0.029
[0.059] [0.045] [0.043] [0.057] [0.043] [0.042]
Housewife 0.05 -0.024 -0.024 0.062 -0.036 -0.024
[0.048] [0.028] [0.043] [0.048] [0.028] [0.042]
Observations 6750 6750 6750 6970 6970 6970
log likelihood -4254.41 -3691.65 -3982.12 -4391.74 -3796.55 -4041.41
Pseudo R2 0.0696 0.0328 0.0754 0.0746 0.0331 0.0829

Notes to Table 2:
Controls: frontier zone dummies.
Omitted categories: young (17 to 34 years old), middle income group, lowest education, employee, occupation in
army. Robust standard errors adjusted for clustering on frontier zones. *** significant at 1%, ** significant at 5%, *
significant at 10%.
Democracy index is built on the basis of Freedom House (2006a). More democracy is a dummy variable based
on the same index (see section III.D.).
Table 3. Democracy and Support to the Market within Cultural Areas
dprobit Estimates of Support to the Market
1 2 3 4 5 6 7
Austro
Hungarian
Empire
Ottoman
Empire Yugoslavia Polish
Empire CIS Central
Asia USSR
Democracy index 0.031 0.137 0.068** 0.0295** 0.046*** 0.231*** 0.034***
[0.021] [0.129] [0.026] [0.012] [0.013] [0.043] [0.010]
Observations 1,656 1,920 2,134 1,734 2,354 740 2,994
Log likelihood -1,022 -1,277 -1,373 -1,064 -1,458 -443 -2,008
Pseudo R2 0.072 0.032 0.041 0.094 0.081 0.117 0.073
Notes to Table 3:
Sub-samples of frontier-zones.
Controls: income categories, age categories, gender, occupation categories, self employed, education categories.
Robust standard errors adjusted for clustering on frontier zones. *** significant at 1%, ** significant at 5%, *
significant at 10%.
The Austro Hungarian zone comprises Croatia, Czech Republic, Hungary, Slovak Republic and Slovenia. The Ottoman
zone comprises Albania, Armenia, Bosnia and Herzegovina, Bulgaria, FYR Macedonia, Montenegro and Serbia.
Yugoslavian zone comprises Bosnia and Herzegovina, Croatia, FYR Macedonia, Montenegro, Serbia and Slovenia. The
Commonwealth of Independent states (CIS) consists of Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan,
Kyrgyzstan, Moldova, the Russian Federation, Tajikistan, Ukraine and Uzbekistan. The former USSR comprises all of
the CIS, plus Estonia, Latvia and Lithuania. Central Asia consists of Kazakhstan, Kyrgyzstan, Tajikistan and
Uzbekistan. The Polish Empire zone comprises Belarus, Lithuania, Poland, Ukraine, the Russian Federation (western
borders). EU zone comprises Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania, the
Slovak Republic and Slovenia.
Democracy index is built on the basis of Freedom House (2006a).

Table 4. Support to Democracy and Regional Indices of Market Liberalization
dprobit Estimates of Support to Democracy/Authoritarianism
-1 -2 -3 -4 -5 -6 -7 -8 -9
Whole sample Only frontier-zones Only frontier-zones
Democracy
preferable Authoritarian
government Does not
matter Democracy
preferable Authoritarian
government Does not
matter Democracy
preferable Authoritarian
government Does not
matter
Industrial index of region -0.014 -0.001 0.012
[0.030] [0.019] [0.029]
Industrial index frontier-zone_j -0.032 -0.183*** 0.16
[0.106] [0.058] [0.110]
Industrial index frontier-zone _k 0.015 -0.115** 0.068
[0.108] [0.054] [0.102]
Adult (35-19) -0.024** 0.017** 0.006 -0.035** 0.022* 0.012 -0.034** 0.022 0.011
[0.011] [0.008] [0.007] [0.015] [0.013] [0.019] [0.016] [0.014] [0.021]
Mid-age (50-65) -0.028* 0.020** 0.007 -0.015 0.011 0.003 -0.017 0.008 0.009
[0.016] [0.010] [0.009] [0.025] [0.016] [0.024] [0.027] [0.016] [0.027]
Old (>65) -0.058*** 0.026* 0.025* -0.073** 0.008 0.053* -0.090** 0.006 0.075**
[0.022] [0.014] [0.013] [0.037] [0.021] [0.030] [0.041] [0.020] [0.031]
Poor -0.056*** 0 0.052*** -0.075*** 0.014 0.057*** -0.078*** 0.015 0.058***
[0.010] [0.006] [0.009] [0.017] [0.012] [0.015] [0.018] [0.012] [0.014]
Rich 0.028*** -0.004 -0.026*** 0.035* -0.005 -0.029* 0.033* -0.004 -0.029*
[0.009] [0.006] [0.007] [0.019] [0.013] [0.015] [0.020] [0.014] [0.016]
Male 0.037*** 0.003 -0.039*** 0.027* 0.006 -0.031** 0.023 0.008 -0.029*
[0.008] [0.005] [0.007] [0.015] [0.011] [0.015] [0.015] [0.012] [0.016]
Compulsory education 0.043** 0.032** -0.052*** 0.044 0.056** -0.069** 0.018 0.041 -0.04
[0.018] [0.016] [0.011] [0.032] [0.027] [0.033] [0.038] [0.026] [0.037]
Secondary education 0.104*** 0.043*** -0.112*** 0.101** 0.084*** -0.136*** 0.069 0.072*** -0.106***
[0.020] [0.015] [0.013] [0.042] [0.023] [0.037] [0.047] [0.022] [0.040]
Professional education 0.117*** 0.049*** -0.129*** 0.125*** 0.085*** -0.161*** 0.094** 0.074*** -0.130***
[0.017] [0.015] [0.014] [0.036] [0.024] [0.034] [0.041] [0.023] [0.034]
University education 0.186*** 0.056*** -0.191*** 0.193*** 0.109*** -0.222*** 0.161*** 0.109*** -0.207***
[0.018] [0.014] [0.011] [0.040] [0.030] [0.025] [0.044] [0.027] [0.028]
Post graduate education 0.252*** 0.015 -0.204*** 0.169*** 0.142** -0.200*** 0.140** 0.151** -0.200***
[0.025] [0.025] [0.012] [0.060] [0.066] [0.032] [0.062] [0.062] [0.039]

Unemployed 0.021 -0.015 -0.004 0.033 -0.034* 0.008 0.008 -0.016 0.011
[0.018] [0.013] [0.015] [0.032] [0.019] [0.023] [0.029] [0.019] [0.021]
Self employed 0.023 -0.014 -0.009 0.03 -0.025 -0.005 0.002 -0.02 0.016
[0.022] [0.014] [0.015] [0.027] [0.022] [0.025] [0.025] [0.022] [0.025]
White collar worker 0.089*** -0.014 -0.079*** 0.081*** -0.008 -0.073*** 0.066** 0.006 -0.074***
[0.013] [0.010] [0.012] [0.026] [0.020] [0.024] [0.026] [0.022] [0.026]
Blue collar worker 0.029* -0.012 -0.014 0.035 -0.008 -0.022 0.024 -0.002 -0.018
[0.016] [0.012] [0.015] [0.029] [0.022] [0.031] [0.032] [0.021] [0.035]
Service worker 0.053*** -0.008 -0.043*** 0.086*** -0.042** -0.038 0.069*** -0.031* -0.034
[0.014] [0.010] [0.013] [0.028] [0.019] [0.026] [0.026] [0.017] [0.028]
Farmer, farm worker 0.060*** -0.004 -0.051*** 0.069*** 0.016 -0.082*** 0.068** 0.029 -0.089***
[0.017] [0.013] [0.017] [0.026] [0.024] [0.023] [0.033] [0.028] [0.028]
Pensioner -0.002 -0.007 0.007 0.008 0.009 -0.014 -0.004 0.023 -0.015
[0.018] [0.010] [0.019] [0.034] [0.017] [0.030] [0.037] [0.016] [0.033]
Student 0.128*** -0.038*** -0.085*** 0.088 -0.054 -0.023 0.071 -0.039 -0.024
[0.028] [0.013] [0.021] [0.065] [0.039] [0.038] [0.067] [0.042] [0.042]
Housewife 0.039** -0.034** -0.005 0.022 -0.031 0.013 -0.004 -0.014 0.02
[0.018] [0.013] [0.019] [0.035] [0.025] [0.030] [0.035] [0.026] [0.032]
Observations 28909 28909 28955 7032 7032 7041 6274 6274 6281
log likelihood -18624.11 -12203.71 -15662.88 -4511.66 -3055.29 -3848.54 -4051.73 -2682.95 -3491.07
Pseudo R2 0.0557 0.0297 0.0711 0.0685 0.0496 0.0814 0.0625 0.0456 0.0746
Notes to Table 4:
Controls: country dummies; urban/rural or metropole area for columns 1 to 3.
Omitted categories: young (17 to 34 years old), middle income group, occupation in army, self-employed, lowest education.
Robust standard errors adjusted for clustering at the country level. *** significant at 1%, ** significant at 5%, * significant at 10%.
The industrial index is constructed at the regional level. Industrial index j is the index of market development of the zone where the respondent lives. Industrial index k
measures the market development of the adjacent frontier-zone.

Table 5.a. Support to Democracy and Regional Indices of Market Liberalization
dprobit Estimates of Support to Democracy
Full sample
-1 -2 -3 -4 -5 -6 -7 -8
Austro
Hungarian Ottoman Yugoslavia CIS Central
Asia Polish
Empire USSR EU
Industrial index 0.109** -0.011 0.045 -0.077 -0.205 -0.002 -0.080** 0.032
[0.050] [0.042] [0.044] [0.048] [0.096] [0.045] [0.034] [0.045]
Observations 4973 7975 5971 10972 4000 4972 13952 9964
Log likelihood -3106 -5138 -3827 -7167 -2547 -3253 -9142 -6394
Pseudo R2
0.062 0.062 0.055 0.054 0.054 0.056 0.050 0.059
Notes to Table 5a:
Full sample.
Controls: income categories, age categories, education categories, gender, occupation categories, self-employed,
country dummies.
Regions (in columns) are defined as in Table 3.
Robust standard errors adjusted for clustering at country level. *** significant at 1%, ** significant at 5%, * significant
at 10%.
The industrial index is constructed at the regional level.
Table 5b. Support to Democracy and Regional Indices of Market Liberalization
dprobit Estimates of Support to Democracy
Sub-sample of Frontier-Zones
-1 -2 -3 -4 -5 -6 -7 -8
Austro
Hungarian Ottoman Yugoslavia CIS Central
Asia Polish
Empire USSR EU
Industrial index 0.123* -0.036 0.125 0.019 -0.123 -0.018 -0.035 -0.009
frontier-zone_k [0.075] [0.085] [0.082] [0.133] [0.252] [0.087] [0.092] [0.073]
Observations 1656 1940 2134 3794 1859 1794 4414 2322
Log likelihood -1051 -1250 -1365 -2452 -1188 -1161 -2869 -1472
Pseudo R2 0.066 0.094 0.072 0.064 0.057 0.067 0.058 0.064
Notes to Table 5b:
Sub-sample of frontier-zones.
Controls: income categories, age categories, education categories, gender, occupation categories, self-employed,
country dummies.
Robust standard errors adjusted for clustering at country level. *** significant at 1%, ** significant at 5%, * significant
at 10%.
The industrial index measures the level of market development of the adjacent frontier-zone k when the respondent lives
in frontier-zone j.

Table 6. The Value of Democracy and Regional Indices of Market Development
Ordered Probit Regressions of the Score of Declared Importance of Democracy
-1 -2
Entire sample
(industrial index of zone j) Only frontier-zones
(industrial index of adjacent zone k)
Industrial index 0.038 -0.30
[0.090] [0.232]
Observations 27955 6281
Log likelihood -61759 -13689
Pseudo R2 0.019 0.027
Notes to Table 6:
Controls: type of area (rural, urban or metropolitan), income categories, age categories, education categories, gender,
occupation categories, self-employed, country dummies.
Robust standard errors adjusted for clustering at the country level. *** significant at 1%, ** significant at 5%, *
significant at 10%.
Column 1: whole sample. Industrial index of the region j of the respondent.
Column 2: only frontier-zones. Industrial index of the adjacent frontier zone k when respondent live in region
j.
Table7. Support to democracy and relative regional income
dprobit Estimates of Support to Democracy
-1 -2 -3
Democracy
preferable Authoritarian
government
preferable
Does not matter
Regional level of expenditure 0.021 -0.002 -0.018
[0.043] [0.031] [0.028]
Observations 27960 27960 27995
Log likelihood -18089 -11981 -15212
Pseudo R2 0.055 0.027 0.073
Notes to Table 7:
Controls: income categories, age categories, education categories, gender, occupation categories, self-
employed, country dummies.
The industrial index is constructed as the average regional real level of expenditure.
Robust standard errors adjusted for clustering at the country level. *** significant at 1%, ** significant at 5%, *
significant at 10%.

ANNEX
Table A1. Descriptive Statistics
Variable Mean Std. dev.
Market preferable
Planned economy is
preferable
1 if resp. prefers market economy to other form of economic system
1 if resp. prefers planned economy under certain circumstances
0.43
0.26
0.50
0.44
Does not matter_eco
Democracy preferable
Authoritarian reg.
preferable
Does not matter_pol
1 if resp. answers “for people like me it does not matter” whether the economy is
organized as a market economy or as a planned economy
1 if resp. prefers democracy to other form of political system
1 if resp. prefers authoritarian regime under certain circumstances
1 if resp. answers “for people like me it does not matter” whether a government is
democratic or authoritarian
0.31
0.57
0.16
0.27
0.46
0.49
0.37
0.37
Old more than 65 years old 0.16 0.37
Mid-age between 50 and 65 years old 0.24 0.43
Adult between 35 and 50 years old 0.31 0.46
Gender 1 if male 0.48 0.50
Unemployed actively looking for a job. waiting for an answer or find no job available 0.09 0.29
White collar worker 0.17 0.38
Blue collar worker 0.18 0.38
Service worker 0.12 0.32
Farmer or farm worker 0.05 0.22
Pensioner 0.21 0.41
Student 0.03 0.16
Housewife 0.06 0.25
Self employed work as self employed at their main job (regardless occupation) 0.08 0.28
Industrial index regional index. share of SMEs. private. post-1989 created enterprises. Min: 1; Max:5 2.39 1.05
Imp free elections importance of free and fair elections. Min: 1; Max 5 0.89 0.32
Imp law order imp. of law and order. Min: 1; Max 5 0.59 0.49
Imp free speech imp. of freedom of speech. Min: 1; Max 5 0.51 0.50
Imp peace imp. of peace and stability. Min: 1; Max 5 0.65 0.48
Imp indep press imp. of press independence. Min: 1; Max 5 0.44 0.50
Imp pol opposition imp. of political opposition. Min: 1; Max 5 0.39 0.49
Imp court indep imp. of courts to defend ind. rights against abuse by state. Min: 1; Max 5 0.55 0.50
Imp court equal imp. of equal treatment of citizens in courts. Min: 1; Max 5 0.60 0.49
Imp minority protec imp. of minority rights protection. Min: 1; Max 5 0.42 0.49
Imp free abroad imp. of freedom to travel abroad. Min: 1; Max 5 0.53 0.50
Imp democracy global index (sum) of importance of above democratic institutions. Min: 0(none is
important); Max: 10 (all are very important)
5.38 3.59

Table A2. Attitudes towards the Market and Democracy in frontier zones of adjacent countries,
ranked by democracy level
Country i Country j
Market
preferable Market
preferable
Estonia> Russia 0.56 0.33
Estonia >Latvia 0.46 0.17
Russia > Belarus 0.32 0.48
Ukraine>Russia 0.50 0.22
Russia>Kazakhstan 0.28 0.35
Latvia> Lithuania 0.32 0.50
Lithuania > Belarus 0.55 0.33
Albania> Montenegro 0.71 0.51
Georgia>Armenia 0.45 0.25
Turkey>Armenia 0.27 0.20
Georgia > Azerbaijan 0.35 0.39
Poland>Belarus 0.42 0.43
Ukraine>Belarus 0.55 0.41
Poland > Ukraine 0.13 0.46
Slovak>Poland 0.27 0.33
Romania>Ukraine 0.74 0.82
Slovak Rep.>Ukraine 0.48 0.50
Croatia>Bosnia & H. 0.34 0.29
Slovenia>Croatia 0.55 0.40
Serbia >FYROM 0.90 0.27
Hungary>Serbia 0.57 0.38
Bulgaria> FYROM 0.25 0.54
Bulgaria>Romania 0.25 0.32
Romania > Moldova 0.59 0.41
Romania >Serbia 0.56 0.38
Hungary>Romania 0.69 0.69
Hungary >Croatia 0.24 0.37
Hungary > Romania 0.27 0.69
Slovak Rep.>Hungary 0.58 0.37
Slovak>Czech Rep. 0.49 0.41
Poland>Czech Rep 0.45 0.48
Kyrgyzstan>Kazakhstan 0.49 0.27
Kyrgyzstan>Tajikistan 0.70 0.35
Symbols > or < indicate the country ranking in terms of democracy according to Freedom House Nations in
Transit 2006. Average score inside each zone.

Table A3. Attitudes Towards the Market and Democracy
in Frontier-Zones of Selected Countries
Frontier
industrial
index
Democracy
preferable Frontier
industrial
index
Democracy
preferable
BELARUS ROMANIA
Belarus Poland 1.87 0.12 Romania Serbia 2.39 0.52
Belarus Ukraine 1.89 0.49 Romania Bulgaria 2.43 0.42
Belarus Russia 1.98 0.57 Romania Hungary 2.58 0.75
Belarus Lithuania 2.03 0.61 Romania Moldova 2.64 0.68
CROATIA RUSSIA
Croatia Bosnia & H. 2.35 0.43 Russia Mongolia 2.2 0.61
Croatia Slovenia 2.31 0.58 Russia Kazakhstan 2.26 0.42
HUNGARY Russia Estonia 2.33 0.48
Hungary Slovak Rep. 2.33 0.65 Russia Poland 2.33 0.57
Hungary Croatia 2.38 0.34 Russia Belarus 2.33 0.38
Hungary Romania 2.48 0.61 Russia Ukraine 2.51 0.31
Hungary Serbia 2.53 0.8 SERBIA
LATVIA Serbia FYROM 2.12 0.92
Latvia Lithuania 2.9 0.51 Serbia Romania 2.29 0.48
Latvia Russia 2.9 0.43 Serbia Hungary 2.4 0.42
Latvia Estonia 3.38 0.56 UKRAINE
LITHUANIA Ukraine Poland 2.25 0.51
Lithuania Belarus 2.5 0.58 Ukraine Belarus 2.32 0.58
Lithuania Latvia 2.9 0.59 Ukraine Russia 2.34 0.61
Lithuania Russia 3.17 0.6 Ukraine Romania 2.53 0.87
POLAND Ukraine Slovak Rep. 2.67 0.51
Poland Belarus 1.94 0.6
Poland Ukraine 2.26 0.47
Poland Czech Rep. 2.43 0.58
Poland Slovak Rep. 2.77 0.46

Table A4. Descriptive Statistics by Country
Support
Democracy
(%)
Support
Authoritarian
(%)
Support
Market (%) Support
Plan (%). Industrial
Index Importance
democracy
Albania 66.1 9.4 65.15 13.14 2.30 7.23
Armenia 47.01 13.6 33.22 22.19 2.32 NA
Azerbaijan 47.55 9.13 39.61 9.27 1.96 5.15
Belarus 52.04 17.06 48 19.08 1.94 4.33
Bosnia & H. 61.42 19.14 34.37 38.65 2.33 6.43
Bulgaria 45.90 17.74 36.79 24.72 2.61 5.89
Croatia 55.28 14.12 36.32 26.78 2.37 7.41
Czech Rep. 58.53 17.59 47.03 27.25 2.60 5.36
Estonia 61.11 12.23 49.47 18.45 2.78 6.03
FYROM 46.63 18.04 33.88 28.96 2.33 5.09
Georgia 58.13 11.63 38 23.04 2.28 5.73
Hungary 61.68 13.45 37.31 26.29 2.53 6.17
Kazakhstan 48.81 22.23 31.92 39.52 2.50 5.86
Kyrgyzstan 58.92 19.11 49.75 27.68 2.25 4.35
Latvia 55.97 19.59 39.11 26.16 2.75 5.99
Lithuania 54.42 10.31 41.64 17.12 2.73 5.72
Moldova 49.59 19.25 39.19 32.75 2.32 4.32
Mongolia 69.92 19.82 71.42 16 2.22 1.79
Montenegro 73.27 8.26 47.17 26.02 2.19 6.82
Poland 54.19 17.49 40.24 14.6 2.36 6.27
Romania 50.19 26.68 45.87 26.77 2.55 5.81
Russia 36.05 32.77 27.67 41.03 2.37 4.88
Serbia 51.02 14 44.52 21.21 2.33 6.80
Slovak Rep. 67.43 13.21 47.51 24.57 2.52 5.12
Slovenia 66.37 8.18 49.79 18.77 2.26 6.29
Tajikistan 62.74 15.87 51.35 28.18 2.21 4.26
Turkey 74.93 6.04 37.59 32.75 2.06 7.01
Ukraine 55.14 24.45 42.19 33.24 2.36 5.39
Uzbekistan 68.4 12.24 43.55 38.04 2.27 3.84

Table A5. Indices of Democracy and Country Rankings
FREEDOM HOUSE BTI POLITY IV
Democracy
(Nations in Transit)
(i)
Freedom
in the
World
(ii)
Ranking Democracy
indicator
(iv)
Polity (v)
Slovenia 1.75 95 1 7 6
Estonia 1.96 95 2 7 6
Slovakia 1.96 91 5 9 9
Hungary 2 93 4 10 10
Latvia 2.07 89 9 8 8
Poland 2.14 92 7 10 10
Lithuania 2.21 90 6 10 10
Czech Rep. 2.25 92 3 10 10
Bulgaria 2.93 98 10 9 9
Romania 3.39 75 11 9 9
Croatia 3.71 84 8 7 7
Serbia 3.71 76(vi) 14 (vi) 6 (vi) 6 (vi)
Albania 3.79 63 16 7 7
FYROM 3.82 61 12 9 9
Montenegro 3.89 NA NA NA NA
Bosnia &
H.
4.07 62 17 NA NA
Ukraine 4.21 72 13 6 6
Georgia 4.86 61 21 7 7
Moldova 4.96 57 23 8 8
Armenia 5.14 41 19 5 5
Kyrgyzstan 5.64 47 24 4 -3
Russia 5.75 35 20 7 7
Tajikistan 5.93 30 27 1 -3
Azerbaijan 5.93 33 25 0 -7
Kazakhstan 6.39 32 22 0 -6
Belarus 6.71 15 26 0 -7
Uzbekistan 6.82 3 28 0 -9
Mongolia NA 83 18 10 10
Turkey NA 65 15 8 7
(i) The democracy score ratings from Nations in Transit survey by Freedom House are based on a scale of 1 to 7, with 1
representing the highest level of democratic progress and 7 the lowest. The Democracy Score is an average of ratings for
electoral process, civil society, independent media, independence of the judicial system, and corruption.
(ii) The Freedom in the World survey provides an annual evaluation of the state of global freedom as experienced by
individuals. The ratings process is based on a checklist of 10 political rights questions and 15 civil liberties questions. The
political rights questions encompass electoral process, political pluralism and participation, and functioning of the

government. The civil liberties questions are concerned with freedom of expression and belief, associational and
organizational rights, rule of law, and personal autonomy and individual rights. The highest number of points that can be
awarded to the political rights checklist is 40, and that to the civil liberties checklist is 60, with the highest score indicating
more freedom. This index is thus more global than the democracy index and more concerned with the actual rights and
social freedoms enjoyed by individuals.
(iii) The Bertelsmann Transformation Index (BTI) is a global ranking that analyzes and evaluates development and
transformation processes in 119 countries. This index is however not only concerned with democracy, but also with the
development of the market economy in each country, and for that reason, is less well suited than indicators purely
concerned with democracy for our identification strategy.
(iv) The Polity IV Democracy indicator is an additive eleven-point scale (0-10), which is a weighted indicator of the
competitiveness of political participation, the openness and competitiveness of executive recruitment, and constraints on
the chief executive.
(v) The Polity indicator from Polity IV is a combined polity score that is computed by subtracting the ‘autocracy score’,
which indicates how restricted or suppressed political participation is, to the democracy score. A negative ranking thus
signifies that autocratic characteristics of a regime outweigh its democracy characteristics.
(vi) Serbia and Montenegro are pooled.
Table A6. Indices of Industrial Market Development at Frontier-Zones
Frontier-Zone i j Frontier zone i Country i Frontier zone
j Country j
Albania Montenegro 2.27 2.36 2.43 2.24
Armenia Georgia 2.00 2.36 2.38 2.24
Azerbaijan Georgia 1.89 1.89 2.25 2.24
Belarus Lithuania 1.95 1.92 2.53 2.70
Belarus Poland 2.04 1.92 2.03 2.38
Belarus Russia 2.00 1.92 2.00 2.38
Belarus Ukraine 2.14 1.92 2.21 2.33
Bosnia & H. Croatia 2.42 2.38 2.38 2.37
Bosnia & H. Serbia 2.56 2.38 2.12 2.25
Bulgaria FYROM 2.47 2.62 2.18 2.29
Croatia Bosnia & H. 2.38 2.37 2.42 2.38
Croatia Slovenia 2.31 2.37 2.19 2.25
Czech Poland 2.62 2.61 2.26 2.38
Czech Slovakia 2.80 2.61 2.28 2.49
Estonia Russia 2.34 2.74 2.55 2.38
Estonia Latvia 3.14 2.33 2.27 2.80
Kazakh-Kyrgyzstan 2.65 2.48 2.32 2.25
Kazakhstan Russia 2.57 2.48 2.38 2.38
Kyrgyzstan Tajikistan 2.00 2.25 2.55 2.20
Latvia Lithuania 2.91 2.80 2.96 2.70
FYROM Serbia 2.15 2.29 2.50 2.25
Moldova Romania 2.35 2.26 2.93 2.56
Poland Slovakia 2.58 2.38 2.55 2.49
Poland Ukraine 2.27 2.38 3.14 2.33
Romania Serbia 2.53 2.56 2.29 2.25
Russia Ukraine 2.47 2.38 2.40 2.33
Slovakia Ukraine 3.00 2.49 2.67 2.33