Democracy, in the form of a popularly elected legislature, can be a potential liability on economic performance. Relations between the executive and legislative branches of government are prone to be confrontational in a nascent democracy, being not inducive to a disciplined implementation of a technical plan for an economic transition to a market economy. The experience of the Republic of Poland from 1989 onwards illustrates well the difficulties that democracy poses.

By providing incentives to ethnic-based political parties to cross the ethnic divide in their appeal to voters, preferential electoral systems provide a means to counter centrifugal political competition. These incentives are greatest in the Alternative Vote. Nevertheless, the benefit of cross-ethnic appeals to political parties do not, by default, outweigh the cost of loosing core supporters from doing so. Furthermore, the Alternative Vote, being majoritarian, might fail to generate a Condorcet winner, resulting in a parliamentary representative who is preferred by neither ethnic faction. Electoral incentives are not the only path towards accommodation in divided societies. Political and legislative traditions, as generated by consociational arrangements, are better able to enshrine cross-ethnic bargaining as a habit. Grand coalitions and ethnic autonomy, similarly key characteristics of consociationalism, secure a sheltered sphere from which ethnic groups can negotiate without feeling excluded or threatened.

Output decline is an artifact of the mismeasurement of real output quantities or the misvaluation of prices. These are statistical causes implicit in the methodologies employed in assembling data series. All components of aggregate demand are under pressure. During times of insecurity, individuals save more and consume less. On the other hand, firms lower production to build down their savings in inventories. A large under-performing investment portfolio cannot be sustained under competitive conditions. Uncertainty and risk-aversity further dampens investment activity. Government net consumption is depressed because of lower tax revenues from administrative mismanagement and a recessionary economy. Faced with a credit crunch, production is lowered. Trade suffers under the deterioration of the external terms-of-trade and the disappearance of traditional export markets. The instantaneous change in the market regime and the swift breakdown of coordination mechanisms outpaces restructuring efforts. Uncertainty, risk-aversity and resistance to change further hampers structural adjustment.