I wonder if David Cameron spent any time in eastern Europe in the 1990s.

Judging from his recent remarks about the Arab spring and international aid, the British prime minister seems to believe that having a more "open" and "free", ie privately owned, economy is the key to both economic development and a successful transition from one-party rule.

The evidence from the former communist countries gives lie to that neoliberal viewpoint. In a recent study entitled Mass Privatisation, State Capacity, and Economic Growth in Post-Communist Countries, published in American Sociological Review, sociologists from the universities of Cambridge and Harvard claim to have established a "direct link" between the mass privatisation programmes followed by around half the countries of the region – enthusiastically urged upon them by western economists and western financial institutions – and the "economic failure and corruption that followed". The more closely the countries followed western advice, and the more they privatised, the worse things became.

The study is at sharp variance with the dominant neoliberal narrative, which portrays the ex-communist states as thriving after they sold off their industries and "liberalised" their economies after the end of one-party rule. Its findings won't though come as too much of a surprise to the citizens of the countries concerned, who suffered enormous hardship as their economies were made more "open".

The level of economic output crashed throughout the region (the average fall in GDP in was nearly 30% in the early 1990s) as eastern Europe suffered a slump far worse than the Great Depression experienced by the US and the UK 60 years earlier, but which the Hollywood film industry or western writers have up to now shown little interest in covering. Millions of workers lost their jobs as state-owned enterprises were privatised. The price of basic essentials rocketed as price controls were lifted and utilities were taken over by the private sector. Governments lost valuable revenue from publicly owned enterprises and state bankruptcy ensued. "We argue that a post-socialist country's choice to rapidly privatise its enterprise holdings immediately reduced that state's financial capacity, due to high budgetary dependence on the earnings of state-owned firms," say the authors of the Cambridge/Harvard report.

Having wreaked such havoc in eastern Europe in the 1990s, the west's neoliberal elite now have the Arab world in their sights. "Western development banks are now lining up to re-enter Egypt or in the case of the EBRD [European Bank of Reconstruction and Development], to enter Egypt and other north African countries in a highly ambitious extension of its founding mandate that saw it focusing purely on the central and eastern European states since its founding in 1991," reports the organisation Bankwatch, which monitors the work of European lending organisations.

Although it does concede that privatisation may have been pushed through too quickly in the past, the EBRD is still singing from the same "free market" hymn sheet of 20 years ago. "The most pressing economic problem for many of the Arab spring countries and the region is that it has been unable to develop a private sector that is independent, competitive and integrated with global markets," writes the bank's president, Thomas Mirow.

"The state is the dominating force in the economy," Mirow complains, adding: "We will be working hard to remedy that, just as we have done in the former communist world." Last month, the EBRD president visited Tunisia, the country that kickstarted the "Arab spring", and declared: "We are aware of the needs of countries in transition and we can offer our expertise and our 'know-how' to Tunisia." Watch out Tunisia, is all I can say.

The neoliberal belief – pushed by both the EBRD and David Cameron – that reducing levels of state ownership in the economy is an essential part of democratic reform and that "free markets" and "free societies" go together is as flawed as the view that "structural adjustment" helps economic development. Chile, under Augusto Pinochet, saw its economy "liberalised", to the approval of Milton Friedman and the Chicago School, yet political freedoms there were greatly curtailed.

By contrast, Norway, criticised by the World Trade Organisation in 2004 for its high level of state-ownership in the economy, is a model democracy, as well as having one of the highest standards of living in the world. Rather than helping to enhance democracy and reduce corruption, privatisation does the opposite. It allows a small group of people to become enormously wealthy and powerful – just think of the emergence of the oligarchs in Russia in the 1990s – while making the majority poorer. As an economy is "liberalised", political power is effectively transferred from the ballot box to the wallet – does anyone think that in Britain in the current neoliberal era, our main political parties are more amenable to public opinion than they were in period 1945-79, when a large section of the economy was in public ownership?

It is of course good news that Burma and several Arab countries are moving away from systems where one party kept a monopoly on power. But let's not be fooled into thinking that moving towards an "open" economy which is "integrated with global markets" is part of the democratisation process, or that large scale privatisation will mean anything but hardship for ordinary people.

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