Economic_History_anim.gif (3797 bytes)  TRANSITION    

 

 

 

Excerpts from

How Russia Became
a Market Economy

By Anders Aslund

Anders Aslund

at Carnegie Endowment for International Peace

 


The Transformation of Economic Thinking
 

 

The last years of the Soviet Union saw a complete shift in economic thinking. both within the elite and among the population at large. The Soviet leadership became aware of the mounting economic crisis in the summer of 1989, and in 1990 its severity became apparent to everyone…. one ideological barrier after another was displaced. Marxism-Leninism was no longer allowed to stifle economic thinking…. Two other barriers rose instead: limited economic knowledge (both among the old elite and the public) and the vested interests of the old elite. 

… The first signal of a renewed top-level interest in reform was the creation of the State Commission on Economic Reform at the USSR Council of Ministers on July 5, 1989. It was headed by a senior academic reform economist, academician Leonid Abalkin, who became deputy prime minister. …

 

 In October 1989. the Reform Commission presented its first reform program, popularly called the Abalkin program. This program initiated an official abandonment of fundamental socialist dogmas. The Abalkin program acknowledged that the market must take precedence over the plan….. It established that an efficient market must be characterized by free prices and competition…. No one who wanted to be taken seriously dared call for central planning any longer. … the Law on Enterprises in the USSR. which was promulgated by the USSR Supreme Soviet on June 4, 1990… this law provided a basis for a market economy..

In February 1990. however, a far more radical program was created. Originally called the 400-day program, its authors were three young economists—Grigory …, Mikhail Zadornov, and Aleksei Mikhailov The program called for a transition to a market economy within 400 days. Its salient features were rapid, massive privatization through sales; boost­ing of state revenues to facilitate the financial stabilization of the econ­omy; and swift yet gradual price liberalization. The authors were inspired by the “shock therapy” of economic reform in Poland. They presented their first version of the program with the words: “The time for gradual transformations has been missed, and the ineffectiveness of partial reforms has been proved by the experiences of Hungary, Yugoslavia, Poland, and China.”

 

In the summer of 1990. Yavlinsky and his now 500-day program gar­nered great public attention and moved to the political center stage. In July 1990. ..Gorbachev and Yeltsin agreed to form a joint working group to refine the 500-day program. The group was headed by … academician Stanislav Shatalin. member of the Presidential Council. Shatalin was assisted by Nikolai Petrakov. Gorbachev’s personal economic advisor. For the rest, the Shatalin group brought a new generation of young econo­mists—the young reform leaders to come—to the political forefront. …

At the end of August 1990. the Shatalin group presented its elabora­tion  the 500-day program, a large report with the unequivocal title Transition to the Market. However, … Gorbachev rejected the extended 500-day program in October 1990….. It was in 1990 that the Russian mind-set shifted to support the idea of a market economy, and the idea of privatization became widely accepted. The 500-day program never mentioned the word socialism. Unlike Gorbachev. Yeltsin was prepared to promote young economists within the Russian government. ….

 

As Soviet leaders gave up on privatization in 1990. President Yeltsin and the Russian leadership seized the political and legislative initiative. …. Full-fledged private enterprise was never accepted by the Soviet Union, but it was permitted by the Russian Federation through enactment of its Law on Property in December 1990.
Law on Enterprises and Entrepreneurial Activity enacted in Russia on December 25, 1990, was also a substantial reform law. It gave private enterprises the explicit right to operate and revoked every restriction on private enterprise…

…. The first Russian privatization law was the Law on Land Reform, which was pro­mulgated as early as November 1990, together with the Law on the Peasant Farm. Even with the enactment of these laws, no land reform ensued…. When the Soviet Union came to an end, a broad conviction reigned in Russia that fast, far-reaching privatization was needed. How­ever, there was little understanding of how to carry this out, ….

 

Although most people comprehended that marketization was neces­sary, the politicians were afraid of the social unrest that would ensue if consumer prices were raised or liberalized…A curious reversal of previous dogmas occurred. The more a certain tenet had been disliked by the communists, the keener the popular un­derstanding that it was necessary became. Thus, private ownership of the means of production became as vital a dogma as their socialization had once been. The market replaced the plan as a tenet, although it was more difficult to grasp. A common misconception was that monopolies should be fought through regulation rather than liberalization. However, the concept that proved most difficult to grasp was macroeconomic stabili­zation:…. 

In the early summer of 1991 in Cambridge, Massachusetts, an effort was undertaken by a joint American-Russian working group chaired by Graham Allison of Harvard University and Grigory Yavlinsky. Its member­s included top American economists such as Jeffrey Sachs and Stanley Fischer. It went by the name “the Grand Bargain,” which suggested a program for political and economic transformation in the USSR supported by massive Western financial aid…. The Grand Bargain was possibly the first economic program that had drawn serious Soviet participation and that was not gradualist in nature. It also signified a new degree of international collaboration regarding Russian economic reform. However, the Grand Bargain had little impact in Russia because it was not widely publicized there. Yavlinsky limited his domestic propaganda efforts to almost no one but Gorbachev, who did not embrace the program…

 And so, on the eve of the collapse of communism, both marketization and privatization were widely accepted in Russia. Marxism-Leninism was no longer much of a hindrance. However, the problem was that few Russians had any alternative knowledge or understanding of economics. Although the vast majority of Russians wanted a market economy based on private ownership, they did not know what such an economy would entail. The field lay open for both vested interests and populism.

 


The Depth of the Economic Crisis in 1991
 

 

When the Soviet Union broke up in December 1991, the Russian economy was in a crisis as complex as it was profound. The old communist system had proven increasingly inadequate and had caused ever greater wastage and inefficient use of resources. All cheap sources of growth, such as abundant raw materials, had been used up. The ill-conceived reform policies had brought on a macroeconomic crisis, reflected in a growing budget deficit. The excessive issuance of money while prices were controlled and as production plummeted had bred a monetary over­hang and had exacerbated shortages, a portent of high open inflation. Gorbachev had drawn extensively not only on Soviet reserves of gold and hard currency but also on international loans. Consequently, at the end of 1991, the USSR defaulted on its international commitments. Finally, the Soviet economy was exposed to a severe external shock in 1991 with the breakdown of the CMEA trading mechanism. Although Russia’s terms of trade improved, much of the prior demand disappeared. The Russian economy became subject to a similar external shock in 1992, when the USSR fell apart. Few valuable assets remained aside from human capital and natural resources.

 

 An Inefficient Economic System  
…The outstanding characteristic of the Soviet socialist economy was the Leninist primacy of politics over eco­nomics. All of the power players, including enterprise managers, tried to maximize their … superiors promoted those peo­ple who exhibited complete loyalty…
A second characteristic of the communist economy was its peculiar economic objective, which focused on quantitative production targets rather than efficiency, profits, or future value…
  Third, regardless of objective function, the socialist order lacked compos­ite standards of value. Prices played a subordinate role; but they still influenced allocation after major allocation decisions had been made in arbitrary political fashion. Yet existing prices served no useful economic function. Some had been frozen for decades…On the rare occasions when prices were revised, it was generally for political  reasons or because of administrative loopholes, rather than to meet demand, world market prices, or actual costs.

 

In the early 1990s, the Soviet price system was in disarray. Certain prices floated freely and rose enormously because of the huge monetary overhang, while most prices remained regulated. …
In light of these realities, enterprises had little incentive to improve efficiency, quality, selection, or technology, because they were neither oriented toward making a profit nor subject to competition. Therefore, the rational approach taken by managers of socialist enterprises was to maximize their political clout, by obeying any whim from above. …. the growth rate fell because of declining efficiency, though official statistics did not reflect the deterio­ration of quality. In the mid-1980s, the annual growth rate in the USSR was probably exaggerated by about 3 percentage points.

 

  Table 2-1.
Average Annual Growth of the Soviet Economy,
1961- 85,
 Net Material Product Percent, at fixed prices

Source    1961- 65 1966 - 70 1971- 75 1976 - 80 1981 - 85 
Official   6.5 7.8 5.7 4.3 3.6
Selyunin & Khanin   4.4 4.1 3.2 1.0 0.6

Sources: Tsentralnoe Statisticheskoe Upravteniye SSSR. Narodnoe khozyaisvo SSSR v 1985 g. (Central Statistical Board of the USSR. The National Economy of the USSR in 1985) (Moscow: Finansy i statistika. 1986). pp. 38. 409; Vasily Selyanin and Grigory Khanin, Cunning Figures, Novy mir. vol. 63 (February 1987). PP. 194—95.

 

When Gorbachev became general secretary of the CPSU, the main problem of the Soviet economy was stagnation, …. At the same time, defense expenditures appear to have amounted to about one-quarter of GDP and had risen steadily in real terms.  

   In 1990 and 1991, state enterprise managers began to adjust to the considerable freedom and security at their jobs as well as to the absurd price relations of the market. Freedom without responsibility amounted to a major principal-agent problem. The principal—the state—had vir­tually withered away; the agents—the managers—were therefore free to focus on personal gain. Piece by piece, they expropriated the assets of enterprises they managed. Any manager who could sell raw materials abroad did so, at least in part to his own benefit. As a result of both wastage and diversion of resources, supplies of inputs receded and state output slumped; it was not impossible to foresee a virtual collapse in production. The decline in net material product continued apace in 1991 and had reached 21 percent in the last quarter. A far steeper fall seemed feasible.

 

A Distorted Economic Structure  
 The combination of politicized decision-making, confused objectives, and distorted relative prices resulted in a multitude of structural distor­tions in the economy.
The structure of the distribution of the GDP was characterized by high expenditures on defense and investment outlays, but low consump­tion. According to the official statistics for 1985, as little as 47.5 percent GDP went to private consumption and 32.0 percent to gross accumulation. However, because around 25 percent of GDP devoted to defence  was hidden in these statistics, real private consumption was probably ­less than 40 percent. ….

In addition, the structure of the economy (both GDP produced and employment) focused too heavily on industry and agriculture and too little on trade and services compared with developed economies. The agriculture sector was a sign of economic backwardness, while the industrial and the minimal service sectors reflected systemic distortions. In this regard, Russia had a more backward economic structure ­than seemingly poorer countries such as Brazil and Argentina (see 2-2).

 

2-2.     
Structure of Production: Distribution of GDP 1991  
Percent (unless otherwise specified)

Country Agriculture Industry Services

1991 GDP per capita
(U.S $)

West Germany 2 39 59 23,650
Italy 3 33 64 18,520
Russia 13 48 39 3,220
Mexico 9 30 61 3,030
Brazil 10 39 51 2,940
Argentina 15 40 46 2,790

Source: World Bank. World Development Report 1993: Investing in Health (Oxford University Press. 1993). pp.

 Yet another handicap of the Soviet economy was that the industrial structure was petrified—dysfunctional enterprises were hardly ever closed down. The USSR had succeeded in urbanization and industriali­zation, but it had no mechanism for reallocating resources within the urban sector, because it lacked a capital market. As economic conditions changed, the Soviet enterprise structure grew increasingly obsolete. As typical feature of Soviet cities was the location of old prerevolutionary factories, such as steelworks and electrical power plants, in the city center. (Even the Kremlin faces a power plant on the opposite bank of the Moscow River.) In the West, such factories were closed down decades ago, as obsolete polluters that made inefficient use of prime land.

 

Table 2-3.
Production Per Capita of Selected Products, 1989  

Product  USSR   USA W.Germ. France Japan Italy
Electricity (kWh)   5.986 11.964 7.215 7.431 6.092 3.650
Steel  (kg)   557 382 691 344  876 436  
Mineral fertilizers (kg)     119 101 63 71 12 33
Tractors (per   1.000 people)   1.9 0.4 1.3 0.4 1.3 1.6
Cement (kg) 488 302 489 469 647 690
Meat (kg) 70 120 96 112 32 63

Source: Goskomstat SSSR, Narodnoe khozyaistvo SSSR v 1989 g.
(The National Economy of the USSR in 1989)(Moscow: Finansy i statistika. 1990). pp. 692—93.

 

Another oddity of the Soviet economic structure was the political nature of allocation, which was done without regard to costs. Enterprises were located anywhere in the country and little or no attention was paid to transportation costs, which led to excessive shipping.

In the end, the inefficiency of the Soviet economic system became staggering. Because of escalating waste, the economy used ever-increas­ing volumes of materials to produce less final output. Table 2-3 illustrates that the USSR kept pace with leading Western industrial countries in industrial output per capita of products such as electricity, steel, mineral fertilizers, cement, and tractors. In 1989, it was even the world’s biggest producer of oil, natural gas, steel, iron ore, mineral fertilizers, sulfuric acid, tractors, and combine harvesters. Notably, the USSR produced almost twice as much steel as the United States. One reason for this was the Soviet emphasis on the defense industry, which consumed vast amounts of steel. Another reason was obsolescence; the USSR had not substituted expensive steel for newer, cheaper materials, such as plastics. A third reason was that the Soviet economy used too much in the way of inputs. High Soviet steel production was thus a sign of wastage rather than welfare.

In general, out of all its production of industrial inputs, the USSR garnered surprisingly little GDP and even less consumption. The Soviet economy required several times more inputs than did Western countries to produce one unit of final output. One of the most staggering examples of Soviet wastage of inputs was in its forestry industry, which consumed seven times more timber than the Finnish forestry industry did to produce ton of paper. In addition, the quality, design, and choice of  Soviet products were inadequate, and much of what was produced was wasted or inadequately used because of the miserable allocation system.

 

2-4.      
Russian Trade With Countries Outside the Former Soviet Union,
1990—92

Billions of U.S. dollars  

  Exports   Imports
  1990 1991   1992   1990   1991 1992
Total 78.7 50.9 40.0 72.0 44.5 36.9
Former CMEA  34.0  11.7  8.0 32.3 10.9 5.3
Developed 28.3 28.8 23.8  28.6  25.9  22.6

Source: Benedicte Vibe Christensen. The Russian Federation in Transition: External Developments, Occasional 11 (International Monetary Fund, February 1994), p. 38.

 

A fifth dysfunctional characteristic of the Soviet economy was that it was protectionist. This protectionism applied to the entire CMEA block. Trade between the ten CMEA countries was settled in bilateral five-year barter deals that were politically motivated; therefore, trade between the communist countries was probably more distorted than trade within them. With little or no economic rationale behind it, this CMEA-based trade was likely to collapse when free trade was introduced in 1991. (This collapse would have been hastened by the fact that product hauls between CMEA partners were long, and real transportation costs were ne­glected.) The intra-CMEA trade volumes were much larger than what would have been the case in a market economy, as suggested by the gravity model. Because the trade structure was the result of politicized negotiations, politics rather than economics determined what products were traded. The trade mechanism was perceived as so absurd that it bred contempt for CMEA partners. This led to the attitude that it no longer was necessary for CMEA partners to pay one another after the CMEA trade mechanism faltered.

In 1991, the CMEA trade system ceased to function, which caused a major external shock. Russia’s trade with the former CMEA countries fell by no less than two-thirds in one year, and its imports from them decreased by half from 1991 to 1992 (see table 2-4). Russia gained substantially in terms of trade. Its raw materials and energy had been underpriced in CMEA trade, whereas machinery and other manufactured products (which Russia primarily imported from eastern Europe) been overpriced. However, the net effect was that both sides reduced trade with one another. The east Europeans could no longer afford to purchase Russian raw materials after the Russians stopped buying their manufactured goods. When the USSR broke up, similar restructuring was to be expected; an extreme form of protectionism had also prevailed within the USSR

 

Table 2-5.
Consolidated State Budget Deficit of the USSR, 1985—90  

Year  

Deficit  

 

Billions
of nominal rubles  

Percent of GDP
1985 13.9 1.8
1986 45.5 5.7
1987 52.5 6.4
1988 80.6 9.2
1989 80.7 8.6
1990 41.4 4.1

Source: Based on Goskomstat SSSR. Narodnoe khozyaistvo SSSR r1990 g. (The National Economy of the USSR in 1990) (Moscow: Finansy i statistika, 1991). pp. 5. 17; calculations are the author’s.

 


The Emergence of a Macroeconomic Crisis
 

 

Traditionally, the Soviet economy displayed several imbalances, but they were limited. ... However, with the ascen­sion of Gorbachev, the Soviet macroeconomic balance was completely destroyed in four stages.

The first stage was not at all dramatic. After Gorbachev took over, the traditional Soviet budget deficit of roughly 2 to 3 percent of GDP each year expanded to around 6 percent of GDP in 1986 and 1987 (see table 2-5)

 

  Table 2-6.
Soviet Wage Increases, 1986—90
Annual increase in percent

Year  

Average
national wage

Official
net material product,
fixed prices

1986   2.9    2.3
1987   3.7    1.6
1988   8.3    4.4
1989   9.4    2.5
1990 14.2  -4.0
1991   70.0 -15.0

Source: Goskomstat SSSR, Narodnoe khozyaistvo SSSR v 1990g., pp. 7, 36: UN Economic Commission for Europe. Ecomic Surrey of Europe in 1991—1992 (United Nations, 1992), P. 105.

 

During a second stage of macroeconomic destabilization (1988—89), paramount problem was that wages rose more than twice as fast asthy had previously (see table 2-6).

The third stage that contributed to a macroeconomic crisis took place 1990, when social benefits were suddenly increased by 25 percent

In 1991, during the fourth and final stage of macroeconomic destabil­ition, state finances broke down. The budget deficit skyrocketed to more than 20 percent of GDP. However, if it had been properly calculated that is, to include semifiscal deficits such as cheap credits and foreign trade subsidies), the deficit would more likely have been on the order of 30 percent of GDP.

 

Table 2-7.
Soviet Foreign Debt and Debt Service Obligations in  Convertible Currencies, 1 986—91  
Billions of U.S. dollars at year end, unless otherwise specified

  1985   1986  1987 1988   1989 1990 1991
Gross debt 31.4 37.4 40.2 49.4 58.5 61.1 65.3
Net debt  18.3  22.5 26.1  34.1 43.8 52.5 56.5
Actual debt service payments  .. 7.8  8.8 8.4 9.4 2.9 16.7
% of convertible currency exports  .. 29.1 28.1 25.1 26.7 68.2 45.1

Sources: UN Economic Commission for Europe. Economic Survey of Europe in 1992 - 1993 (Uniled  Nations, 1993),p. 289;
 Benedicte Vibe Christensen. The Russian Federation in Transition, P. 42.

 

In the second half of 1991, the USSR and Russia faced complete financial ruin. There were grave shortages, and most state shops were nearly empty. Queues were unbelievably long, and people could stand in one line for goods for up to a week, The monetary overhang was enor­mous, warranting (as it later turned out) a tripling of retail trade prices. Even so, open inflation raged, and prices doubled or tripled in 1991. Statistics are indeterminate for this period, as most goods disappeared from state shops toward the end of that year, although many goods were still available in commercial shops or on the black market, at significantly higher prices.

Foreign Debt Crisis  
From 1986 on, international loans were increasingly used to finance the USSR’s budget deficit. However, a rising share of the deficit was not financed at all but resulted in more money being put into circulation.
Both gross and net foreign debt rose quickly under Gorbachev. At the end of 1984, the net Soviet debt was assessed at only $14.2 billion; by the end of 1991, it had risen to $56.5 billion (see table 2~7). Substantial Soviet gold reserves had been sold out as well.

 

Table 2-7 shows actual debt service payments, which wer than claims in 1991. After late 1989, the USSR started delaying number of international payments. As a result, it was offerd less international credit with shorter terms, and its backlog of unpaid bills increased to about $6 billion by the end of 1991. At that currency reserves were virtually depleted …

Conclusions: The End of the Soviet System
  Why did the Soviet Union collapse? In the early 1980s, a basic problem was that economic growth had slowed significantly. Economic petrification raised the question of the Soviet system’s long-term viability. It remains unclear how long the Soviet economy could have continued to stagnate; but there was certainly no reason to expect it to recover.

Gorbachev shook up the USSR’s existing institutional balance in the hope of promoting economic growth. His primary purpose appears to have been to reinforce the Soviet Union’s status as a superpower. In his effort to reform the system, Gorbachev made almost every conceivable mistake. In particular, he disregarded finance altogether. His political compromises left the USSR with sadly inconsistent economic policies. The advice he obtained regarding the economy proved inadequate; Soviet economic science had been devastated by political repression and Marxism-Leninism, and advice from economists outside the system was simply not solicited. Gorbachev avoided adopting any clear reform program, and he dismantled most economic policymaking structures without building new ones.

 

However, many of Gorbachev’s flaws now appear to have been inher­ent. The system could only have been altered from the top down. There­fore, Gorbachev could only have reached the top by subjecting himself to the idiosyncracies of the communist system, including its self-imposed ignorance of the outside world and of modern social theory. Gorbachev had advanced his career through his supreme ability to compromise; but the crisis he was to face required extraordinary decisiveness instead.

Even if Gorbachev had acted flawlessly, it is doubtful that he could have achieved much greater success. At the pinnacle of society, the many members of the nomenklatura were not prepared to collaborate with any reformer. Adamant in their egoistic conservatism, the apparatchiki sabotaged any attempt at reform. But society at large had suffered too much and seen too many failed attempts to believe that socialism could be reformed. Cynicism and alienation were rampant throughout the USSR. Gorbachev tried to activate and revitalize Soviet society through glasnost, but the many horrifying revelations that followed clarified for the people that socialism had little to offer them. Moreover, the deep structural problems of the Soviet economy rendered any attempt at its reformation too complicated, unpopular, and costly. The petrification of the Soviet rnunist system had simply gone too far. Substantial destruction of the systern had to precede any construction of a new one.
…. When Gorbachev finally stepped down as President of the Soviet Union in December 1991, he left behind a country in a state of utter and complete collapse.

 

A Program of Radical Economic Reform
Although Yeltsin was ambivalent about reforming Russia’s political system, he appeared all the more determined to adopt a program of radical economic reform. ‘there were many reasons for this radicalism and decisiveness. Russia was in the midst of a tremendous economic crisis, with massive shortages and imbalances that augured a collapse in production. So many halfhearted reform attempts had already failed that a fundamental reform seemed the only sensible option to many. Poland had also set an example with its seemingly successful launch of economic shock therapy in early 1990, and in January 1991, Czechoslovakia had followed suit. Many Russians were well informed about the Polish experience. Finally, the cream of the young Russian economists had become convinced that a swift, radical change of economic system was the best solution. This self-confident and well-educated emerging elite was pre­pared to take over the Russian government under Yeltsin’s aegis. Yeltsin thus had access to more sophisticated economic than political advice.

President Yeltsin … began his big reform speech on October 28, 1991, by stating: “I appeal to you at one of the most critical moments in Russian history. Right now  it will he decided what kind of country Russia will be in the coming years and decades
…Not a single reform effort in Russia has ever been completed…Rus­sia’s trouble was … an inability to adhere to a consistent reform policy. …I turn to you with determination to stand unconditionally on the road of profound reforms … The period of movement with small steps is over. . . . A big reformist breakthrough is necessary.”

 

In hindsight Yeltsin reckoned “The goal I have set before the government is to make reform irreversible. …. Gaidar’s reform had led …to the destruction of the old economy. It was achieved with terrible pain but  achieved nonetheless. There was probably no other way to do it. Except for Stalinist industry, adapted to modern conditions and a Stalinist economy, virtually no other industry existed here. Just as it had been created, so must it be destroyed.” 

… Yeltsin… realized how deep Russia’s economic crisis was. After August 1991, “the rationing of virtually everything had reached its limit. The shelves in the stores were absolutely bare. . . . The political atmosphere was also quite gloomy.”…. Although he was convinced of the need for radical market economic transformation, he had only limited understand­ing of what this would mean in practice. He therefore entrusted Yegor Gaidar (the main author of Yeltsin’s speech of October 28, 1991) to formulate the concrete reform strategy.

… Gaidar insisted on not formulating a proper program; he wanted to present it through actions rather than in words. A list of no less than 70 planned legal acts to be adopted no later than December 15 was approved by government decree on November 19, 1991.

 

For Yeltsin. the central economic tasks were stabilization and economic freedom …Yeltsin was surprisingly vague on the actual timing of various mea­sures: …the idea of simultaneous lib­eralization and stabilization was missing. … Although both Yeltsin and Gaidar used the term shock therapy, they took a gradual approach to economic reform, with limited synchronization both in ideas and implementation. Originally, Gaidar did not even en­vision full liberalization and stabilization before Russia introduced its own independent currency, which he reckoned would require a minimum of nine months of technical preparation…. The foreign advisors urged as comprehensive a big bang as possible, including wider simultaneous price liberalization, stricter monetary policy, more liberalization of foreign trade, early uni­fication of the exchange rate, full convertibility on current account, and greater efforts to mobilize international financing.  

From the outset, Yeltsin made it clear that it was Russia, and not the CIS, that would carry out radical reform…. Russia was nevertheless prepared to cooperate closely with its neighbors acting as friendly sovereign states in the transformation…Russia intended to pursue an independent policy based on its national interests. It clarified to the other former Soviet republics what its price liberalization and tax changes would entail. Most republics adopted some (but not all) of the measures. As a goodwill gesture to them, Russia delayed its price liberalization from mid-Decem­ber 1991 until January 2, 1992.  

 

  A spurious issue was whether or not Russia would introduce its own national currency. Yeltsin discussed this at length in his reform speech and presented two options. The other republics could either accept the creation of a unified ruble zone with one central bank and a full-fledged monetary union, or Russia would introduce a new Russian currency… The options were clear. It was evident that the other republics would not accept one common central bank, which would have a Russian majority because of Russia’s dominant size. Yet the Russian leadership hesitated, and the vital issue of monetary reform was not resolved in time.

In essence, Yeltsin called for an orthodox macroeconomic stabilization program emphasizing price liberalization and strict budgetary policy. …On the expenditure side, major cuts were to be made in subsidies to enterprises, defense, and state administration, and all foreign aid would cease. In addition, price liberalization would lead to a sharp decline in price subsidies. ….
Monetary policy received much less thought and attention. …  

Gaidar was anxious to introduce a unified exchange rate and render the ruble convertible on current account. However, the complete exhaus­tion of reserves and the general disorder prompted Gaidar to delay this until July 1, 1992. Yet the basic exchange rate was allowed to float after January 1, 1992. Gaidar would have preferred to peg the exchange rate, which had facilitated macroeconomic stabilization in Poland and Czecho­slovakia, but as he explained: “We have to proceed from reality—we do not have six billion dollars for the creation of the necessary stabilization fund.”  

It is difficult to assess how great Russian hopes for Western assistance actually were. But in his first reform speech, Yeltsin made strong and extensive exhortations to international organizations and the West for help.…  

 

In his main reform speech, Yeltsin envisioned free wage formation as one aspect of economic liberty, whereas Gaidar was afraid of excessive wage increases in the state sector. Therefore, Gaidar was pripared to accept some kind of incomes policy in principle, but only if the exchange rate was first pegged, which required a stabilization fund. Gaidar then accepted the incorporation of a tax-based incomes policy of the Polish type in the shadow program instigated by the IME However, because no international financing was forthcoming, this commitment was of no consequence.  

Both Yeltsin’s speech and the overall reform strategy were surprisingly vague and inconsistent about liberalization. The concept of economic freedom was mentioned but was not elaborated on. A variety of separate elements were discussed instead. The focus was price liberalization, but it was not put into the wider context of general liberalization. Moreover, liberalization of prices under conditions of pervasive shortages would mean massive price increases across the board. After Yeltsin declared that prices would be liberalized once and for all, various interest groups chipped away at his resolve.  

 

The prime counterargument against price liberalization was the al­leged far-reaching monopolization of the Russian economy. Yeltsin ac­knowledged this peculiarity. As usual, he promised a “package of mea­sures” to fight monopolies and stimulate competition. The government was prepared accordingly to start breaking up various large concerns, and small and medium-size enterprises were soon to offer competition. Yet the lack of conceptualization was striking.  

A major shortcoming of the whole reform strategy was the failure to broach the idea of free trade. In his long speech, Yeltsin barely mentioned domestic trade and did not condemn state orders. Freedom of trade was proclaimed later, in a Presidential Decree adopted on January 29, 1992, but was not firmly set in the reform framework. Neither did Yeltsin advocate freedom of foreign trade. He only complained about corruption and excessive bureaucracy, proposing a number of half-measures, such as competitive sales of import and export licenses. But Yeltsin did not see foreign competition as a weapon against monopolies.  

 

The ideas Yeltsin presented on privatization were energetic, vague, and eclectic. He began by declaring: “For impermissibly long, we have discussed whether we need private ownership or not. In the meantime, the party-state elite has engaged in their own personal privatization. Today we have to seize the initiative, and we are intent on doing so.”  

The privatization of small and medium-size enterprises was made a prior­ity; Yeltsin hoped that half could be privatized within three months. The privatization of housing had already started and would continue. Next came the more complicated privatization of large industrial enterprises. Many would remain in state hands, but they should also be transformed into independent joint stock companies, with the shares to be divided between the state and work collectives. State-owned shares would then be sold at market prices to anyone who wanted to buy them. Finally, land reform allowing sales and purchases of land was long overdue.  

 

Yeltsin did not disguise the fact that the transition would have signifi­cant social costs, although he made no attempt to quantify them: “I have to tell you frankly: today in the severest crisis we cannot carry out reform painlessly. The first step will be most difficult. A certain decline in the standard of living will take place. . . . It will be worse for everybody for about half a year. Then, the prices will fall and the consumer market will be filled with goods. And toward the fall of 1992, as I promised before the elections, the economy will stabilize and people’s lives will gradually improve.” However, Yeltsin did not prepare his listeners for a substantial decline in GDP, which was inevitable even if hardly quantifiable. Gaidar stated that production would fall by at least 10 percent in 1992, but the government’s uncertain and defensive attitude toward the decline in pro­duction provided opponents with good ammunition for the debate  Obviously, no one could have known when the recovery would start. Yeltsin’s statement that it would begin as early as the fall of 1992 appears to have been his own opinion. Gaidar harbored a more pessimistic view and did not forsee an early upturn. Yeltsin also promised to provide a new social safety net for Russians, with targeted support for the most needy citizens.  

By 1991, before the reform had been launched, crime was already a major public concern. Yeltsin spoke at length about his worries over the rise in organized crime and corruption. 

 

Yeltsin’s idea of the capitalism that would arise was similar to that experienced in Russia during the three decades preceding the October 1917 revolution. “There should be only one limitation to profiteering: the law. Unfortunately, the law-enforcement agencies are adapting very slowly and poorly to this new crime phenomenon. That’s the typical Russian style.” Yeltsin understood that Russian capitalism would have to be messy.  

In conclusion, the emphasis was on balancing the budget and reducing subsidies through price liberalization. If international financing were granted. Russia was prepared to peg the exchange rate, make its currency convertible on current account, further liberalize foreign trade, and pos­sibly introduce an incomes policy. Four major shortcomings that became evident were lack of liberalization of both domestic and foreign trade, poor conceptualization of monetary policy, and vacillation in economic relations with other former Soviet republics. The privatization program was rudimentary but ambitious. For these reasons, the Russian reform program was less comprehensive than the reform programs of Poland and Czechoslovakia, which addressed all these shortcomings. However, unlike Russia, both countries had access to international financial support when they launched their radical reforms.

 

 

 

 

 

 

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