Liberal Reform in Russia: the Truths and Myths

Abstract

Sergey Glaziev — Counselor of the President of the Russian Federation.

There is still little consensus about how the economic reforms should have been carried out in the 1990s, even though the experience is there waiting to be analyzed and accounted for in future undertakings. The present article was written by a direct participant in these events and it provides a detailed narrative of how the related decisions were actually taken. Foreign recommendations in favor of price liberalization, privatization and open foreign trade very soon became a mainstream discourse in designing a transformation policy, although it was influenced to a greater extent by political matters rather than academic discussions. Eltsyn was aggressively persuaded to accept the radical style of these changes, which is explained by the motives of people who surrounded him. The figure most noted among them was A. Chubais, who insisted that the reform was carried out as soon as possible to avoid any risk of rollback to the Soviet system. He was determined to do so even at the cost of economic growth, economic competitiveness, and the prospects of social and economic development.

The government, however, was made up of people (such as the author himself), who were poorly aware of how real everyday life was organized in enterprises and in the national economy as a whole. And there was an insufficient scientific foundation for any kind of such change to be implemented. As a result, many decisions were taken based exclusively on their simplicity: the more straightforward, the better. Liberalization of prices was the classical case, which also illustrated how the new mechanism and, particularly, the new principles unsuccessfully overlapped with existing procedures.

Another example was the second stage of reform, i.e. privatization, when some fictional theory of ‘full voucherization’ was proposed in order to redistribute property among people through privatization vouchers. Given the low economic culture of people and the ruling establishment and the absence of corresponding legal support, this strategy brought about a devastating effect to the economy through rise and collapse of financial pyramids, galloping inflation and disintegration of industrial networks, which was further worsened by the poor quality of management and other negative phenomena. As a result, many end-use industries went bankrupt by the mid-1990s. The disruption of technological chains led to a sharp rise in transaction costs and general macroeconomic chaos.

The only industries that could survive after such economic mess were rough manufacturers and raw material industries, which managed to enter the foreign markets. The monetary policy was also quite premature and especially lacking in scientific justification. In order to estimate the possible inflation, the Central bank relied on a quite primitive equation, relating inflation directly to the money supply and completely ignoring all other factors (such as money velocity, monopolistic powers, inflation expectations, etc). And the author is convinced that the people who adopted such course and ignored the experiences known from world history either had a particular purpose or they were completely illiterate in the economic respect.

There were, of course, many necessary and useful decisions taken in the 1990s. In some aspects and areas it was even possible to manage the chaos and make realistic forecasts. However, in general, there was no single strategy of reform, and its course was rather shaped without any system and under the strong influence of political powers. This is particularly reflected in Eltsyn’s principle of appointing state cadres: today — one minister, tomorrow — another. He never really got to know them or have them introduced to him. Many members of government unceremoniously accepted bribes and influenced political decisions out of their personal commercial and political interests. The strategic failures and, particularly, the underestimation of the fact that the market transition was to a greater extent a learning process, led to a situation, where wealth was obtained through corruption and deception rather than through creative activity.

The general conclusion is that even 20 years after the reforms we have learned absolutely nothing. There is still no mechanism to make powers accountable for their decisions. But, most importantly, without proper reasoning, most conventional solutions — ‘private ownership is more efficient than state ownership’, ‘free market is better than state regulation’, ‘controlling money supply is a way of fighting inflation’ — may easily lead to tragic consequences in a complex social and economic organism. A national economy is a complex system of many non-linear relations which cannot be managed with primitive instruments without considering all possible interactions. There is still room for optimism, but we have to start analyzing our experience and think of a way to make powers accountable for decisions they take.