2.1 The Course of Economic Policy
Short-term
perspectives
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The coming winter will be much more difficult
than last;
insufficient electric power (above all, in the Northern
Caucasus and the region east of Lake Baikal), fluctuating
prices of oil and petroleum products, the growing danger
of
failure of cities' heating systems, the intensification
of
feed shortages in the majority of regions, and potential
irregularities in the country's food supply all point to
this conclusion.
Enterprises, having exhausted their reserves
and fulfilled
government orders, are simply closing their production lines
and discharging workers; there is no further production,
no
raw materials, no assembly, and no money with which to refit
the factories. From the spring of 1993, massive unemployment
will be an element in our lives. Women and individuals with
higher education have already come into contact with this
phenomenon; the next group on the street will be skilled
workers.
The directors of large enterprises, disorientated
by the
contradictory steps taken by the administration of Russia,
by the campaign to turn enterprises into joint-stock
companies, by the voucherization scheme, by the belated
re-
appraisal of funds and the games played over centralized
credits, are increasing their pressure on the administration
to "dislodge" various benefits. The tactic of
burying the
rising cost of production inputs in the cost of output is
continuing. Each enterprise director will try to preserve
jobs as long as possible, but there is the possibility of
many limitations. The fall in production and in imports
is
continuing, and investment in manufacturing is approaching
a
minimum. Housing construction is faltering.
Without goods and without profit, there
can be no taxes. The republic's budget, the outlays of which
today alreadyexceed receipts by a
third, can only finance further spending via monetary emission.
The result is the distribution of new government credits.
Today there does not exist the political willpower to liquidate
hundreds of enterprises. Already in autumn, the grinding
cog-wheel of inflation will continue to turn: A rise in
the price of oil and gas followed by the resulting increase
in the cost of feed and foodstuffs. An increase in income
level followed by a new increment to the cost of consumer
perishables. Government credits for the replenishment of
enterprises' resources followed by a rise in the level of
interindustry defaults. The overestimation of government
enterprises' capital resources followed by the rise in the
general price level. The monthly level of inflation, brought
down to 10 or 15 percent in the summer, will increase three
to four times.
The drastic increase in the population's
income, the removal
of indebtedness of wage payments, the substantial increase
in minimum pensions and minimum wages, and the "income
spiral" in many branches of the economy all have the
end
result of increasing the demand for consumer goods, above
all for inexpensive food products -- bread, pasta, cereals,
and vegetables. The supply continues to get smaller.
Consequently, the consumer market in the fall through the
spring will witness the further intensification of food
shortages. There will be a reduction in food inventories,
bursts in demand will become more frequent, and once again
several types of goods will disappear from the shelves.
Attempts by the administration to regulate the different
markets by the simple imposition of prices will only worsen
the shortages. A paradoxical situation will follow, in which
a shortage of goods occurs in conditions of "unrestricted"
and ever increasing prices.
The weekly increase in prices will lead
to more inflationary expectations. People will try to insure
themselves against the ever devaluating rouble. If a significant
increase in the interest rate on personal savings accounts
is not made, then the flow of funds from such accounts will
continue. Institutions in charge of pension funds, finding
themselves unprepared for the speedy increase in minimum
pension payments and seeing their resources depreciate throughout
the year, will not be able to provide the ever-rising pension
and benefit payments. Hence, the gradual destruction of
the government system of social services, free medical care
and education continues.
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A declaration regarding medical insurance
has yet to spell out its methodology and its organizational
structure. More important, however, is the fact that no
sources of finance exist; the budget is empty, and people
are either psychologically not prepared or, more likely,
simply not willing to pay for medical care. In this area,
also, one finds an apparent paradox: A significant reduction
in the number of physicians due to the lack of demand during
drastic worsening of traditional health level indicators.
What is left for "normal" people
to do? The "naturalization"
of daily life: Barter, gardening, relatives in the
countryside. Theft is sharply increasing -- in industry
as
well as in apartments. Worries about personal safety have
become the number one concern for individuals. A massive
reverse migration has begun -- from the cities to the
countryside, to relatives, to the earth, to work. Some
search for happiness abroad.
Local administrations, upon whom lies the
responsibility for
local welfare provisions, will soon no longer be able to
count upon help from Moscow, inasmuch as the capital is
losing control of the country's resources. In their attempts
to minimize their contact with "higher authorities,"
local
governments are beginning to take local measures: Creating
inventories of grain, heating products and foodstuffs.
Financial resources are needed for these actions. Below
we
list how such authorities are fighting for their piece of
an
ever-shrinking "pie:"
-- Non-payment of tax receipts to the republican
budget.
-- Barter agreements in external and inter-regional
deals and refusal to sell hard-currency earnings.
-- Autonomous exploitation and extraction of resources
and the direct search for foreign partners and potential
investors.
-- Attempts to use the national banks in the Russian
Federation and the regional banks of the Central Bank of
Russia for supplementary credits.
-- As cash shortages intensify, the utilization of money
substitutes.
At the regional level, structures that successfully
satisfy
the above functions are formed quickly. Many controls over
the distribution of resources are leaving Moscow and are
now
found in the hands of a quickly growing regional elite.
And
quickly a large difference in the conditions of different
regions is becoming apparent; some of them are facing
serious insufficiencies in resources. In the "natural"
differentiation of regions, the federal administration is
making highly erratic allocations of taxes and other
benefits to those constituent member republics of the
Russian Federation and oblasts (regions) with a well
organized working class (e.g., Vorkuta, Kemerovo). The
average salary paid to workers of the same field living
in
two neighboring oblasts already frequently differs by 2-3
times. This situation may generate inter-regional conflicts
and makes a consistent economic policy impossible.
Republican powers can, in the short term,
do very little to
counteract the decentralization in the management of
economics as much because of an insufficient appraisal of
the problem as because of the fierce battles within organs
of power.
The economy will shrink before our eyes;
the flow of people from the north and from some regions
in the far east will increase. Economic life in these regions
will die out.
Likewise large scientific centers will die
out in the
absence of financing. An obvious loss in Russia's
international standing will likely result. This general
economic recession will continue throughout the whole of
1993.
At the same time, one can hardly expect
a sharp decline in
imports from CIS states. Besides the other former member
states of the Soviet Union, there are as yet no alternative
markets for these new republics. The West will most likely
continue to provide credits and humanitarian aid for
critical imports to Russia through international financial
organizations. But it is senseless to make a serious
financial policy from within a changing Russian economy
under the present circumstances.
In the autumn and winter,
the inflationary potential will grow:
1. Price of this year's harvest. Given the
established
purchase price of grain and other agricultural goods, the
cost of production is sharply increasing. This will demand
a compensatory increase in incomes.
2. Energy prices. The newly established prices on grain
do
not correspond to the relative costs of energy. Already
the
state of oil extraction calls for significant increases
in
budgetary expenditures or a steady increase in the energy
prices. After the immediate price rise in September, oil
extraction enterprises significantly exceeded, by two or
three times, the suggested price "ceiling" of
5.2 thousand
roubles per ton. The uncontrolled price increase for oil
and
petroleum products is a powerful inflationary force.
3. Default crisis. Already the government credits used to
replenish enterprise capital stocks are having an
inflationary effect. The provision of credit for near
completed stages of interindustry debt arrears
requires a substantial expansion of credit, which will first
make a splash in the price of producer goods, and then ripple
out to consumer prices. 4. Re-estimation of capital funds
(indexation). The results of such a process are a jump in
amortized deductions, which brings with it, on one hand,
a production cost push on prices and, on the other, a decrease
in the profits of the enterprises and thereby a decrease
in profit taxes for the government. The positive result,
an increase in capitalization via deductions to amortization,
may, to a large extent, be "eaten up" by the consequential
effect on inflation growth.
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Practically all of the above was contained
in the logic of the course of events in the form that it
took over the last few years, especially in 1992. The replacement
of various officials in the Russian government, which has
been taking place since the spring, and judging from everything
will continue through the autumn and the beginning of winter,
considering the proposed programmes of the candidates for
the key posts, will not result in any positive progress.
The economic policy of this past year has
created a
significant potential for a social backlash. The possibility
exists for a restoration of the vertical system of
government management of the economy and a return to the
usual methods of running enterprises. One could expect the
freezing of prices and wages, the increasing of government
investment and credits to government enterprises, and a
rebirth of the sectoral approach to economics. But such
an
attempt to recreate an administrative approach to social
and
economic management would be absolutely barren and would
even hasten the process of disintegration.
Therefore, by the middle of 1993:
Republican budget: Receipts will be no more
than half of
outlays, this deficit being funded virtually entirely by
monetary emission. VAT will be virtually impossible to
collect. Either a massive refusal by government enterprises
to pay taxes or the distribution of special privileges from
the government to those bodies.
Local budgets: Ninety percent of local expenses will go
to
social and cultural measures; The financing of city
transport systems and housing services is an insoluble
problem unless alternative forms of financing are found
soon. Refusal to pay republican taxes in
one form or
another. The possibility of disintegration in Russia's
financial system.
Credit: An exponential increase in size. Practically all
credits will go toward wage payments. Bank support for
centralized credits. An ideal environment for large-scale
financial speculation, and the possibility of bankruptcy
in
several large joint-stock ventures. Attempts by regions
to
create their own credit emission systems.
Export and Hard Currency Receipts: A further decrease by
20-
30%. A large portion of hard currency earned will remain
abroad. Multiple exchange rates and trading and cash
exchange rates will fall by several factors.
Production: Curtailment of high-technology production, a
sharp decrease in assortment of goods, continuation of
price imbalances and small land-holdings in place of former
collective farms. Insufficiencies in cattle feed, and mass
slaughter of livestock in winter and spring. Worsening
conditions for the growth of production, including on
personal subsidiary land-holdings and large-scale
agriculture.
The federal authorities do not possess the necessary rights,
economic levers or political influence for the development
and execution of economic policies similar to the
traditional "centralized" system. Russia, in the
autumn and
winter of 1992, will be far closer to hyperinflation then
it
was in the fall - winter of 1991, before reforms began.
We have attempted to present only a few
examples of the economic dynamics of the near future, as
it appears in December 1992. The situation will continue
to worsen in practically all parameters, but no catastrophes
will occur. Despite the continuing recession, massive unemployment
and bankruptcies can be avoided. Despite
the long drop in the standard of living, no social groups
are starving, and so on. Life goes on and the economy continues
to function, even in conditions of hyperinflation.
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