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Books by Grigory Yavlinsky
Economics and Politics in Russia
The Center for Economic and Political Research (EPIcenter)
Nizhni Novgorod-Moscow, 1992
CHAPTER 2. The New Policies of the Administration.

2.1 The Course of Economic Policy

Mistakes in the realization of economic policies or in the strategy?

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Supporters of "shock" therapy usually attribute the inefficiencies in the realization of these reformulation methods to improper execution, stating that had the fiscal and monetary policies been stricter, then the liberalization of economic activity would have been that much quicker. Reform activities of the Russian administration have, to this point, been mainly to correct the chosen strategy of political priorities of liberalization and fiscal stabilization.

One might pose the question, however, of whether it is worth persisting with the chosen strategy and whether the results of such a policy will turn out to be the best for Russia. Or might there exist here some conditions which separate Russia from the slate of other post-socialist countries, and might it be worth considering other paths?

1. Institutional conditions of reform. That Russia lacked even a small market sector during the entire time of Russia's administrative economy (70 years -- three generations) points especially to the question of whether there exists the possibility of the population and enterprises reacting in unforeseen and contrary ways to the macroeconomic reform policies chosen by the administration. (For example, traditionally in the West, a recession brings along with it bankruptcy and unemployment. In Russia's economy, however, there is no sign of such an occurrence, despite the fact that the officially recognized recession has lasted since the end of 1989, and the government has, since 1992, drastically cut its support for enterprises.)

Without a doubt, the rejection of communist ideology did not automatically erase the psychological, ethical and other

barriers to the acceptance of a market ideology and the formulation of a market reaction to corresponding stimuli. Moreover, during the unsuccessful institutional reforms, these barriers sometimes receive fully materialistic reinforcements; hence, the stereotypes formed regarding collective property in government enterprises will long hinder the economic reinvigoration of Russia.

The "socialist" transformation in Russia's economy extended in many different directions. It is therefore extremely difficult to shrink government spending under such conditions as virtually complete central budget financing of medicine and education. It is just as difficult to attempt to create a labor market when apartments are still state - 48 -

property and while "free movement of labor" in the country is still impeded by various factors. To liberalize prices in the current conditions of a government monopoly structure is also awkward, as is the attempt to give economic freedom to state enterprises under a highly unclear set of property rights and relationships. There exists an array of further examples.

2. The depth of the structural deformation. There is no doubt that the economy of Russia faces far greater structural deformation than the economies of Eastern European countries. The reason for this is linked to 1) the formation of a socialist economy during the interwar period, with the Soviet Union finding itself in hostile surroundings, 2) the high costs of holding the status of a nuclear and aerospace superpower, 3) the traditionally closed nature of the the Soviet economy, and so on. Upon undertaking a "shock" policy of developmental reform, the former Soviet economy faces far sharper changes in the structure of final demand than do the economies of Eastern Europe. And if now new forms of existence are spontaneously found by enterprises (e.g., the expansion of interindustry debt), then those forms indicate an inclination to hold on to old structures, and not a shift toward new ones. In this

sense, no one can be satisfied -- neither reformers nor enterprises. Until now there has not yet been even one sufficiently clearly expressed positive development in the policy structure (In Poland, while still in the first months of reform, the question of the export sector was but parenthetical, while in Russia exports have fallen by over one third in the first eight months of 1992).

3. There exist a range of political factors connected with the transformation of governmental affairs in Russia which highly complicate the economic transformation: an undefined zone of rouble circulation, unclear customs borders, unregulated interrepublican trade, conflicts with an array of regions inside Russia, and so on. Reservations regarding the unconditional choice of tight fiscal and monetary policy priorities not only occur regarding the unique features of Russia's economy; there also are a number of theoretical objections to such a policy choice. They are for the most part connected with the idea that rules of the free market do not come into play in just any situation, but only in a market "environment" comprised of free and rational leaders of industry (the "economic man" concept). For the creation of a market economy, a certain critical mass of institutional conditions must be achieved. The instantaneous switch of a post-socialist economy to market conditions is likely long to hinder necessary institutional transformations, usher in a highly deformed market structure and throw the economy into a long period of economic stagnation. Moreover, when the very instruments used to execute such a policy break upon contact with their patient (as happened when a strict credit policy was found to be powerless against the avalanche of interindustry - 49 -

debt), one must wonder about the expediency of continuing former strategies, and the efficiency of using former instruments of economic regulation. Under changing structure of final demand, there is a consequent need for rebuilding of the whole economy. One

needs time and long-term investment for such a "perestroika." Otherwise, there exists only one outcome in this policy -- the cessation of activity in whole sectors of the economy and a structural equilibrium point at an extremely low level which cannot satisfy the demands of the population even in those goods which previously were considered to be first priorities. In addition, the policy will result in massive unemployment. In that sense, instantaneous structural reform policies are unacceptable. And if such a result has not yet happened in Russia, then this does not prove that applying shock methods of structural reform is possible, but only shows the lack of success in the application of those methods and a disregard for the macroeconomic financial limits upon enterprises and for the means by which they compensate for these limits (i.e., an increase in interindustry debt). Perhaps the very breakdown of this perestroika has created an acceptable shock therapy in Russia, despite the fact that the population is willing to wait out its inherent consequences -- a fall in the standard of living.

Inflation in the Russian economy is not a question of austere economic policy (although such a policy can and must be used to slow down price rises). Inflation here has profound institutional and structural roots. The task of surmounting inflation is not a short-term task of fiscal policy, but a long-term problem in the systematic transformation of the economy. The greatest problem of the unsuccessful reforms of 1992 is not insufficient resolve on the part of the country's administration to take the only possible path, but the incorrect choice of that path -- the very strategy of economic reform itself.

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