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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

New Strategy

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A new strategy for the reformation of Russia's post- socialist economy might be built upon the following principles. It is necessary to reject an orientation toward short-term success in economic policy ("shock" methods of fiscal and monetary policy, "voucherization" as means of institutional transformation, etc). Success is possible only given a long interval of time. Economic policies must be oriented toward the achievement of long-term goals. The priority in this transformation must be devoted to those systemic changes in the economy which, in the future, will provide the possibility of economic recovery. This is especially important if one considers that systemic changes are, as a rule, irreversible. The greatest demand upon fiscal and monetary policy is not to disrupt the systemic transformations, but, as much as possible, to stimulate them. There must be found a way to conduct fiscal and monetary policy so as not to interfere, even in conditions of high inflation, with the pursuit of business activity and investment. The most important feature

of such fiscal and monetary policies is predictability. One must stop the practice of arbitrarily changing the rules of economic activity such as in the spheres of taxes, credit distribution, the parameters of foreign economic activities, etc. The public's panicky inflationary expectations must be replaced by rational ones. That with which the developed market economies struggle might become a guarantee for stability in our economy. In order to do that it is necessary to create in the economy a "nominal anchor," following the dynamic of which industry and the public would be able to predict rationally the dynamics of the macroeconomy as a whole and thereby plan their business and investment actions. However, the stabilization of the current exchange rate level is not possible; this is a long-term task. One might create a unique "floating nominal anchor," deciding on a standard change in the single commercial rate of the rouble depending upon a percent or absolute equation. Using a percentage equation this assignment would be continuous. An absolute equation would yield a continually declining rate of inflation. It is clear that an unconditional commitment by the government to carry out this floating rate is necessary. Upon that commitment must be built the entire macroeconomic policy. A back-stop fund of hard currency reserves might act as a shock absorber. Such a fund could be created by Russia's own reserves or by borrowed funds in the amount of, say, three months worth of imports. The shrinkage or growth of such a fund would be a signal to tighten or loosen fiscal or monetary policies.

If we accept the impossibility of a sharp reduction in the rate of inflation, we must then take the next best step -- minimize the loss due to inflation. In order to minimize the redistribution of financial resources, which is tied to rising prices, it is necessary to create a mechanism of wage indexation and a range of other indicators. Presently there are newly formed economic policy pressure groups from the

side of industrial enterprises, agriculture and other social and economic spheres. This provides the possibility of creating a "social peace pact against disorder," which would guarantee the confidence and backing of manufacturers, agriculturalists and different pressure groups in the execution of several measures; the indexation of state budget expenses (including wage indexation for workers in state budget funded organizations), indexation of income tax, of the interest rate charged for credit by the Central Bank of Russia and of taxes on the increases in the average wage rate, etc. Indexation would have to be tied to the dynamic of the rouble's exchange rate.

In this manner one achieves a logical noncontradictory mechanism of macroeconomic control. Elements of such a mechanism are well known and have already been used in part during 1992. They have been used in different combinations in several other countries (e.g., a standardized mechanism for the Mexican exchange rate during the late 1980s, Japan's system of fine-tuning its macroeconomic regulation in its support of the yen from the 1950s to the 1970s, etc). At the same time the individual composition of the reform must not take a standard form, invariable with its change of venue. The mechanism used must be unique to each country, especially for a country as unique as Russia.

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