Russia's Economic Transformation in the 1990s Edited by Anders Aslund ,_ - P INTER London and Washington PINTER A Cassell Imprint Wellington House, 124 Strand, London WC2R OBB, England PO Box 605, Herndon, Virginia 20172, USA First publis]ted 1997 ©Anders Aslund and the contributors 1997 Apart from any fair dealing for the purposes of research or private study or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may not be reproduced, stored or transmitted, in any form or by any means or process, without the prior permission in writing of the copyright holders or their agents Except for reproduction in accordance with the terms of licences issued by the Copyright Licensing Agency, photocopying of whole or part of this publication without the prior written permission of the copyright holders or their agents in single or multiple copies whether for gain or not is illegal and expressly forbidden Please direct all enquiries concerning copyright to the publishers British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN 85567 461 (Hardback) 85567 462 (Paperback) Library of Congress Cataloging-in-Publication Data Ru~sia's economic transformation in the 1990s/edited by Anders Aslund p em Selection of papers presented at four conferences held in June each year from 1991 till 1994 in Stockholm, at the Institute of East European Economics, Stockholm School of Economics Includes bibliographical references and index ISBN 1-85567-461-0.- ISBN 1-85567-462-9 (pbk.) Russia (Federation)-Economic conditions-1991- Russia (Federation)-Economic policy-1991- I Aslund, Anders, 1946HC340 12.R878 1997 338.947'09'049-dc21 97-19559 CIP Typeset by BookEns Ltd Royston, Herts Printed and bound in Great Britain by Bookcraft (Bath) Ltd Contents List of Figures List of Tables v vi Introduction I Anders As lund Part I Part II Preconditions I A Critiqpe of Soviet Reform Plans Anders As lund Economic Reform in Russia: Social, Political, and Institutional Aspects Sergei A Vasiliev II 25 Liberalization and Privatization The First Half-Year of Russian Transformation 4I Marek Dabrowski Problems in Foreign Trade Regulation in the Russian Economic Reform 56 Petr Aven Main Issues of Privatization in Russia 68 Anatoly Chubais and Maria Vishnevskaya Part III Macro-economic Stabilization Remaining Steps to a Market-Based Monetary System in Russia 79 jeffrey Sachs and David Lipton Farewell, Rouble Zone IOI Brigitte Granville Macro-economic Policy and Stabilization in Russia II9 Boris G Fedorov Why Russia Has Failed to Stabilize jeffrey D Sachs iii I27 iv Part IV CONTENTS Social Evaluation 10 The Conditions of Life Andrei Illarionov, Richard Layard and Peter Orszag 11 Labour Market Adjustment: The Russian Way Richard Layard and Andrea Richter Epilogu~ 13 159 182 Anders Aslund Index 191 List of Figures Figure 10.1 The relative price of food (CPI for foodstuffs/CPI for non-foodstuffs, Dec 1990 = 1) Figure 11.1 Two routes for reallocating labour Figure 11.2 Labour force flows, as per cent of labour force, 1993 Figure 11.3 Percentage of industrial firms expanding over the previous month Figure 11.4 The real average wage v List of Tables Table 2.1 Table 2.2 Table Table Table Table 3.1 3.2 6.1 7.1 Table 7.2 Table 7.3 Table 7.4 Table 10.1 Table 10.2 Table Table Table Table Table 10.3 10.4 10.5 10.6 10.7 Table 10.8 Table 10.9 Table 10.10 Table 10.11 Table 10.12 Table 10.13 Table 10.14 Table 10.15 Table 10.16 Attitudes to the free prices, 1991-1992 Attitude towards price liberalization in St Petersburg, 1991-1992 Base money December 1991-April·1992 Short-term credits of commercial banks Example of arrears Financing of resource flows from Russia to other states of the former Soviet Union Financing of other states by the Central Bank of Russia, 1992 Trade between Russia and the FRSs, 1993 (bn roubles) Monetary systems in FRSs: the situation in November 1993 Indices of real income, consumers' expenditure, wages · and pensions (1991 = 100) Indices of real consumers' expenditure: measured vs survey data (1991 = 100) Expenditure shares Indices of real expenditure (1991 = 100) Consumption of food and food products (kg per person) Purchases of non-food commodities (per person) Income inequality (individual data, monthly per capita income) Distribution of per capita consumption of meat (kg per month) Income inequality in the United Kingdom and Russia (individual data, monthly per capita income) Minimum subsistence level per person, 1992 (R/month) Percentage of individuals living below the poverty level Wages inequality across manufacturing industries, 1991 and 1992 Wages differentials across branches (as a proportion of the average wage) Wages, incomes and pensions Child benefits in April 1993 The minimum wage vi LIST OF TABLES Table 10.17 Regional income differences: nominal income per capita (as percentage of capita) Table 10.18 Regional income differences: food price index (as percentage of average) Table 10.19 Regional income differences: real per capita income (money income/food price index) as percentage of average) Table 10.20 Changes in income, food prices and real income, january 1992-March 1993 Oan 1992 = 1.0) Table 10.21 Out of employment by region, February 1993 Table 10.22 Real measured consumers' expenditure and retail sales (1985 = 100) Table 10.23 Educational levels of the registered unemployed vii 12 R u s '· '· · -~- Kazakhstan ·-· ·\ , Iran c Russia and its Neighbouring Countries h s Mongolia K identifies the Kalingrad Region which is part of (but physically separated from) Russia, and N likewise Nakhichevan which is part of Azerbaijan The twelve countries identified by numbers are: Estonia; Latvia; Lithuania; Moldova; Georgia; Armenia; Azerbaijan; Tajikistan; Kyrgyzstan; 10 Czech Republic; 11 Slovakia; 12 Hungary EPILOGUE 185 market price - exported them on their own account and took the difference for themselves Imports of essential foods were subsidized by 99 per cent in 1992 Altogether, these three forms of rents that went to the rich a:qd wellconnected amounted to no less than 75 per cent of GDP in 1992 (Aslund, 1996) The voucher privatization is usually blamed for excessive enrichment by managers, but by comparison it offered managers a tiny flow of resources In the spring of 1996, the total market capitalization of the 200 most important Russian companies was about per cent of GDP (Russian Economic Trends, vol 5, no 2, p 114) The rest of the about 16,000 voucher-privatized large and medium-sized enterprises cannot have been worth more than an additional third Thus, the total value of the voucher-privatized enterprises, including Gazprom and all the oil companies, was only about per cent of GDP Of those shares, managers held about 20 per cent according to World Bank surveys Hence, by 1996 the managers had received less than per cent of GDP from voucher privatization, and that is a total amount, while the financial flows detailed above are given only for the peak year 1992 Capitalism is undoubtedly about enrichment, and nobody could have expected the transition to be just, so these are not our concerns The prime problem is rather that rent-seeking encouraged managers to continue living off the state instead of restructuring their enterprises A rent-seeker does not care about output or enterprises profits, as they tend to be irrelevant to his rent Therefore, it is not surprising that output fell so sharply as long as rentseeking through inflationary means remained the preoccupation of managers Privatization, on the contrary, is by definition a transfer of a finite resource - an enterprise After that enterprise has been transferred to new owners, they have a palpable incentive to restructure the enterprise and boost its profits and value This should result in a return to economic growth in due time The numbers above run counter to the current myth that the voucher privatization made Russian managers rich The cause of this pervasive myth appears to be that the voucher privatization was a comparatively open and transparent process, and people tend to exaggerate the value of smoke-stacks and understate the value of invisible financial flows The problem in Russia was not the early privatization, but the limited liberalization and late stabilization, which caused a prolonged decline in output and the standard of living as well as an extraordinary enrichment of the rent-seekers Could the Reforms Have Been More Successful? With the advantage of hindsight, it is obvious how the economic policy should have been amended Essentially, four measures were needeci to eliminate these forms of rent An early deregulation of exports and the freeing of domestic prices of export goods (primarily, oil, gas, metals, chemicals and timber) would have led to the instant elimination of export rents A unification of the exchange rate would have led to the immediate abolition of import rents An early introduction of positive real interest rates would have 186 ANDERS AsLUND annulled the subsidization of credits, which would also have helped sorting out the problems with the rouble zone These were four simple measures that could have been imposed with the stroke of the pen by the government and the Central Bank Technically and economically, they harboured no mysteries, and the radical reformers in the Russian government aspired to undertake these very measures But was it politically possible to undertake them? It would have been, if the West had been prepared to support the Russian transformation with a standard IMF programme in early 1992 Most of the standard ingredients of a successful economic reform were in place First, Russia had a strong popularly elected political leader in President Yeltsin, who supported radical reform Second, he had appointed a very competent reform team under Yegor Gaidar Third, in his big speech to Parliament on 28 October 1991, President Yeltsin had presented a comprehensive radical reform programme Fourth, the later so troublesome Russian Parliament had approved this reform speech and extraordinary powers for the President with overwhelming majority The important element that was missing was international financial support provided on IMF conditionality The West did offer commodity credits, but they went straight to the rent-seeking food importers and were positively harmful, as they led to the maintenance of import subsidies If a standard IMF programme with ordinary financing had been offered, it would have been possible for Yegor Gaidar to undertake all the four measures suggested above from the beginning of january 1992 It was no real problem that Russia was not ·a member of the IMF as yet A shadow programme with bilateral financing could have been arranged, if the West has shown the political will When the IMF finally acted in early 1995 and concluded an ordinary stand-by agreement with Russia with a financing of about $6.8 billion, Russia's finances did stabilize This could have been done in early 1992, and the problem was that the West did not believe in Russia, President Yeltsin or Yegor Gaidar This is the line jeffrey Sachs argued so forcefully in late 1991 and he repeats it in his chapter in this volume All the solutions presented here pertain to radical reform or what its adversaries prefer to call 'shock therapy' However, a broad range of people argue that the problem with Russia is that the radical reformers went too fast What they concretely suggest is usually: that prices should have been liberalized even more slowly; that the budget deficit should have been even larger; that Russia should have been more protectionist; that privatization should have been slower- or at least different From today's perspective, it is easy to evaluate these proposals by posing the question: would such measures have increased or decreased rent-seeking? A slower price deregulation or foreign trade liberalization would have caused even larger import and export rents A slower fiscal adjustment would have provided more subsidies to the rent-seekers In addition, it would have caused higher inflation, which would have brought about an even greater fall EPILOGUE 187 in output and consumption A slower privatization would have further delayed enterprise restructuring and thus the recovery of output The gradualists should face up to reality and acknowledge that their proposals would have led to negative consequences in all regards Tellingly, their programme was heralded by the rent-seekers The relevant criticism of the Russian reform program is provided by Marek Dabrowski in his chapter in this volume A bizarre gradualist illusion is that the post-Communist state in transition should give additional state resources to the poor The underlying assumption was that the state was good and strong All evidence from the · former Soviet Union shows, on the contrary, that the state was extremely corrupt and weak Consequendy, it gave as much as possible to the rich and privileged but litde to the poor and suffering The way of improving the fate of the poor was not to let the state divert more resources but less In short, the issue was to minimize the state so that it did not harm society Any discretionary state action of such a weak state was likely to help the wrong people Russia's Place in an International Comparison There is a tradition both among Russians and foreign specialists on Russia to treat the country as an incomprehensible mystery that cannot be understood by any laws of social science One favourite quote of the proponents that Russia is exceptional is the nineteenth-century Russian poet Fedor Tiutchev's line: 'You cannot understand Russia with your intellect' Another is Winston Churchill's words: 'Russia is a riddle wrapped in a mystery inside an enigma.' However, a nice quote or two are no good substitutes for hard analysis Today, there is ample evidence from 27 other countries that formerly belonged to the Soviet bloc Their experiences are well studied, and the lessons from post-Communist transformation are striking There is a strong positive correlation between all important reform measures: liberalization, financial stabilization, privatization, private enterprise development and institutional development The idea that there is choice between doing one radical measure or another is simply wrong There is no trade-off but, on the contrary, complementarity Moreover, the more radical a reform has been in these terms, the smaller the fall in total output, the earlier the rise in output, the smaller the decline in standard of living, and the more even the income distribution Only the rentseekers benefit from slow reform, while there are definitely no socially beneficial effects arising We can be more specific and compare Russia with the most similar country, namely Ukraine In 1990, Ukraine's GDP per capita was officially 10 per cent per capita higher than Russia's, but today the Ukrainian average dollar wage is about half of the Russian wage measured in dollars, and it is evident to the bare eye that Ukraine is far worse off economically The explanation is obvious For almost three years, Ukraine did all those things 188 ANDERS AsLUND the gradualists require As a result, Ukraine ended up as an unmitigated economic disaster - far worse than Russia by all economic standards In 1993, its inflation was 10,155 per cent compared to 840 per cent in Russia, and its output continues to fall more than Russia's It would be hard to find a cultural explanation why the more Western Ukraine should be more backward than Russia The reason plainly lies in economic policy, which is determined by a few and can be implemented by few top policy-makers Therefore, there is a great deal of choice The government and its economic policy matter Admittedly, the former Soviet Union has done collectively far worse than East-Central Europe Much of this can be explained With the harmful persistence of the rouble zone, as discussed by Jeffrey Sachs and David Lipton as well as Brigitte Granville However, there are no doubt additional reasons, notably that the elite has been so much less constrained in the former Soviet Union than in East-Central Europe Thus, it could indulge all the more in rent-seeking The environment of economic policy matters a great deal, as Sergei Vasiliev has ·discussed in this volume The conclusion, however, is hardly that the government should be less energetic in its reform efforts Petr Aven's chapter provides a nice illustration On the one hand, the government is more likely not to succeed in undertaking a very radical policy On the other hand, it is all the more necessary, and eventually Russia will have to go further towards reducing the role of the state than East-Central Europe for the simple reason that the state functions so much worse in Russia Who wants corrupt officials to reallocate your money and limit your freedom of action? Where Is Russia Going? Today, Russia has become a market economy, with dominant private ownership, though it is a rather distorted market economy A widespread opinion is that it is impossible to big business in Russia without having senior government officials as some kind of partners Income differentials are as great as in Latin America In fact, Russia is most reminiscent of Latin American crony capitalism most pronounced in the 1970s at the height of world leftism The state is exploited by the privileged to their own benefit and it is enhancing - not reducing - inequality in society Fortunately, this state of affairs can hardly last in Russia The government collects ever less taxes, so it can no longer afford to pamper the elites as much as before Furthermore, Russia has not yet returned to growth, and it might not before the arbitrary tax system and the excessive regulations are amended At the same time, Russians have learned market economics the hard way, and no longer accept unabated rent-seeking The 'Washington consensus' on the essence of a sound market economy is steadily winning ground in the minds of the Russians The basic rules of a market economy have been established and block much of the rent-seeking The new capitalists and the regional pressure groups are ambiguous forces, but they basically favour decentralization and more freedom from the federal state EPILOGUE 189 Thus, there are many factors that suggest that Russia will be compelled to move as the Latin American countries in the direction of a much more liberal state and economy, but it is not obvious.how fast that will happen There has been much talk in Russia about a German, Swedish, or East Asian model, but it can be dismissed All those states have well-functioning governments, while the Russian administration functions like a corrupt Latin American government Characteristically, the East Asian model is primarily advocated· by red directors who want to avoid democracy and competition West European models are suggested by them as well, but also by social democrats and people who refuse to understand the limitations of the capacity of the Russian state Russia's real choice is between a Latin American model of the 1970s or today What Happened to the Russian Reformers? The reform ministers were ousted one by one In May 1992, the first one fell -Vladimir Lopukhin, who had antagonized the mighty energy lobby, headed then as now by Viktor Chernomyrdin In December 1992, Yegor Gaidar, Petr Aven and Minister of Economy Andrei Nechaev were ousted under pressure from the Parliament The entry of Boris Fedorov as Minister of Finance salvaged much of the reformist energy in the government, but by january 1994 he felt compe~led to resign, as did Gaidar after a brief return Other original reform ministers have abandoned or moderated their cause Since then, Russia's reform efforts have been painfully concentrated in one manAnatoly Chubais He has accomplished a great deal He designed and implemented Russia's mass privatization, and he carried out the financial stabilization that eventually succeeded in 1995 and 1996 But one man cannot everything What happened to the reformers? Chubais and his followers, such as Maxim Boycko and Sergei Vasiliev, and a few others remain in government Initially, many reformers became politicians, notably Yegor Gaidar and Boris Fedorov However, their success in politics ·has been rather limited, and gradually many leave politics Several of our reformers have become important bankers or investment bankers: Petr Aven, Andrei Nechaev, Vladimir Lopukhin, Andrei Kazmin and Boris Fedorov A few stay in academia- Yegor Gaidar, Andrei Illarionov and Aleksei Ulyukaev Nobody is really suffering Most of the Western collaborators have continued working on Russian affairs, and several have produced substantial books on the Russian transformation Notes Aslund et al., (1996); World Bank (1996); Banarjee et al., (1995); Citrin and Lahiri · (1995); EBRD (1994, 1995, 1996) Apart from the four conference volumes, I would mention Aslund (1995); Boycko, Shleifer and Vishny (1995); Granville (1995); Layard and Parker (1996) The 190 ANDERS ASLUND article by Lipton and Sachs (1992) should also be noticed Richard Layard has led the publication of Russian Economic Trends, which is a quarterly publication with the best current economic statistics and analysis It has been published for the last five years References ~.slund, A (1995) How Russia Became a Market Economy, Brookings, Washington, DC Aslund, A (1996) 'Reform Vs "Rent-Seeking" in Russia's Economic Transformation', • Transition, 26 January, pp 12-16 Aslund, A., Boone, P and Johnson, S (1996) 'How to Stabilize: Lessons from PostCommunist Countries', Brookings Papers on Economic Activity, vol 26, no 1, pp 217-313 Aslund, A and Dmitriev, M (eds) (1996) Sotsialnaya politika v period perekhoda k rynku: problemy i resheniya (Social Policy in the Transition to a Market Economy: Problems and Solutions), Carnegie Endowment for International Peace, Moscow Banarjee, B., Koen, V., Krueger, T., Lutz, M.S., Marrese, M and Saavalainen, T.O (1995) Road Maps of the Transition: The Baltics, the Czech Republic, Hungary, and Russia, IMF, Occasional Paper No 127, Washington, DC Boycko, M., Shleifer, M and Vishny, R (1995) Privatizing Russia, MIT Press, Cambridge, Mass Citrin, D.A., and Lahiri, A.K (eds) (1995) Policy Experiences and Issues in the Baltics, Russia, and Other Countries of the Former Soviet Union, IMF, Occasional Paper No 133, Washington, DC European Bank for Reconstruction and Development (EBRD) (1994) Transition Report, EBRD, London, October European Bank for Reconstruction and Development (EBRD) (1995) Transition Report 1995, EBRD, London European Bank for Reconstruction and Development (EBRD) (1996) Transition Report 1996, EBRD, London Fischer, S., Sahay, R and Vegh, C.A (1996) 'Stabilization and Growth in Transition Economies: The Early Experience', IMF Working Paper, mimeo, Washington, DC, March Government of the Russian Federation (1992-1996) Russian Economic Trends, Whurr Publishers, London Granville, B (1995) The Success of Russian Economic Reforms, The Royal Institute of International Affairs, London Layard, R and Parker,] (1996) The Coming Russian Boom: A Guide to New Markets and Politics, The Free Press, London Lipton, D., and Sachs, J D (1992) 'Prospects for Russia's Economic Reforms', Brookings Papers on Economic Activity, vol 22, no 2, pp 213-65 Maleva, T (1996) 'Differentsiatsiya dokhodov naseleniya v usloviyakh finansovoi stabilizatsii (Differe~tiation of Incomes of the Population under Financial Stabilization)', in A Aslund and M Dmitriev, Social Policy in the Transition to a Market Economy, Carnegie Endowment for International Peace, Moscow, pp 4562 World Bank (1996) From Plan to Market: World Development Report 1996, Oxford University Press, Oxford Index Abalkin, Leonid 16 · administrative privatization 36-7 administrative regulation of foreign trade 59-61 Aganbegyan compromise (1990) 22 agricultural industry 15, 34-5, 44, 45 Albania 6, 42 Alblakin Plan (1989) 11 Anti-crisis Programme (Programma deistvii) (1991) 11, 15, 19, 22 anti-dumping regulations 65 anti-inflationary measures 53, 109 anti-reform lobby 45, 47, 128, 130 Armenia 107, 110 ~rrears see inter-enterprise arrears Aslund, Anders 114, 187 Atkinson, A 143, 157 Avert, Petr 189 average wages 145-6, 174 Azerbaijan 103, 107, 112, 116 balance of trade see trade balance Balcerowicz programme (Poland) 44, 45, 47, 53-4 Banarjee, B 187 bank balance conversions 82, 83 banking system 43, 45-6, 57, 59, 79, 106, 108-10, 113-14 correspondent accounts 106-8, 115 household accounts 88-9, 99, 102, 103 in independent states 106, 108-10, 113-14 payments mechanisms 79, 84-5, 90-1, 9~95-~ 9~ 10~107-8, 115,116 see also central banks; monetary system bankruptcies 5, 57, 94, 95, 97, 98, 103, 120, 126, 161 barter 48-9, 104, 115 Basic Guidelines on Economic Stabilization (1990) 11, 15 Baturin, A 157 Belarus 51, 82, 107, 109,.110, 111, 112, 113-14, 116 benefits see child benefits; pension payments; workers benefits Blanchflower, D 161, 171, 174 Blejer, Mario I 43 Boone, Peter 179 Boycko, Maxim 189 bribery and corruption 18, 65, 130, 189 budget deficits 3, 17-18, 42-3, 44, 47, 103, 120-1, 126, 128-9, 186 budget revenue 102-3,121-2 from privatization 68, 75-6 budget surpluses 17 budgetary cuts 17-18 Bulgaria 42 business associations 30, 45 capitalism 16, 26, 44, 182, 185, 188-9 see also democratization; economic reform cash money 86-7,94, 99, 107-8, 109-10, 111, 113, 116 see also currencies; money supply cash roubles (nalichnyi) 79, 81,, 82, 83, 86, 87-8, 91, 103, 106, 109, 110 cash shortages 51, 108, 109, 116 Central Bank of Russia (CBR) 43, 45-6, 50, 80,81,84-5,88,98,99,102-3,106,108, 113, 114, 119, 122, 123, 130, 133, 184, 186 · central banks 90-1 independence of 79, 92-5, 98 in independent states 46, 81, 82, 99, 106 centrally planned economies ( CPE) see command economies chastnoe see enterprise culture Chechnya 132, 133, 134 Chernomyrdin, Viktor 113, 119, 189 child benefits 149, 156 children and young people 13 7, 144, 145, 155, 156, 175 Chubais, Anatoly 119, 130, 189 Commonwealth of Independent States (CIS) see independent states Citrin, D A 187 clearing houses 95-7 see also payments mechanisms closed economies see command economies CMEA 44,57 collateral 111 COMECON see CMEA command economies 13, 42, 49, 56, 58, 86-7, 99 see also economic structure 192 INDEX common law 26 communism 125-6 achievements of long term effects of 3, 13, 14-16, 25-6, 41-6 competition-based privatization 74-5 Congress of People's Deputies of Russia 31, 45, 131 constitutional reform 31, 34 consumer goods 14, 35, 57, 58, 62, 124 queuing for 139, 143, 156 consumption see domestic consumption contractual relationships 26, 27 controlled inflation 52 convertible currencies 4-5, 35, 42, 46, 47, 48,56, 64,83 national 79, 81-5, 106~14 see also currencies; money supply corporate taxation 50 correspondent accounts 106-8, 115 see also banking system Cottarelli, Carlo coupon systems 113 following price liberalization 107-8, 116 credit control 80, 81, 82, 88, 130 credit creation 81, 87, 97, 98, 111, 122, 130 Systematic Transformation Facility (STF) 109, 123, 124 credits 35,50-1,57,82,94-5,103,106-11, 128, 131, 134, 184-5, 186 currencies 182 cash money 86-7, 94, 99, 109-10, 111, 113, 116 convertible 4-5,35, 42, 46, 47, 48, 56, 64, 83 national 79, 81-5, 101-14, 127, 128, 130 parallel 106-7, 115 see also money supply; rouble zone currency coefficients see exchange rates currency reforms see convertible currencies currency regulation 62-4 customs unions 113 see also foreign trade Czechoslovakia/Czech Republic 6, 42, 45 economic reform 20, 53, 60, 61, 62, 127, 129 Dabrowski, Marek 114 debt servicing 57, 85, 98, 109, 128, 129 see also monetary system decision-making 16, 53, 57, 58, 67, 188 defence expenditure 17, 23, 184 Delpla, ] acques 114 democratization 3, 12-14, 36, 183 deregulation see liberalization Dewatripont, Mathias 22 disclosure laws 98 domestic consumption 137-42, 156-7, 183, 184 Dornbusch, R 104, 105, 106, 115 East Germany 42, 53 see also Germany economic crises 1-2, 3, 11, 27-8,32,34, 35, 36,41-4,46-7,52,53,57-8,131 cash crises 88-9 economic policies 5, 11-24, 57, 110-11, 119-26, 185-6 economic reform anti-reform lobby 45, 47, 128, 130 concepts of 46-8 costs of 3, 13, 20-1, 22, 35 future action on 75-6, 98, 126, 188-9 gradualism in 16-17, 22,46-7,48, 52-3, 54, 186-8 in independent states 22, 36-7,44,45, 51, 52 and labour market 159-81 and political structure 13, 21-2, 29-33, 44-5, 186 preconditions for 1, 3, 11-24, 25-7, 41-6 process of 12-22, 25-37, 41-55, 182-8 public opinion of 5, 12, 13, 20-1, 25, 28-9, 69, 127, 182, 186 radical 1-2, 6, 28, 34, 41, 127-34, 186-7 reform plans 11-24, 186 results of 182-90 social background 25-9, 32-5 speed of 11-12 stabilization of 27-9, 30, 34-7, 46-8, 52, 53-4, 127-36 types of 59-67 under Gorbachev 11-12, 13, 15-16, 21-2, 23 Western support for 123-4, 127, 128, 129-30, 131-4, 186 see also transition process economic structure 3, 184, 188 command economies 13, 42, 49, 56, 58, 86-7, 99 mixed economies 15-16 shortage economy 49 education and training 152, 158, 161-2, 172, 174, 175 elections 22, 29-30, 31, 32, 34 Ellam, Michael 114, 180 employment policies 151-2, 161-2, 174-6 see also labour market energy prices 49, 52, 105, 138 enterprise culture 12, 14-15, 30, 35, 47, 70-1,87,185,186-7 see also privatization EPICENTR report (1992) 46 Estonia 6, 79, 82-3, 84, 99, 105, 107, 112, 115, 127, 129 ethnic conflict 46 excess wage tax 174, 175, 178-9, 180 exchange rate unification 12, 22, 46, 47, 79, 81,85-6,99,110-11,185-6 INDEX exchange rates 49, 58, 63, 66, 105, 123, 129 foreign exchange earnings 86 pegging of 83-4, 128 excise tax 50, 62, 66 exemptions see tariff privileges export licences 58, 59, 61, 65, 104 export quotas 59, 60-1, 65, 67 see also foreign trade regulation export tariffs 56, 60,61-2, 63, 66, 113, 123-4 export taxes 64, 113 exporters 65, 66 exports 46, 57, 58, 59, 61-2, 64, 66, 105, 123-4, 182, 183, 184-6 see also foreign trade external debt 42-3, 57 see also monetary system external liberalization 12, 53 Federov, Boris 109, 111, 189 financial stabilization 2, 3, 5, 12, 156 fiscal policies 49-50, 53, 110-11, 120-2 see also monetary policies Fischer, Stanley 98, 128, 183 fixed exchange rates 12 fixed prices see price control floating exchange rates 12, 83, 103, 123, 129 food prices 43, 48 food supplies 5, 35, 48, 64, 139-41, 143, 144, 155, 185 see also living standards forced savings 2, 43 foreign exchange market 103, 115 foreign investment 35, 70, 76 foreign trade 44, 130 exports 46, 57, 58, 59, 61-2, 64, 66, 182, 183, 184-6 free trade 19, 104 import substitution 19, 57 imports 35, 46, 57, 58-9, 61, 62, 64, 66, 67,85, 105,123-4,184,185 and monetary system 84-5, 99 and rouble zone 101 trade deficits 42-3, 103-4, 106, 110, 111 see also intra-regional trade foreign trade barriers 46, 48-9, 113, 182 foreign trade liberalization 3-4, 12, 35, 46, 47,49,185-6 foreign trade monopolies 58-9, 62 foreign trade performance 57-8 foreign trade regulation 56-67, 104, 182 former Soviet republics (FSRs) see independent states free trade 19, 104 Friedman, Milton 80 G7 119, 124, 127, 129 Gaidar, Yegor 13, 44, 45, 46, 47, 48, 56, 59, 66, 120-1, 125, 130-1, 18~ 18~ 189 Galbraith, John Kenneth 22 193 Garvy, G 87 Georgia 107, 112, 116 Gerashchenko, Viktor 108-9, 111, 120, 130 Germany 84, 115 see also East Germany gold reserves 111 Gomulka, Stanislaw 47-8 Gontmacher, Eugene 156 Gorbachev, Mikhall 11, 12, 22, 57 economic reform under 11-12, 13, 15-16, 21-2,23 Gorbacheva, T L 179 Gosbank see Central Bank of Russia (CBR) Goskomimushchestvo (GKI) see State Committee for State Property Management Goskomstat 114-15, 139, 140, 144, 156, 179 government policies 188 economic 5, 11-24, 57, 110-11, 119-26, 185-6 employment 151-2, 161-2, 174-6 fiscal 49-50, 53, 110-11, 120-2 monetary 50-1, 53, 79, 80, 106, 122-3, 126, 128 policy making 32-3 wage regulation 15, 47-8, 52, 53; 95, 97, 134 gradualism in economic reform 16-17, 22, 46-7, 48, 52-3,54, 186-8· in transition process 16-17 grain prices 35 Granville, B 101, 104, 105, 110 gross domestic product (GDP) 43, 49-50, 101, 114-15, 126, 128, 134, 183, 184, 185, 187 gross national product (GNP) 17, 18, 67, 105 growth rate 182, 183 and inflation 124-5, 183 Halligan, Liam 179 Hanson, Philip 23 Hansson, A 115 hard currency market 57, 58-9, 62-4, 66, 67,84 health care 172 hirings 163-5 see also labour market household accounts 88-9, 99, 102, 103 see also banking system housing 138, 143, 162, 172, 175 Hungary 42, 45, 53; 61, 62 hyperinflation 4, 25, 27, 127, 131 Ickes, B W 106 Illarionov, Andrei 189 import subsidies 2, 59, 64, 67 194 INDEX import substitution 19, 57 import tariffs 62, 123-4 imports 35, 46, 57, 58-9, 61, 66, 85, 184, 185 see also foreign trade income tax 50 incomes see wages incomes policies see wage regulation independent states 14, 22, 36-7, 44, 45, 51, 52 banking systems 106, 108-10, 113-14 central banks 46, 81, 82, 99, 106 economic reform 22, 36-7, 44, 45, 51, 52 intra-regional trade 104, 105, 115 living standards 152-5 monetary systems 79, 81-5, 101, 103, 110-13 national currencies 79, 81-5, 101-14, 127, 128, 130 political structure 36-7, 44, 45 privatization in 68-9 androuble zone 79, 81-5, 101-14 state borders 59 unemployment in 154-5 see also individual states individuals 26, 27 personal identity 162, 172 · and the state 26 industrial structure 45, 71-3, 74, 75-6, 173, 184 industry and the military 17, 34-5, 45, 93, 127 see also defence expenditure inflation rate 4-5, 17, 32, 35, 43, 49, 50-1, 110, 113-14, 119, 123, 129, 182-3; 184, 188 anti-inflationary measures 53, 109 controlled 52 effects of 137-9, 156 and growth rate 124-5, 183 hyperinflation 4, 25, 27, 127, 131 influence of rouble zone 101, 103, 106 and money supply 101 repressed 42, 43, 46, 47 see also monetary system institutional structure 3, 12, 30-2, 45 reform of 56, 70, 183 inter-enterprise arrears 87, 90-1, 93-7, 98, 99, 103 causes 104-5 prevention 94, 97 repayment 94-6, 108 interest rates 88-90, 185-6 International Labour Organization (ILO) International Monetary Fund (IMF) 5, 43, 53, 59, 80, 81, 115, 116, 119, 121, 186 criticism of 127, 128, 129, 131, Hf6 Systematic Transformation Facility (STF) 109, 123, 124 intra-regional trade 104, 105, 115 see also foreign trade investment 44, 74 foreign 35, 70, 76 involuntary leave 165, 177, 179 see also labour market jackman, S 180 jaruzelski, General 13, 22 job security 159, 160 see also labour market Johnson, Simon 114 Kazakhstan 105, 106, 107, 109, 110, 111, 112 Kazmin, Andrei 189 Kebich, Vyacheslav 113 Keynes, john Maynard 171 King, Timothy 156 kolkhoz markets 43 Kyrgyzstan 107, 109, 112, 115, 116 labour collectives 69 labour market 5-6, 15, 120 and economic reform 159-81 hirings 163-4 involuntary leave 165, 179 job security 159, 160 overmanning 160-2 and privatization 69, 71-2, 75-6 reallocation of labour 159-61 short-time work 165, 179 state employees 30, 69 trade unions 30, 35, 172 unemployment benefits 150, 158, 161, 167, 168, 174, 175, 178 unemployment levels 5-6, 18, 35, 126, 137, 150-2,154-5,156,158,159,160-2,163, 165-70, 171, 173-4, 179-80, 183 labour market flows 162-70 labour mobility 6, 27, 162, 172, 175 Latvia 6, 79, 82-3, 107, 112, 115 Law 'on the General Basis of Entrepreneurship (1991) 15 Law on Privatization of State and Municipal Enterprises (1991) 68 Layard, Richard 47-8, 180, 189-90 legal framework 26, 182, 183 common law 26 for monetary system 98, 132-3 for privatization 68-70, 76 liberalization 2, 29, 42, 47, 54 domestic 12 external 12, 53 of foreign trade 3-4, 12, 35, 46, 47, 49, 185-6 partial 47 see also price· liberalization licensing arrangements see export licences INDEX Lipton, D 104, 128; 189 Lithuania 107, 112, 115 living standards 5, 32, 120, 137-58, 182, 183, 184 domestic consumption 137-42, 156-7, 183, 184 food supplies 5, 35, 48, 64, 139-41, 143, 144, 155, 185 in independent states 152-5 poverty levels 137, 140, 143-5, 155, 156, 187 see also social structure loans see credits Lopukhin, Vladimir 189 Lukashenko, Alexander 113 Lushin, A 110, Ill 195 stabilization; inflation rate monetary union 110-11 see also rouble zone money supply 42-3,44,47, 50-1, 87-8, 94, 107-8, 116 money velocity 42 Mongolia 66 monopoly rights 37, 47, 49 in foreign trade 58-9, 62 Mozhina, M 157 national currencies 79, 81-5, 101-14, 127, 128, 130 national unity 44-5 natural resources 105, 152 Nazarbaev, Nursultan 22-3 Nechaev, Andrei 189 net material product (NMP) 43 Nickell, R 180 nomenklatura privatization 69 non-cash roubles (beznalichnyi) 79, 86, 87-8, 103, 106, 108, 110, 116 non-tariff regulation see administrative regulation management methods 69, 70, 71-2, 92, 162, 185 market economies 1, 3, 11-12, 13, 36, 182, 188-9 conceptualization of 3, 14-16 development 25-37, 70-1 models 13, 22-3 and monetary system 79-100 see also privatization obligatory surrender market structure 3, 185 of hard currency 64 foreign exchange market 102, 115 oil industry 57, 58, 59-60 hard currency market 57, 58-9, 62-4, 66, oil prices 42-3, 49, 52, 57, 59-60, 105-6, 182 67,84 mass privatization 71-3, 74, 75-6 On the division of state property (1992) 68 Mazowiecki, Tadeusz 44-5, 47 Michalopoulos, C 104, 105, 115 Oppenheimer, Peter 114 Micklewright, J 143, 157 opposition to economic reform 45, 47, 128, 131 military-industrial complex 14, 17, 34-5, 45,93,127 to privatization 69, 186-7 see also defence expenditure see also public support minimum wage 15, 150, 151, 158, 167-8 Oswald, A 161, 171, 174 mixed economies 15-16 output see productivity overmanning 160-2 see also economic structure see also labour market Moldavia 107, 116, 129 monetary policies 50-1, 53, 79, 80, 106, parallel currencies 106-7, 115 122-3, 126, 128 responsibility for 80-1 Parker, J 189 ' Parliament 31, 33-4, 45, 92, 111, 130, 186 stabilization of 80, 120, 138, 156 paternalism 160, 161, 173 see also fiscal policies Pavlov, Valentin 11, 15, 43 monetary system 4-5, convertible currencies 4-5, 35, 42, 46, 47, payments mechanisms 79, 84-5, 90-1, 94, 95-7,99,106,107-8,115,116 48,56, 64,79,81-5,101-14 debt servicing 57, 85, 98, 109, 128, 129 see also banking system pegged exchange rates 83-4, 128 external debt 42-3, 57 and foreign trade 84'-5, 99 pension payments 74,138, 145,147-9, 156, 157, 158 in independent states 79, 81-5, 101, 103, 110-13 personal identity 162, 172 legal framework for 98, 132-3 Poland 1, 3, 6, 30, 42, 160, 170-1 economic reform 13, 16, 20-1, 41, 44-6, and market economies 79-100 rouble zone 2, 4-5, 46, 47, 52, 79, 80-5, 47,48,52-4,60,62, 127,129,130 98, 101-18 policy-making 32-3 see also banking system; financial see also government policies 196 INDEX political credit concept 52 political instability 30-2, 33-4, 125-6, 127 political parties 29-30, 32 political reform 21-2, 32-5 political structure and economic reform 13, 21-2, 29-33, 44-5, 186 executive branch 31, 33-4 in independent states 36-7, 44, 45 legislature 31, 33-4 the president 31, 32, 33-4, 92 public opinion of 32, 35, 47 Polterovich, V 153 Popkin, Barry 156, 157 poverty levels 137, 140, 143-5, 155, 156, 187 see also living standards the president 31, 32, 33-4, 92 pressure groups 34-5, 45, 47, 128, 130 see also public opinion price control 42, 43, 49, 52, 54 price liberalization 3, 14-15, 18-19, 46, 47, 54, 104, 115, 182, 185-6 coupon systems following 107-8, 116 effects of 28, 30, 35, 60, 87, 137-8 price rises following 25-6, 137-8 prices 20, 25, 32, 49, 87, 137-8 domestic 60, 123 energy 49, 52, 105, 138 exports 65, 104, lOS food 43, 48 grain 35 oil 42-3,49, 5~5~59-6~ 105~6, 182 relative 18 privatization 2, 3, 4, 12, 13, 22, 44, 53, 6876, 130, 183 administrative 36-7 budget revenue from 68, 75-6 competition-based 74-6 enterprise culture 12, 14-15, 30, 35, 47, 70-1,87,185,186-7 and labour market 69, 71-2, 75-6 of land ownership 23 of large-scale industry 71-3, 74, 75-6 legal framework 68-70, 76 management methods 69, 70, 71-2 nomenklatura 69 opposition to 69, 186-7 property rights 15, 16, 26, 68 public support for 69, 70 of small-scale enterprises 70-1, 75 by vouchers 69, 70, 73-5, 76, 173, 180, 185 privilege schemes in privatized enterprises 71-2 productivity 32, 35, 42, 43, 58, 120, 161, 183 profit making 71-2, 102-3 ProkoPev, Yurii 23 property rights 15, 16, 23, 26, 68 see also privatization proportional representation 30 see also elections protectionism 186 import subsidies 2, 59, 64, 67 import substitution 19, 57 import tariffs 62, 123-4 public opinion 5, 12, 13, 20, 25, 28-9, 131-2 see also social unrest public support for economic reform 20-1, 69, 127, 182, 186 for political activities 32, 35, 47 for privatization 69, 70 see also opposition public transport 138, 143 public works 162, 175 queuing for consumer goods 139, 143, 156 quotas see export quotas radical economic reform 1-6, 28, 34, 41, 127 34, 186-7 rationing 107 raw materials lOS, 184-5 real wages 6, 43, 137-9, 142, 156, 171 redundancies see unemployment refinancing 81, 122 reform see economic reform regional issues see independent states regulation of foreign trade 56-67, 104 relative prices 18 rent-seeking 184-7 repressed inflation 42, 43, 46, 47 reserve requirements 122 residence permits (propiska) 162, 172 see also housing retirement age 156 see also pension payments retraining see education and training Romania 42 Roland, Gerard 22 Rostowski, j acek 48 the rouble value of 86 Rouble Monetary Authority (proposed) 80-1 rouble zone 2, 4-5, 46, 47, 52 future of 79-83, 101-18 and independent states 79, 81-5, 101-14 influence on inflation 101, 103, 106 'new' 106, 109-10 'old' 106, 109-10 reform of 79, 80-2, 83, 98, 186 see also monetary system Roxburgh, I W 180 INDEX rural population 27 Russian Economic Trends 189-90 Russian Federal Republic (RSFSR) 11, 1618,68 Ryterman; R 106 Sachs,] 103, 104, 114-15, 128, 131, 186, 189 Sahay, R 183 sales-verification systems 93-4 Sberbank 88-9,99,102 securities trading 98, 122 self-employment · 166, 177 Selkhozbank 102 service sector 184 Shapiro,] C 180 Shatalin Programme (1990) 11, 13, 14-15, 16, 17, 19,22, 23 Shleifer, M 189 shock therapy see radical economic reform short-time working 165, 179 see also labour market the shortage economy 49 Siberia 152 social costs of transition process 16, 20-1, 184-5 social structure 3, 5, 12, 26-9, 184 and economic reform 25-9, 32-5 in independent states 152-3 individualism 26, 27, 162, 172 inequalities in 5, 137, 142-3, 155 rural population ~7 stability of 22, 27 urban development see also living standards social unrest 13, 25-6, 27-8, 30, 32, 35, 54, 130 see also public opinion; strike action social welfare 17, 53, 137, 172, 173 child benefits 149,156 health care 172 pensions 74, 138, 145, 147-9, 156, 157, 158 socialism see communism stabilization of economic reform 27-9, 30, 34-7, 46-8, 52, 53-4, 127-36 failures in 127-36 financial 2, 3, 5, 12, 156 of monetary policy 80, 120, 138, 156 Stabilisation and Reforms (Stabilizatsiya i reformy .) (1991) 46, 48 standard of living see living standards state borders 59 State Committee for State Property Management (Goskomimushchestvo) (GKI) 70, 72, 73 state employees 30, 69 state intervention 15, 19-20, 26, 66, 67 197 State privatization programme (1992) 69-70 strategic resources 59-60, 65 strike action 27-8, 30, 32, 130, 172 see also social unrest subsidies 2, 17, 29, 43, 47, 105, 130, 138, 140, 184-5, 186 Supreme Soviet see Parliament Systematic Transformation Facility (STF) 109, 123, 124 Tajikistan 107, llO, 111, ll2 tariff privileges 65, 66 tariff regulation see export tariffs Tarr,D 104,105,115 tax collection 50, 131-2,188 tax privileges 35, 49-50, 130-1 tax reform 47, 50, 66, 121-2 tax revenues 14, 18, 20, 32, 130, 132 taxation 18,48, 12~ 121,131-2 excess wage tax 174, 175, 178-9, 180 export taxes 64, 113 income tax 50 VAT 50, 62, 66 technical credits 108, 109 technological imports 57, 58, 64 trade balance 66, 83, 84-5, 103-6, 183 trade barriers and restrictions 46, 48-9, ll3, 182 trade deficits 42-3, 103-4, 106, llO, lll see also foreign trade trade tariffs see tariff regulation trade unions 30, 35, 172 see also labour market trading zones 104, 105, ll5 transition processes 3, 27-8,42,46-7, 182-8 costs of 3, 22 gradualism in 16-17 to new style rouble zone 110-11 social costs of 16, 20-1, 184-5 trade protection during 62 see also economic reform Turkmenistan 106, 107, 112 Ukraine 51, 82, 83, 98, 106, 107, 108, 109, 112, 115, 11~ 187-8 Ulyukaev, Aleksei 189 unemployment benefits 150, 158, 161, 167, 168, 174, 175, 178 unemployment levels 5-6, 35, 126, 137, 150-2, 154-5, 158, 167-70, 171, 179-80, 183 causes of 159-67 employers' attitudes to 173-4 female 150 increases in 18, 150, ·156, 184 see also labour market unified exchange rate's 12, 22, 46, 7, 79 198 INDEX urban development Uzbekistan 103, 106, 107, llO, lll, ll2 value-added tax (VAT) 50, 62, 66 Vasiliev, Sergei 189 Vegh, C A 183 Vishny, R 189 Vnesheconom-bank 57 Vneshtorgbank 102 Volskii, Arkadii 22 voucher system in privatization process 69, 70, 73-5, 76, 173, 180, 185 wage arrears 51, 165-6, 177 wage bargaining 175 wage distribution 146-7, 156, 157 wage flexibility 159, 160-1, 169-71, 172 wage payments 86, 87, 88, 99, 103 wage regulation 15, 47-8, 52, 53, 95, 97, 134 wage rigidity 160 wages 15, 17, 46, 49-50, 138, 184 average 145-6, 173 excess wage tax 173, 174, 175, 178-9, 180 in independent states 152-4 minimum 15, 150, 151, 158, 167-8 real 6, 43, 137-9, 142,156, 171 welfare see social welfare Western experience of unemployment 174-5 Western support for economic reform 123-4, 127, 128, 129-30, 131-4, 186 Williamson, J 101, 103 work sharing 175-6 see also labour market workers' benefits 160, 172-3 World Bank 127, 144, 184, 185, 187 Yavlinski, Gi-igorii 18 Yeltsin, Boris 1, 2, 44, 45, 46, 48, 130, 131, 134, 186 young people see children and young people Yugoslavia 25 This book is a collection of articles on the Russian economic transformation, written between 1991 and 1994 It offers a unique inside perspective of the reform process All the articles were written by people who were deeply involved in the econom ic reforms Some are senior Russian policy-makers, such as Anatoly Chubais, Boris Fedorov, Petr Aven, Sergei Vasiliev and Andrei lllarionov Others, such as Jeffrey Sachs, David Lipton, Richard Layard, Marek Dabrowski and Anders Aslund, were prominent foreign advisers to the Russian government The articles were written at the height of the reforms and they reflect the knowledge, thoughts and ideas retained by the leading reformers and their advisers whilst attempting a radical transformation of the Russian economy The contributors, while unanimously advocating radical reform, also provide substantial empirical evidence of the pressing economic issues and concerns of the period Although most of the contributors worked for the Russian government when they wrote their articles, they are still remarkably critical of the reform process, maintaining that the reforms were not radical enough either in content or in approach Anders Aslund is a leading scholar of post-communist economies and the Russian economy He served as a senior economic adviser to the Russian government from 1991 to 1994, and is currently a Senior Associate at the Carnegie Endowment for International Peace, Washington and Moscow Front cove r illustration : McDonald 's in Moscow, Russia © Jim Holmes/Axiom ,_ - P INTER A Cassell imprint Wellington House 125 Strand London WC2R OBB PRINTED IN GREAT BRITAIN ISB N 1- 8556 7-4 62- II I 781855 674622 > ... Plans', written in 1991 I think it is worthwhile to refresh the reader's memory about the state of the economic thinking in Russia just before the reforms My chapter is a critique of the most significant... emerged in the USSR to date? I have tried to select the most crucial issues, by scrutinizing the key elements in a systemic change, starting with political preconditions, and continuing with intellectual... I pinpoint nine factors that appear to me to ·be the major stumbling-blocks for the switch to a new economic system in the short term: neglect of democracy; relations between the centre and the