What Were the Alternatives to Russia's Economic Reform?

Meeting Report
Vol. 1 - No. 4 ? September 16, 1999

Acknowledging the widespread criticism of Russian reforms in the United States, Yevgeny Yasin, a leading Russian economic reformer and Minister of Economy from 1994 to 1997, emphasized that contrary to general belief, reforms in Russia have produced results. Yasin, who helped formulate every major reform program between 1989 and 1998 and currently heads the Higher School of Economics, contended that Russia has "a modern economy, a process of forming institutions, and a market economy," despite the tremendous difficulties that the transformation of a socialist state to a market democracy entails.

Yasin maintained that policy alternatives have always existed, but "the results could be worse." He listed four key choices in the Russian reforms:

• The first big choice was Mikhail Gorbachev?s decision in the 1980?s to allow democratization before economic reform. Alternatively, Gorbachev could have attempted an economic reform without political liberalization, as happened in China.
• The second critical choice was between a planned economy and a free-market economy, i.e. price liberalization and the opening of the economy. According to Yasin, the resolution of this debate was predetermined by the preceding democratization. A planned economy and political liberalization could not have been sustained together since social and living conditions had significantly deteriorated: "People found no food in the stores; therefore, they would not have stood by a planned economy" once they had a political voice, he argued.
• A third crucial choice was between privatization and decentralization. Decentralization had begun under Gorbachev, however, and produced negative effects. The problem was the lack of liberalization and hard budget constraints. Managers were given freedom to handle public assets, but faced no accountability or responsibility. The only way out was mass privatization, according to Yasin. Otherwise, everything would have been stolen.
• The final crucial issue of the economic reform course was whether Russia should adopt a "shock-therapy" approach or gradual reform. Despite adopting "shock therapy" in its rhetoric, Russia in fact launched the milder, slower reform path, according to Yasin.

Although a more radical reform would have been better, overall correct choices were made, Yasin argued. He nevertheless listed four mistakes:

• The government?s decision to increase the price of Russian oil, a step which increased inflation fivefold rather than just liberalize the price;
• Excessive insider ownership with 51% of shares going to insiders;
• The 1995 loans-for-shares scheme; and
• The GKO pyramid, resulting in the government?s default on its budget payments and stimulating the 1998 financial crisis.

To explain the mistakes, Yasin suggested that the communist legacy was too strong to allow a more radical reform, and political compromises were needed. He insisted that in the end, "too many compromises were made," yet he also contended that the compromises were inescapable since the social atmosphere was too explosive.

An important component missing in the reforms, Yasin stressed, was reforms in the social sphere, such as housing, education, infrastructure, transportation, and health care reforms. With respect to the role and policy alternatives of the United States and the West in general, Yasin expressed his gratitude to policy-makers in the U.S., the World Bank, and the IMF for their help, but he regretted the lack of a program similar to the Marshall Plan in 1992 was a crucial mistake on the part of the West. "It was at that time," Yasin said, "when the Russian people?s commitment to reforms and their willingness to go with the reforms was the highest. The West should have supported that through a Marshall Plan. Now, people are apathetic and no longer believe in economic reform."

Asked about corruption in Russia and about possibilities to combat it, Yasin admitted that it is a widespread problem, with a long tradition in Russia, further augmented by seventy years of communism. He agreed that the Russian government was not doing enough to reduce corruption, but expressed his belief that Russia would overcome this problem, just as the United States overcame a similar problem at the beginning of this century. As possible ways to alleviate corruption, Yasin suggested the reduction of state bureaucracy and the number of state employees. Yet he also called for the strengthening of state power and the police apparatus. Trying to resolve this tension between advocating too much and too little government, Yasin stressed that the Russian government should support a strong judiciary and effective law-enforcement mechanisms, but not attempt to invest directly in the economy. Yasin emphasized that the current Western media attention to corruption in Russia merely hurts US-Russian relations without helping to solve the problem.

Probed about the influence and relevance of foreign advisers for the reforms in Russia in the context of the "Who Lost Russia" debate, Yasin said that with due thanks to Western advisers, the course of Russian reforms was really in the hands of the Russian reformers. He insisted that the main question "is not whom to blame but where we go from here."

Prepared by Vanda Felbabova, junior fellow with the Russia and Eurasia Program.