Contemporary Russia: Revolutionary Past and Post-Industrial Future

Over the past ten years, Russia has been subject to four separate but overlapping transitions. This is a historically unprecedented occurrence. First, Russia had to deal with the structural challenges to its economy associated with post-industrialization. What the West had to go through in the 1970s, the USSR had to deal with in the 1980s. Structurally, these two systems were not that far apart and the same high inflation and structural dislocation that plagued the West in its transition from a traditional industrial economy plagued the USSR a decade later. Second, Russia was assailed by a full-scale macroeconomic crisis. Although uniquely Russian in character, in principle this crisis was no different than those that have occurred in Argentina and Mexico. Third, Russia was confronted by the transition from Communism. This was a process that was, most certainly, unique in history, but Russia did not go it alone. Rather, Russia went through its post-Communist transition along with 25 other countries formerly of the Warsaw Pact and Soviet Union. Fourth, Russia had to face the challenge of political revolution. This was the first full-scale revolution in an industrialized country. In this instance, revolution is defined as a systemic transformation carried out under a weak government that can meet neither its obligations nor its needs. Economically, this revolution was characterized by a budget crisis, default and the redistribution of property for political purposes in order to increase efficiency, restore fiscal order and provide for a modicum of stability. In Dr. Mau's view, the most interesting feature of the early period of this revolution is the rapidity with which the Russian government was able to reconstitute state institutions after abolishing their Soviet predecessors.

The most important result of the past ten years is that three of the four crises confronting Russia are now over. Russia's macro-economic crisis is over, its transition from communism complete and its revolution has ended (in as much as the nature of the regime in Russia is no longer a question of political debate). The main challenge that remains is to deal with post-industrialization. This challenge contains a double uncertainty: no one truly knows what a post-industrial society and economy is, let alone how to catch up to it, as Russia must. A few features of this new system have become clear. Specifically, it has become obvious that industrial policies are no longer necessary. There is no longer any need for a clear set of industrial goals and priorities. It is, however, less clear what sort of positive incentives can be created to induce successful adaptation to this new system. This is reflected in the domestic debate in Russia on accession to the WTO. In Dr. Mau's view, the point should not be to focus on how to protect old industries, but rather how to promote new industries and sectors of the economy through competition.

Currently, four separate approaches are being advanced on how to deal with the challenges facing Russia. The first approach proposes to redistribute the wealth earned from the exploitation of Russia's natural resources to other sectors of the economy and society in order to further their development. While not a bad idea in theory, this sort of system of redistribution is not very sound in Russia where state institutions are of a less than trustworthy character. A second approach looks to Russia's emerging Integrated Business Groups (IBGs) to help overcome the high transaction costs that currently cripple much of the economic activity in the country. According to Dr. Mau, while these IBGs can help mitigate transaction costs, they also have a tendency to privatize profits and nationalize loses. Moreover, in order for these IBGs to remain a positive influence, the Russian government will have to push for entrance into the WTO in order to offset the monopolistic tendencies of these groups through institutionalized free trade practices. A third approach addresses Russia's external debt to GDP ratio, claiming that it is simply too high. In Dr. Mau's view, Russia's debt to GDP ratio may very well be too high for an industrializing country to bear, industrialized countries have had to assume much higher ratios in order to offset the costs of the social services, such as education, that are a hallmark of post-industrialization. The fourth and most promising approach is to focus on Russia's institutional setting. It is important for Russia to adopt an institutional benchmark, like the EU, to use as a model and a goal for reforming its own institutions. In this instance, Russia would aim to form a close relationship with the EU, much as Norway has, while reserving the ability to distance itself from those EU policies that would be detrimental to Russia's development.

Looking into the not too distant future, Dr. Mau concluded by observing that Russia's economic legislation has begun to exhibit diminishing returns. For every new piece of legislation passed, there has been less of a positive effect on Russia's economy. This is because Russia has begun to pump up against the limits of what its outmoded judicial and administrative systems will allow. In Dr. Mau's words, "It doesn't matter how rational the laws are on paper if they aren't supported in practice." Thus it is slowly becoming clear that in order for Russia to continue to grow as it has it will have to tackle the nadir of administrative and bureaucratic reform that it has thus far avoided. This reform will be Russia's next great challenge.

Summary by Karlis Kirsis, Junior Fellow, Russian & Eurasian Program