FOUR CRISES

Russia’s transition from Communism to a market democracy was not an easy task. It still is and will continue to be a subject for difficult and energetic debate – political, theoretical and ideological. A tortuous and contradictory journey gave rise to acrimonious debate about the very nature of the reform. This debate focuses upon the effectiveness and appropriateness of the reform, and whether there were alternative ways of meeting the challenges then confronting Russia.

One of the key points of the debate considers several questions, such as: To what extent were Russia’s problems unique to the country? Were they inherent in the historical experience, as well as the national and cultural features of Russia’s development? And, accordingly, to what extent were universal approaches and the experience of other countries applicable in developing and implementing a programme of post-Communist restructuring? This is all the more important because an answer to these questions makes it possible to summarize the results of the first post-communist decade, as well as formulate some important problems concerning Russia’s further progress toward the free market and democracy. 

At the end of the 1980s, Russia (or rather the Soviet Union) encountered formidable challenges associated with four different transformational processes. It was those processes that determined the country’s development throughout the 1990s. While not necessarily interrelated per se, they proved to be intertwined in Russia, substantially affecting each other, not to mention the economic and political development of the whole country.

First, Russia faced the challenges of the post-industrial epoch. Transition from an industrial to a post-industrial society was accompanied by severe structural and macroeconomic crises, such as those the Western countries experienced from the 1970s onwards. The Soviet Union was able to delay its structural adjustment to the new challenges thanks to the favorable conditions of the world markets. One of these was the oil crises, which sharply increased the prices for important Soviet exports. But the price of that delay made the adjustment all the more painful when there was no longer any escaping it. The structural crisis of the Soviet economic system, which climaxed in the drastic decline of Russia’s present market economy, resulted from the same processes which, with reference to Western countries in the 1970s, were described as “stagflation.”

Intense discussions about the nature of the structural transformation continued throughout the 1990s. Some authors described the decline in output as de-industrialization, although a more in-depth analysis of the ongoing processes allows the nucleus of a new, post-industrial structure to be discerned in the structural change that is currently in progress (see Table 1).  Telecommunications and electronics industries were booming (since 1998, the latter has been growing by as much as one-third annually). Modifications to more advanced products were constantly taking place in the chemical and metallurgical industries. The number of educational institutions was increasing markedly, as were the numbers of undergraduate and postgraduate students. Of course, this trend is not absolutely predominant, and whether it will be sustained or not will greatly depend on the efficiency of economic policy, as well as on the government’s ability to promote favorable change.

Table 1. Some indicators of social and economic development  in the 1990s  (1991 = 100 unless stated otherwise)

Second, post-communist transformation was occurring throughout Russian society. This was a truly unique experiment. Never before in history (including the history of economics) has there been a transition from a totally state-controlled system to a market economy. Of course, the most difficult part involved the transformation of property rights, i.e. privatization on a national scale. However, this sort of transition was not peculiar to Russia. Post-communist change was simultaneously occurring in about 25 countries. What is more, Russia was not a pioneer in this respect: a number of countries had embarked on such a transition two or three years earlier, which provided the post-Soviet republics with some experience, albeit very limited in nature.  

Third, Russia was faced with a full-blown macroeconomic crisis resulting from its populist economic policies (beginning in the second half of the 1980s), which led to the breakdown of the fiscal and monetary systems, extremely high inflation and an industrial output decline. However, the phenomenon of macroeconomic crisis, together with the various ways of handling it, had been thoroughly studied by the end of the twentieth century. In the post-war period, many European, Asian and Latin American countries had to grapple with similar problems. Moreover, Russia had a similar experience of pulling itself out of a severe macroeconomic crisis in 1922-23.

Fourth and last, the political, macroeconomic and structural changes that Russia faced at the turn of the 1990s were accompanied by a full-scale social revolution. A systemic transformation, which radically changed the social set-up of the country, was being initiated inside of a weak state, which in fact is one of the defining characteristics of a revolution. By the time the post-communist changes had begun, practically every institution of the state had been all but destroyed, and their restoration was essentially the central political objective of the first post-communist decade. Moreover, economic reform advanced only to the extent that the institutions of the state were restored, which made the pace of reform much slower than in most other post-communist countries. Among the countries undergoing post-communist transition, the revolutionary transformation affecting Russia was a unique feature, although not entirely new to European history.

The interconnection of these crises determined not only the uniqueness, but also the peculiar complexity, of the reforms. Whereas in all known cases the policy of financial stabilization could be based on existing institutions of a market economy (not always effective but at least existing), in Russia stabilization and formation of market institutions went on almost concurrently. Naturally, this considerably complicated and prolonged the reforms. And the absence of a real state (political institutions, including a system of legal order, law enforcement and so on) that is characteristic of a revolutionary epoch meant that the implementation of these liberalization measures could not be delayed.

Russian reformers were frequently criticized for their preoccupation with financial (or stabilization) policy at the expense of institutional reforms. This seems to be a bit unfair, since institutional reforms were receiving considerable attention from the very beginning of the post-communist transformation. It was simply that the institutions which had to be created in Russia were perceived by Western analysts as something given. Meanwhile, over the course of the 1990s in Russia, the fundamental institutions – without which a market economy cannot exist –were created: a democratic constitutional system, the institution of private property, free price setting, an environment of competition, financial markets, a banking sector, labor market and much else. Of course, the functioning of these institutions, their effectiveness and reliability, can and do evoke sharp criticism, particularly from detached observers. However, the problem is that all these institutions previously did not exist—and not only in practice but also in the historical memory of the people. This is different from, say, the situation in the Central and Eastern European countries, where the Communist regime had existed for only forty years, that is, less than the life of one generation.

As the new institutions were formed, other economic tasks, above all stabilization, could be solved methodically. From this viewpoint the internal logic of macroeconomic stabilization can be seen. As is well known, in Russia this task took approximately nine years (1991-1999) and went through several stages. In 1992, the liberalization of prices was carried out, which allowed inflation to be converted from concealed (total shortage of goods) to open form, and thereby the initial precondition for stabilization to be created. This action required no institutions other than a reforming mood on the part of the government, as well as the readiness of society to pay a definite price for overcoming the ‘goods famine.’ But the attempt at macroeconomic stabilization in 1992 failed – neither the social nor the political conditions were in place in Russia. There followed monetary stabilization (1995), for which the adoption of a new Constitution was required, breaking the link between the Central Bank and the populist body of deputies. The independence of the monetary authorities, combined with a stabilization course on the part of the government, allowed the ruble to be stabilized. This too, however, was not stabilization. A continual conflict between the executive and the legislative branches of power prevented the balancing of the budget. At the same time, the rise of the institution of state debt allowed stability of the ruble to be ensured for some time despite the weak budget. Only the gradual overcoming of the revolutionary political crisis, together with the formation of a government majority in the Duma, allowed the task of macroeconomic stabilization to be fully solved.

The sharpest criticism of the economic reforms has been directed at the privatization program that was carried out in Russia in the first half of the 1990s. Nevertheless, it is difficult to dispute the exceptionally important role the creation and strengthening of the institution of private property also played in solving the task of financial and political stabilization. 

RESULTS

First of all, macroeconomic stabilization was achieved. The crisis was quite protracted (lasting about ten years) but not unprecedented in economic history. Stabilization was brought about through an array of standard measures (liberalization, fiscal and monetary restraint), and its success paved the way for the resumption of economic growth. Of course, stabilization was not achieved once and for all.  An economic system is never guaranteed from mistakes by the authorities, against unsound and populist decisions.

The process of revolutionary transformation was practically completed. The restoration of the state is very much in evidence. Macroeconomic stabilization has gone in step with political stabilization. In 1999, analysis of political parties’ pre-election programs showed the reference points of the main political groups to be converging, however important the differences between them. A common system of fundamental political values, which are above political dispute, is emerging. Specifically, no one calls into question the importance of private property as the basis of economic and political life (although appraisal of the outcome of privatization still arouses controversy); no one calls for an end to tight monetary and fiscal policies (until quite recently inflationary financing of the budget deficit was widely thought to be acceptable); all groups (even on the left) support the policy of alleviating the tax burden, while everyone accepts the need to shift the emphasis of policy implementation to profound institutional reform. Of course, the practical recommendations of particular political groups still widely differ, but those differences are no longer so pronounced as to constitute a threat to political stability. The ability of the authorities to secure basic macroeconomic stability is the most important characteristics, thus suggesting that the crisis has been overcome.

Putin’s first presidency (2000-2004) brought new elements to the pattern of post-revolutionary political and economic stabilization. A steady pro-government majority was being formed in the Lower House – the Duma. Practically every new bill sponsored by the government could now rely on parliamentary support, which was very important for the political regime to further advance its initiatives. On the one hand, there was less political haggling over each specific bill, and hence more consistent pursuit of the government’s chosen course. On the other hand, the system of relations between the government (relying on its parliamentary majority) and the opposition (the parliamentary minority) was assuming the form typical of stable democratic societies.  

It could be persuasively argued that the goals of the post-communist transformation have been successfully accomplished. This conclusion tends to provoke especially strong objections and therefore needs to be clarified. The Communist system was distinguished by three main political characteristics: a totalitarian political regime, absolute domination of state ownership in the economy, and shortage of goods as a basic constituent of economic and political life. By the end of the 1990s, the three main features of Communism had been eliminated in Russia. This certainly does not mean that Russia has fully overcome the crisis. However, severe structural problems which Russia is still facing and which make it vulnerable to external shocks are not, strictly speaking, a legacy of the Communist system. They reflect rather the development and crisis of the industrial system, and it is no accident that practically all countries which have had to cope with the transition from an industrial to a post-industrial society have faced similar problems and challenges.
 
To sum up, the dominant socio-economic problems confronting Russia today are the crisis of the industrial system and the establishment of the socio-economic foundation of a post-industrial society. This process defines the main challenges that the country will need to meet in the coming decade. Apart from these challenges, which influence Russia ‘from the future,’ so to speak, and form the objective of its development, it is necessary to see another factor which also will contribute to the overall picture of modern Russia. Revolution has a long-lasting impact on society above and beyond its influence on the current development of the revolutionary nation.