18.05.2005
Perestroika Through the Prism of History
№2 2005 April/June
Vladimir Mau

Vladimir Mau is Rector of the Russian Presidential Academy of National Economy and Public Administration.

The two decades that have elapsed since Mikhail Gorbachev took
the highest post in Soviet Communist Party hierarchy has been a
time of sweeping changes in Russia and across the world, as well as
the subject of heated scientific and political debates. Whatever
aspects of this period are being discussed, an intriguing question
always stands out, explicitly or implicitly: Could the events have
taken a different course? To what degree was the course of
developments predetermined by objective factors? Or was it spurred
by an accidental concourse of circumstances, mistakes and
spontaneous whims of certain leaders?

RESPONSE TO THE CRISIS OF INDUSTRIAL SOCIETY

Soviet economic policy was subjected to cyclical fluctuations
since the days of its infancy. Scientists have termed this
phenomenon the ‘investment cycle in socialist economies’ which had
the following phases: implementation of an investment program;
economic growth slowdown; liberalization measures; acceleration of
the rate of growth; increased macroeconomic imbalances; rejection
of liberal reforms and enactment of a new investment program [Bajt
A. Investment Cycles in European Socialist Economies. Journal of
Economic Literature, Vol. 9, 1971, pp. 53-63; Bauer T. Investment
Cycles in Planned Economies. Acta Oeconomica, 1978, Vol. 21, No. 3,
pp. 243-260; Ickes B.W. Cycles Fluctuations in Centrally Planned
Economies: A Critique of the Literature. Soviet Studies, 1986, Vol.
38, No. 1, pp. 36-52] 
This is how developments progressed from the 1920s through to the
mid-1980s. In line with this logic, the liberalization measures
offered by perestroika did not look novel. As opposed to previous
periods, however, they did not entail a toughening of the economic
regime. Instead, liberalization began to deepen and expand.
There were two fundamental factors that predetermined the nature of
restructuring processes and the eventual collapse of the Communist
system. First, the Soviet Union suffered a crisis regarding
industrialization, which catalyzed the need for systemic changes.
Second, the transformation took the form of a full-blown
revolution, comparable with great revolutions of the past in nature
and dimension. While the first factor determined the essence and
direction of the transformation, the second one decided its form
and character.

The Soviet social and economic model was the product of the
industrial age. This model was characterized by the dominance of
several factors: large industrial entities that influenced all
spheres of society, mass production technologies that relied on
standardization and wide-scale use for their efficiency, and
monopolistic tendencies in the economic and political spheres.
Soviet economic policy also suggested direct government
interference in the economic process, weak competitiveness inside
the country and, more specifically, a tendency toward the
restriction – or elimination – of external competition. The
industrial age was successful in that it met several important
industrial and social challenges: it helped stimulate a sizable
rise in labor productivity, intensify urbanization and satisfy the
basic needs of the population of its respective countries. The
Soviet Union, which continued to advance pre-revolutionary Russia’s
process of industrialization, successfully solved those problems in
the late 1950s and early 1960s.

At this time, the economies of the industrialized countries were
becoming based on information technologies. The formation of the
new economy was accompanied by several factors, such as the
weakening of monopolistic tendencies, animated competition, the
reduced role of large industrial entities, increased flexibility of
production, and individual approaches to production and technology
solutions. Globalization evolved as a crucial element of the new
economy, which promoted the diminishing role of the government in
economic affairs, together with the liberalization of the domestic
economy and foreign trade.

In the early 1970s, the industrialized West was hit by a deep
economic crisis known as “stagflation” which persisted for the
greater part of that decade. Stagflation is a half-forgotten term
now, but it was quite popular thirty years ago. The crisis gave the
impression that the West had slid into a new stage of the “general
crisis of capitalism.” It soon became clear, however, that the
social and economic systems were adapting to a new phase of
technological development (or, to put it in Marxist terms, to a new
level in the development of productive forces).

The Soviet Union faced nearly identical problems, but its rigid
political and economic system did not allow the authorities to
begin a timely adaptation to the new realities – the Soviet economy
was utterly unreceptive to innovation.

The result was that while the West used the crisis to adapt
itself to the new challenges, the Soviet Union showed small but
steady growth rates, while at the same time falling into a severe
systemic crisis. Traditional heavy industries remained dominant to
the detriment of the more advanced technologies (IT,
telecommunications, etc.); defense production maintained the
central role in the Soviet economy. Against the background of a new
economy emerging in the West, Soviet growth rates were sliding. The
main problem, however, was that in the 1980s the gap between
Western and Soviet economic development became apparent to
everyone. 

The nature of that crisis predetermined the general direction of
the steps the authorities had to take: the liberalization of all
aspects of life. While the objectives of the industrialization
(more specifically, the catch-up industrialization) required active
mobilization and a concentration of resources in the so-called
‘growth point’ sectors, the post-industrial economies required the
activation of individual and corporate creativity and the total
development of human resources.

The specifics of the post-industrial age explain, for instance,
why liberalism has been blooming over the past 25 or so years. The
development of productive forces and the relevant models of
successful modernization rely on liberal policies (in the developed
Western countries), or policies which mark a tendency toward
liberalization (in the fast-growing countries of Southeast Asia,
for example). It also explains why the Soviet and Russian
governments followed a more or less consistent course of
liberalization, regardless of their partisan attitudes.

THE HONEYMOON OF PERESTROIKA

Another important feature of Russia’s transformation is that it
turned into a full-blown revolution. Whether or not it actually
experienced a revolution is mostly a subject for debate amongst
Western analysts. In Russia, the issue never stirred much debate,
but the idea that the revolution was over came through in President
Putin’s annual address to the Federal Assembly in 2001.

In a most generalized sense, revolution is a systemic
transformation that radically changes a country’s social structure
and takes place under the conditions of weak state power. The
latter is a major contributing factor of revolution – it
predetermines many of its typical features and makes it different
from other changes that produce major social changes. The crisis of
state power manifests itself as a sharp conflict between the elites
(or main groups of interests) that do not have a consensus on basic
values and key issues concerning the country’s further development.
In the economic sphere, the weakness of state power manifests
itself in a financial crisis, the government’s inability to collect
taxes and keep expenditures and revenues in balance.

A weak state power results in the spontaneous transformation of
economic and social system. Social development becomes dependent on
the conduct of various forces “dragging” the country in different
directions. All full-blown revolutions go through several typical
stages:

1) a “rosy period” or “honeymoon,” when all forces in society
unite to overthrow the old regime and power is supplanted by a
popular “moderate government;”
2) the split of socio-political forces which brings about the
collapse of the “moderate government;”
3) a period of radical change which accompanies the ultimate
breakup of the old system;
4) a Thermidor period, during which the foundation is laid for the
new state machinery;
5) post-Thermidor stabilization and end of
revolution.   

An analysis of Russia’s transformation as a revolutionary
process indicates that perestroika represented its first “rosy”
stage. And the specific characteristic of this stage is a bizarre
economic policy which hinged on two illusions. First, the seemingly
unanimous dislike of the old regime and a desire to overthrow it by
all members of society. Second, the seemingly universal popularity
of the new revolutionary government which proclaims a course for
discarding the legacy of the past. The combination of these
illusions has some long-term consequences for the country.

First, a popular revolutionary government tends to make
extraordinary decisions, especially in the economic sphere. Leaders
of the early revolutionary government are inclined to overestimate
their own popularity and the nation’s unity, which results in
decisions that are alien to economic logic and unthinkable under
normal conditions. Here are just a few examples of the perestroika
period.

The anti-liquor campaign. This ridiculous attempt to solve
Russia’s centuries-old problem had a dangerous consequence – the
country sacrificed a sizable part of its budget revenues at a time
when it was already suffering heavy losses due to a fall in oil
prices.  

Simultaneous implementation of the policies of economic
restructuring and acceleration. The latter involved an increase in
the amount of savings in the national income and a reduction in the
consumption expenditure, while economic restructuring suggested
greater freedom of the economic agents (which lacked incentives for
extensive investment activities).

Stimulating entrepreneurship (in the form of cooperative
societies and individual labor activities) while fighting against
“illicit incomes” at the same time. The regulation of both spheres
would be endorsed almost simultaneously.

Second, an early revolutionary government seems to be unable to
formulate a coherent program of social and economic reform. It
still has strong ideological and political bonds with the old
system, and its reform program tends to implement certain programs
deferred in the past. Such programs cannot be implemented in
principle, but they enjoy broad public support and, hence, receive
the attention of the authorities. For instance, during the
perestroika years there was serious discussion involving the
possible replication of reforms drafted in 1965, and even some
which were drafted under Lenin’s New Economic Policy [which
admitted of private enterprise within the context of the Bolshevik
government-controlled economy – Ed.]. The authorities searched in
vain for some sort of socialist economic model, but the
post-industrial age already challenged the validity of those
outdated programs.

As the Soviet government attempted to restore the independence
of economic agents under conditions of state ownership, it
strengthened the independence of the directors of the industrial
enterprises. This decision produced a dual negative effect. First,
it deepened the economic crisis, as an expansion of the factories’
independence did not entail higher responsibility for performance.
Furthermore, it strengthened the position of the director as the
factory’s owner, although not de jure. Thus it seriously aggravated
the problem that is typical of any revolution – bringing into
balance the formal and real status of the owners.

Third, the government’s self-perception as being popular with
the people deprives it of the ability to make necessary but
unpopular decisions. During perestroika, the government headed by
Prime Minister Nikolai Ryzhkov lacked the courage to raise retail
prices; this timidity set off a snowballing commodity deficit and a
collapse of the consumer market. Yet, the government’s coy policy
toward retail prices did not prevent it to raise wholesale prices,
which played into the hands of certain interest groups. Add to this
tax and budgetary populism – the readiness to cut down taxes and
increase budget spending during a severe budgetary crisis – in a
bid to buy political support.

The above three factors played a crucial role as catalysts of
the economic crisis during the perestroika years. Yet the arguments
herein mentioned should not be regarded as charges against the
early revolutionary government of Mikhail Gorbachev and Nikolai
Ryzhkov. The commencing revolutionary transformation had its own
logic that is typical of all great revolutions of the past. One
fact remains irrefutable, though: the economic decisions of the
late 1980s kicked off a heavy financial crisis that Russia had to
overcome during the entire next decade.

Later developments testified to the revolutionary nature of the
transformation. The logic of the financial crisis, property
redistribution and subsequent stabilization were typical of the
governments of all countries that had evidenced full-blown
revolutions. Inflation curves during the revolutionary age, the
history of English land ownership, the French Revolution Assignat
and debt defaults of revolutionary governments help us to
understand many things in Russia’s post-perestroika social,
economic and political processes.

But let us consider whether there were real alternatives to the
perestroika policies, and if the answer is yes, what were
they? 

REPEATING SOVIET STRATEGY?

Mikhail Gorbachev commented on one occasion that he was not
pursuing personal political goals when he began the reforms. “I had
enough resources to keep power during my lifetime,” he said.

In the early 1980s, few people expected any intensive changes
from the Soviet leadership and the most far reaching statements
were something like “improvements in the economic mechanisms” in
the style of the “reforming documents” of 1979 and 1983. Nobody saw
the sources of transformation inside the Soviet system or within
its elite. Moreover, many people had interpreted Gorbachev’s first
statements about reform as a temporary and, in all probability,
verbal liberalization. People were expecting the traditional
mobilization measures, such as toughening discipline at workplaces,
intensifying administrative control over the quality of products
(introduction of the so-called State Product Commissioning Boards
at factories), raising the amount of savings in the national
income, and maneuvering the investment course in favor of the
machine-building industry. All of these initiatives had been
envisioned by the 12th state five-year plan. In a word, a serious
market reform looked highly improbable, and many Western analysts
believed economic improvements would take the form of regulations
of centralized control, reduction in the bureaucratic chain of
command and a gradual drift toward the centralized governance
typical of East Germany. [Hanson Ph. From Stagnation to
Catastroika: Commentaries on the Soviet Economy, 1983-1991. New
York: Praeger, 1992, pp. 63-66, 68-76, 85-92.]

On the other hand, the Soviet system looked exceptionally
durable. Eminent political scientists were quite confident the
Soviet Union had long passed the age of revolutions and, like the
U.S., was invulnerable to destabilization. They viewed both
superpowers as classic examples of countries where only gradual
transformations were possible. [Huntington S.P. Political Order in
Changing Societies. Hew Haven: Yale University Press, 1968; Dunn J.
Modern Revolutions: An Introduction to the Analysis of a Political
Phenomenon. 2nd ed. Cambridge: Cambridge University Press,
1989.]

An analysis of the political processes taking place inside of
the Soviet system prompted the conclusion that it would remain
stable and durable (at least in Gorbachev’s political lifetime),
but the economic situation was not quite so clear. In the
mid-1980s, there existed two factors which prohibited the Soviet
system from being passive or stagnant. First, structural changes
had occurred in the Soviet economy as a result of an oil boom of
the 1970s. Second, the West had entered the phase of
post-industrial growth.

The commencement of the perestroika policy is often associated
with the 1984 fall of oil prices and swelling budget problems. No
doubt, this is true: in 1985 a deficit was registered in the Soviet
budget for the first time in decades. While in 1980 the budget had
a surplus of 1.3 percent of the GDP, it gave way to a 1.7-percent
deficit in 1985, which grew to 10.3 percent in just five years.

The roots of the crisis go down not to the collapse of oil
prices in the 1980s, but a sharp increase of oil prices in 1973 and
the oil boom that followed. The prices stayed at very high levels
for almost a decade and hit a new unprecedented record at the
beginning of the 1980s, when a barrel of crude would sell at about
$90 when calculated at current exchange rates. As it turned out,
high oil prices had a double effect on the Soviet economy.

Large oil revenues created a special situation that enabled the
Soviet leadership to ignore economic reform that the depressed
economy of the 1960s had necessitated. The reform of 1965 was
deemed necessary as the Soviet economy had stalled, growth rates
had begun falling, the output of consumer goods had fallen short of
the demand and industry needed many up-to-date resources. It was
obvious that the Soviet economy could function smoothly only when
there was a continuous inflow of cheap resources. From the 1930s
through to the 1950s, the pool of cheap resources had been formed
from the labor of numerous prisoners and a highly inequitable
exchange of commodities and finances with the agrarian sector. By
the mid-1960s, however, the country ran out of such resources and
reform became inevitable. But with the commissioning of the
West-Siberian oilfields, together with the oil shock of 1973, there
was ensured an influx of “easy oil dollars,” and economic reform
fell off the agenda.

Yet the Soviet economy was changing structurally, and its
dependence on earnings from the exports of energy resources was
growing. The Soviet system of the 1960s showed signs of certain
stability. There existed moderate consumption rates which permitted
a consistent level of distribution along the traditional
same-amount-good-for-all principle. Furthermore, the Soviet economy
was closed and fairly independent from foreign trade. The “positive
shock” of 1973 marked an abrupt increase on the future dependence
of the Soviet system on such external events. The Soviet government
actually used the oil revenues for a sort of structural maneuver –
it exchanged oil and gas for foodstuffs and purchased new oil and
gas equipment to increase further oil and gas output.
Simultaneously, the country was getting increasingly more dependent
on imported food (see Table 1 and Table 2).

Naturally, industrial efficiency, labor productivity and the
quest for new innovations receded to the background of the
government’s attention. It eagerly stated their importance, but the
good disposition did not go farther than ritual statements.
Innovative activity was confined to defense production. But since
the country’s defense potential depended as much on the defense
industry as on the economic and political environment in the
country, the defense sector was also influenced by the situation in
foreign trade activity.

At this time, the Soviet economy grew considerably more open, as
did its dependence on the international market situation.
Furthermore, an important change occurred in the structure of the
Soviet economy, as well as in the psychological disposition of the
nation. The economy now depended on the international market
situation, apart from the availability of inexpensive resources. By
the end of the 1970s, it became obvious that the Soviet Union could
no longer ensure its stability without massive imports of
foodstuffs. Soviet society began opening up to the outside world,
as increasing numbers of people started to travel abroad and
getting to know the way of life in Western democracies. Amassed
imports of consumer goods further discredited the Soviet economic
system. In fact, imported consumer goods opened for the Soviets a
window to the Western lifestyle.

Falling energy resource prices could not help but provoke a
heavy crisis which was economic as well as political in nature. It
also included problems concerning the maintenance of military and
strategic parity with the U.S. This eventually meant that
Communism, nourished by a standoff with an opposing system, was
doomed.
Hypothetically, the government could have begun “screw-tightening,”
that is, permitted a fall in living standards and reverted to the
old socio-economic model that was hinged on mobilization. This
option, however, had three powerful obstacles to it.

First, the elite, urbanized and educated sections of society
would have refused to accept such developments. Unlike in the first
decades of the 20th century, the people had accumulated some
material and cultural assets and were unwilling to lose them. This
circumstance set barriers against converting the masses and
mobilizing society to sustain material losses “in the name of a
bright future.”

Second, the new stage in the development of productive forces
practically eliminated the possibility for an advance within the
format of a closed economy and in disregard of the globalization
processes. Even a reverting to the mobilization model would not
make it possible to boost the development of productive forces to a
level suitable for the upkeep of the defense potential and
retention of the status of a superpower. In other words, the result
would be the same as in the case of a fall in oil prices. But it is
also true that the demise of the system might have taken a much
longer time – the system had enough energy to drag on until the end
of Gorbachev’s political life.

Third, the urban population with its demographic habits (one or
two children per family) was not prepared to support the military
and political adventures essential to maintaining the country’s
status of a superpower. Despite the tremendous pride that the
citizens had in their vast and powerful country which was supported
by satellite states, they would not agree to pay with their very
lives for the preservation of such a system.

To sum up, all the opportunities to maintain the Soviet system
without great changes had been exhausted by the mid-1980s.

TRANSFORMATION CHINESE-STYLE: PRO AND CONTRA

Today, there are Russian politicians and researchers who argue
that the political reforms in the Soviet Union were a mistake,
while the Chinese method of reform might have been the best model
to follow.

The Chinese transformation that was launched in 1978 had a
special feature: economic reforms prevailed over the political
ones. The Chinese economy was overhauled to a much greater degree
than the political system, which remains essentially totalitarian
and relies on the monopoly of the Communist Party – although it,
too, has experienced some modifications. The one-party system has
remained intact; the regime maintains an ideological stringency,
while the old nomenklatura keeps power in its hands. Thus, economic
changes are gradual and well controlled by the state, which puts
down any attempts of political activity by individual members of
society.

There are several arguments of an economic and socio-political
nature as to why the Chinese path is inapplicable in present-day
Russia, and, furthermore, why it could not have been helpful in the
Soviet Union.

The political impossibility of using the Chinese recipe in
post-Communist Russia is obvious. The Chinese method presupposes
the presence of a totalitarian regime as a core political element.
That regime exercises an all-embracing control over all aspects of
life through vertical party structures and state security agencies.
In Russia, the liberal reforms of late 1991 and early 1992 began in
the absence of a state machinery, to say nothing of a strong state
– by that time the Soviet Union had ceased to exist.

The socio-economic structure of Chinese society resembled the
Soviet one – yet not that of the 1980s, but from the period of
Lenin’s New Economic Policy. Specifically, China of the 1980s and
the 1990s was more similar to the Soviet Union of the 1920s and the
1930s. This is obvious when we look at specific indicators, such as
the correlation of the urban and rural population, the structure of
the Gross National Product and employment, the level of literacy,
the social security system, the resultant per capita GDP and public
sector share in GDP (see Table 3).

In other words, there are three crucial – and interconnected –
conditions for fast economic growth with the preservation of
political authoritarianism. First, a relatively low level of
economic development: this implies the non-involvement of large
labor resources in efficient production (i.e. overpopulation of
rural areas). Second, a low level of social development: the
government does not make social commitments that are typical of the
developed nations. (For instance, social insurance and guaranteed
pensions cover 20 percent of the Chinese population, while in the
Soviet Union those social guarantees were enjoyed by the entire
population.) Third, a low educational level: the demand for
democratization is not of paramount importance for the greater part
of the population.

All of these factors are present in China, while none of them
were to be found in the Soviet Union of the 1980s. That is why
those people insisting that Russia take lessons from China must
agree to the following main conditions for such development. First,
the government renounces its social pledges, which would involve
the elimination of the bulk of pensions and social benefits, as
well as a sharp reduction in free services in public healthcare and
education. Second, it reduces the public sector share in GDP to 20
to 25 percent from the current 36 to 40 percent.

The architects of reform should also take account of two
distinct properties of the educated urban population – it has a
good historical memory and depends on the government’s social
spending.

People in the rural areas offer a straightforward reaction to
any changes: in the past, after the nation had passed through a war
or violent campaign, for example, the provincial folk returned to
their customary business and the economic growth in the country
quickly resumes. People from the urban areas, on the other hand,
behave differently – they remember historical precedents and are
more difficult to deceive. Soviet society of the 1980s was already
fairly mature and well educated and the country was open enough to
accommodate a more Western lifestyle. Thus, the people would not
believe in the sincerity of the party leadership’s economic
initiatives in the absence of political changes. Reform-minded
Soviet officials had to prove that their actions were not mere
rhetoric or a provocation of the security forces and thus
demonstrate a real readiness for political change.

A slashing of the public sector burden on the economy – similar
to that in China – was not permissible for Russia. In China, the
abrupt cutting of the public sector share in the GDP was possible
because it renounced the subsidization of its non-profitable
industrial facilities – a step that caused no major social problems
in a predominantly agrarian country. But the Soviet leaders did not
venture such a policy for political considerations. Too many
industrial facilities could have immediately collapsed, thus
accelerating the crisis in the Soviet economy. (I once asked
Mikhail Gorbachev why he and his associates had not tried to take
the Chinese path. The former leader of the Soviet Union said that
the majority of people understood the fundamental differences
between the situation in the Soviet Union and China.)
Finally, the stability factor is of crucial importance, too. Since
the mid-1990s, China has occupied the top position in terms of
foreign investment. Many analysts link the Chinese reforms to the
investment boom. However, statistics show that Beijing started its
reform program in 1978, while large amount of foreign investment
did not begin to enter the Chinese budget until 1992. In other
words, it took China 13 years of reform initiatives and political
stability to win the trust of foreign investors.

THE EXPERIENCE OF CENTRAL AND EAST EUROPEAN COUNTRIES

Russia’s transformation was starkly different from the
transformations that took place in the countries of Central and
Eastern Europe, including the former Soviet Baltic republics.
Although all of their starting points were the same (all found
themselves in a post-Soviet crisis) and had identical objectives
(building modern market democracies), later – during the
post-Communist transformation – they showed noticeable differences
in the character, pace and mechanisms of their reforms.
Russia and the former Soviet bloc countries chose the
liberalization of prices and foreign trade, macroeconomic
stabilization, privatization, together with the creation of
incentives for the emergence of new businesses. However, most
Central and East European countries succeeded in divorcing
themselves from the heritage of Communism faster than Russia and at
a lower cost. Those countries were able to quickly attain
stabilization, bring order into property relations and achieve
overall economic growth (see Table 4).

The reason for such discrepancies lies in the political sphere.
The collapse of Communism was tantamount to national liberation in
Central and East European countries, that is, liberation from a
system that had been imposed on them through the use of force.
Conversely, the Soviet Union had to overcome the fall of a system
that had grown from within. This factor predetermined an
evolutionary transformation in the first case and a revolutionary
one in the latter.

From the very start, people in Central and Eastern Europe shared
consensus over the direction of their transformation – returning to
Europe and joining the existing European economic and political
institutions, above all, the EU and NATO. Those objectives were
shared by the entire political elite, both on the left and on the
right, except for some marginal political groups. Whatever the
dimensions and complexity of the post-Communist transformation in
those countries, there was no talk of a full-blown revolution, i.e.
the collapse of the state and the need to restore major
institutions of power. The certainty about the guidelines for
progress and the steady functioning of  key institutions
(primarily, judicial and legal agencies) always limit transactional
costs, stimulate the development of private business and,
consequently, lead to economic growth.

An additional factor making the policies of Central and East
European countries predictable was their declaration to join the EU
and NATO, as well as the preparedness of the two alliances for
enlargement. The candidacy terms for the countries seeking
accession to the EU and NATO set clear tasks for institutional
reforms and provided certain external control by the more developed
nations – also members of these alliances. Thus, a barrier was
erected against possible populist risings in Central and East
European countries and this significantly contributed to their
overcoming the post-Communist crisis. It should be mentioned,
however, that their adoption of cumbersome and highly expensive
European legislation later slowed down their economic growth.

As stated earlier, in contrast to Central and East European
countries, the former Soviet Union experienced a full-blown
revolution. The collapse of government institutions, together with
the collapse of the Soviet empire and the absence of external
stimuli for stabilization, dramatically extended the time needed to
overcome the systemic crisis. As a result, post-Communist
transformation in Russia, although similar in form with the other
Communist countries (liberalization, stabilization, privatization,
etc.,) had specific features.

First, macroeconomic stabilization took a longer period of time.
Political fighting in a society on the brink of revolution made
financial and monetary policy a hostage. Inflation, which in
essence is a process of redistribution, turned into an instrument
of political struggle. Its rate often reflected a balance between
the groups of people interested in stabilization and those whose
economic aspirations would suffer from it. The immense weakness of
state power and its dependence on different interest groups forced
the people in power to build shaky coalitions, sometimes at the
price of macroeconomic stability.

Second, issues concerning property often became an important
factor in the political struggle. Generally, the redistribution of
property (privatization in the case of Russia) can pursue three
objectives: 1) the creation of efficient owners, 2) replenishment
of the budget, and 3) the winning (or purchase) of political
support. In the conditions of a revolutionary crisis, the political
objective of privatization unavoidably moves into the foreground,
since serious investors (candidates for “efficient owners”) do not
put their money into an economy that is plagued with political
ambiguity. This means that the government redistributes property to
build up its social base, while efficient owners enter the economy
only after the revolution is over. Naturally, such a situation
slows down a country’s pulling out of crisis and its efforts to
achieve a steady economic growth.

Third, a crisis involving political institutions obstructs
business activity. The laws regulating the economy may be good, but
it is much more important for a businessman to see how they are
applied in practice and how the government ensures their normal
functioning. First and foremost, this concerns the judiciary and
law enforcement systems. If they are inefficient, this drives up
transactional costs and often forces businesspeople to incur extra
expenses (for protection of property, maintaining private police
and lawyers), which in turn drives up the cost of their products or
services. Such a scenario hinders competitiveness in the
country.
The specific features of Russia’s transformation discussed above
are not unique, and all of them can be found in the great
revolutions of the past. At the same time, the model of
post-Communist transformation in the Central and East European
countries can hardly be regarded as an alternative to Russia’s
reforms. Although having identical goals, we are approaching them
under different conditions while relying on the political
institutions which our countries inherited from the last
governments of the Communist era. In Russia’s case, it is the
heritage of perestroika.