13.10.2006
Uncompleted Transition
№4 2006 October/ December
Leonid Grigoriev

Leonid Grigoriev is chief advisor to the head of the Analysis Center under the Government of the Russian Federation, Head of the World Economy Chair of the World Economy and International Affairs Department of the National Research University–Higher School of Economics.

Fifteen new states emerged in the
post-Soviet area after the break up of the Soviet Union and the
achievement of independendence in 1991. Since then their
development has been largely influenced by both political and
economic factors. Political factors often determined the economic
progress, as key decisions concerning market reform were made by
the political elites. As a result, political processes had a
critical effect on the legal and economic environment in the FSU
during the transition period.



All of the former Soviet
states were challenged by a “triple transition:” politically – from
a Soviet state to a democracy; economically –  from a planned economy to a market economy; and
structurally – from a republic as part of a large country to an
independent state.

 

The difficulties of this transition
were enormous, even if they were not aggravated by internal
conflicts.

 

THE TRANSITION CRISIS

 

All FSU countries were confronted
with the pressing need of creating complex mechanisms of regulatory
rules, property rights and corporate governance – formidable tasks
for the new elites. Within a brief time span (1991-1993), several
destructive processes occurred simultaneously: the rupture of “old
planned” links between business enterprises, which came as a second
shock after the disintegration of the Council for Mutual Economic
Assistance (CMEA, also known as Comecon) a year before.
Furthermore, there was an acute budgetary crisis: Russian budget
deficit in 1992 was close to 43 percent of the GDP, accompanied by
a CPI surge at 40 times a year. In the other newly independent
states the picture was similar. The economic crisis was accompanied
by hyperinflation, chaos, and the confusion and disorientation of
economic managers whose lack of vision forced them to establish
control over enterprises out of self-interest and the logic of
survival. Against this backdrop, and with passions running high
over the issue of independence and the formation of new political
elites, armed conflicts broke out in several countries. It was at
this time that the first refugees and labor migrants began to
appear.

Graph 1.          GDP
Changes, 1990 = 100 (constant prices)

Source: UNSD, IMF (GDP estimate), EIA
(oil price estimate)

 

At first glance, it may seem that the
shock caused by the breakup of the Soviet Union was similar for all
newly independent states both in intensity and in form. Yet the
outcome much depended on the assets structure and the quality of
policies. Even within the Russian Federation, the impact of the
disintegration differed substantially by regions. The Central and
East European countries had experienced an economic crisis in 1990,
therefore in Graph 1 the intensity level is somewhat reduced for
this region. The post-Soviet countries experienced a deeper crisis
than their European neighbors. Judging by GDP fluctuations in the
period 1990 through 2005, the three Baltic republics are closer to
the Central and East European countries, while Russia, with its
large influence in the post-Soviet area, occupies an intermediary
position with huge regional differences.

 

Despite the fact that the start of
the 21st century was marked by economic growth in the majority of
these countries, not all of the post-Soviet countries have
completely overcome the severe transition crisis (see Table 1). GDP
declined the most steeply in Georgia, which was apparently caused
by the country’s economic policy and territorial conflict though it
had very good start-up resources.

 

Table 1. GDP and Electricity
Generation in FSU Countries,

 

 

  

Source: CIS Statistics Committee,
IMF, Euromonitor

 

The newly independent states had to
rely on their own natural and acquired competitive advantages.
After the industrial crash, the basic factors were geographic
position, accumulated productive assets (a country’s
specialization), human capital, and the quality of market
institutions. The last factor has taken center stage in studies
over the past decade, since it became clear that simple dissection
of production growth into labor and capital growth does not explain
the huge disparity in the level of effectiveness regarding the use
of national (regional) resources. Needless to say, the existence of
specific competitive factors, such as natural resources (oil in
Azerbaijan, or gas in Turkmenistan) or geography (transit in the
Baltic countries), is conducive to national development, although
it is also essential for every state to make a sensible use of its
competitive advantages and to seek consensus in dealing with
outstanding problems.

 

Methods for assessing economic
effectiveness coexist with a huge number of prejudices and myths
about economic effectiveness per se. At the time of the breakdown
of the Soviet Union, the Soviet republics generally believed that
they were sustaining enormous losses, caused by centralized price
controls, as well as by their status as constituent republics.
There is no question that all economic agents sustained heavy
losses due to rigid, non-market price mechanisms, especially in the
late 1980s when the planned economy experienced a profound crisis.
However, the massive system of internal subsidies often benefited
certain regions that had either a better array of valuable
resources or better opportunities to lobby the government for more
subsidies and investment.

 

The economic legacy that the newly
independent states inherited from the Soviet Union had several
aspects. First, almost all of the republics had a fairly high level
of literacy, education and healthcare. Even after a decade of
chronic under-financing in the social sphere, for example, their
education and mortality levels are considerably better than in most
developing countries although they are still behind the more
developed democracies. It is hardly surprising that although the
quality of universities and research centers varied considerably in
different republics, relatively high secondary education standards
were provided in all of them. Characteristically, the 2002 study of
the social security standards of eight CIS countries made by the UN
Committee for Development Policy showed that none of these
countries corresponded to the status of a “less developed” country.
However, in terms of their per capita GDP (which is less than $800)
and composite Economic Vulnerability Index, almost all of these
countries could be included into the “less developed” group (which
enjoys certain trade privileges on the U.S. and EU markets).

 

Second, the Soviet system that
controlled the redistribution of resources through prices and
capital investment was designed to even out the levels of
development. For example, Georgia as a Soviet republic received
economic preferences, the loss of which affected the country’s
prosperity in the subsequent period. In the 1980s, Moldavia used
centralized funds to build a large complex of research centers for
the Academy of Sciences, which later fell into disrepair. Under the
Soviet system, the flow of energy resources, the prices of which
were considerably undervalued in a planned economy, also played an
essential role. The changes in relative prices, which occurred
during the first decade of the transition period and which became a
major development factor, occurred almost spontaneously, bringing
them more or less in line with world prices. Some countries (for
example, Ukraine) would have never built energy-consuming
industries if it had not been for low energy prices in the Soviet
Union.

 

Third, the problems those countries
confronted after the breakup of a common planned economic space
involved the disintegration of economic links, the institution of
customs borders, and the disappearance of guaranteed demand for the
goods that they produced. The less diversified a region’s economy
was, the stronger was the trade shock.

 

The present status of the CIS
countries is the result not so much of startup opportunities, or
external impacts, as of the level of stability and performance by
new ruling elites. Generally, 15 years is enough time for a state
to create the basic institutions of statehood, property rights and
governance, and a free market (and all countries had a substantial
external technical assistance for building the institutions). It is
enough time to define the goals and lines of development. It is
also enough time for business players to form local investment
models, taking into account all of the profitability and risk
factors. The character of the economic process in each country was
to a very large degree predetermined by the ability of the national
elite to ensure social peace, stability and the predictability of
macroeconomic policy, establish effective legal institutions and
guarantee property rights – in other words, reduce the internal
political costs of reform and development.

 

The character of the transition
crisis was largely dependent on the original branch structure of
the economy. Thus, the manufacturing industry (especially the
defense sector) was hurt the most. Naturally, the raw materials
sectors were less affected, which contributed to low commodity
prices in the 1990s. Predictably, the main victims of the budgetary
crisis were the realms of education, healthcare and science. Amid
fierce competition on the global markets, the agricultural sector
did not show much progress. However, there was growth in domestic
trade, transport, communications, and housing construction
segments. The transition period saw a drastic change in the
economic structure: viable sectors of the economy, especially the
services industry, were crucial for overcoming the crisis.

 

During the 1990-94 period, all FSU
countries experienced a sharp decline in economic performance
indicators, which was accompanied by hyperinflation, unemployment,
the loss of certain industries, and an abrupt change in the
structure of property rights. In 1995-97, the first signs of
economic stabilization emerged in almost all post-Soviet countries.
An essential factor in the development of export to Russia during
this period was the overvalued rate of the ruble in Russia, which
was supposed to serve the “magic” goal of macro-stabilization.
Traditional exports to Russia were sustained by the disparity both
in the level of wages and in the exchange rates of national
currencies. Russia’s macroeconomic policy provided some vital space
for neighboring economies. Meanwhile, the decline continued in
almost all countries, but was less severe as compared with the
first stage. This growth period proved to be short-lived, and its
end was marked by the collapse of the “ruble corridor” that had
been established, and a financial meltdown in Russia.

 

Today, the events of 1996-99 have
more or less been forgotten, especially considering the good
condition of many performance indicators. The Russian economy
survived the consequences of the fluctuation band, the GKO (T-bill)
pyramid investment scheme, and the macroeconomic policy of that
time. But in trade relations with the CIS, Baltic and CMEA
countries, traditional exporters to Russia, the consequences were
extremely serious. The artificially “strong” ruble in 1996-98 gave
some respite to these countries’ exports, but this made the second
export shock for the FSU countries all the worse. Financial
upheavals and a four-times nominal (50-percent real) devaluation of
the ruble put the neighboring countries in a very difficult
position. Major Western exporters (e.g., meat exporters) were only
able to preserve their hold on the Russian market by drastically
cutting their prices. Russia’s share in regional trade
plummeted.

 

This marked a turning point in trade
relations between Russia and Ukraine and some other countries which
turned to the EU markets. The decline in import demand in Russia
accelerated the development of Russia’s domestic industry; it also
forced the weaker enterprises in Ukraine and other countries to
reorient themselves toward other markets, especially in the EU.
This period was marked by the rapid expansion of the Russian
economy and its import capacity both due to general growth and the
appreciation of the ruble (in 2006, it surpassed the July 1998
level). Rapid economic growth in 2000-05 created a new situation:
there was suddenly a high demand for a labor force in Russia, as
well as a search for investment opportunities for Russian capital
outside the country. Likewise, in the EU, economic stagnation in
2001-2003 was followed by an upturn, growth in export, and
increasing demand for foreign labor, which consolidated the
reorientation of economic relations. In 2004, the admission of 10
Central and East European countries to the EU changed the
conditions for development, since it gave some of these countries
better opportunities to compete on EU markets. However, former FSU
countries still export most finished goods to Russia.

 

Growth in the FSU countries resumed
at different periods. The three Baltic States achieved a growth
phase together with the Central and East European countries back in
the mid-1990s, whereas Russia and the majority of other FSU
countries did not see growth until the turn of the millennium. At
the same time, robust political developments occurred in these
countries, impacting on their economic policy with regard to the EU
and Russia. The governments of these countries were confronted with
a conflict between the actual state of the economy and the people’s
aspirations. Whereas during the first decade of the transition
period the general economic crisis did not give much hope for the
future, at the start of the 21st century the situation changed –
principally due to the economic upturn in Russia and the EU, as
well as due to the EU’s eastward expansion. The upturn in the
region, the large number of foreign labor in EU countries and in
Russia, and the invigoration of Russian business stand in marked
contrast with the situation in neighboring countries. This calls
into question the results of the first few years of independence,
as well as their development goals, means of achieving these goals,
and ways of improving living standards.

 

TRANSITIONAL DEVELOPMENT
MODELS

 

After the severe transition crisis,
the post-Soviet countries could not integrate into the global
economy within a short period. Their approaches to this integration
can be classified into four development models:

 

Model A: migration model (“starting
over”);

 

Model B: industrial model (attempt to
preserve assets);

 

Model C: resources model (oil and
gas);

 

Model D: services model
(restructuring and services).

 

Model A is connected
with de-industrialization, increased competition with foreign
imports, impoverishment of the population, and people
border-crossing in search of employment. In Russia, this model is
present as well, and the movement of citizens is directed, as a
rule, to the capital or southern regions of the country (i.e. the
Krasnodar Region). This model has several characteristic features:
workers’ remittances go directly to their families, bypassing the
state budget. Large countries have more levers for redistributing
budgetary resources in favor of governance and general state tasks,
whereas small countries need external donors (grants and loans).
The attraction of capital, given the cheap labor force, is limited
due to the difficulties associated with organizing a business
climate, as well as by the outflow of highly skilled
specialists.

 

Model B presupposes
a higher previous level of industrialization and attempts to
preserve the industrial sector for the future. This model also
presupposes more stable markets and the preservation of firms where
Soviet industrial assets were once concentrated. This is the most
difficult model for a country or region with regard to economic
policy, but it does provide the opportunity amidst global
competition to retain a high level of competitiveness in the field
of human capital instead of exporting it. This model, however, is
characterized by particularly acute problems pertaining to
privatization, property rights and the collection of taxes from
enterprises. It is also plagued by huge difficulties in formulating
a realistic industrial policy, as well as preserving scientific and
educational potential.

 

Model C offers
advantages of its own, including high incomes for the state and
some industries. On the other hand, it creates institutional
problems for the development of other industries (and regions).
Also, it depends on the global price cycle for raw-material
exports. The difficulties of using oil revenues for development are
well known and only a few countries – especially the developed
countries with strong market institutions (e.g. Norway, Great
Britain, and the Netherlands) – have managed to successfully deal
with such a strategy.

 

Model D
characterizes countries that had a comparatively high level of
economic development at the time of the Soviet Union’s break-up. It
also includes countries that had natural competitive advantages,
most importantly of a geographical nature, which enabled them to
develop their services sector and attract foreign capital. This
group includes all Baltic States.

 

It should be noted that the suggested
classification is an approximation: Belarus, Uzbekistan and
Turkmenistan, for example, had a lot of specifics. Russia has
passed through all the transitional models: throughout the last 15
years it has been a major market of goods, a source of raw
materials and energy, a provider of surplus labor force, and an
important source of private capital investment for a majority of
the post-Soviet countries. Russia has had a strong impact on
neighboring economies through fluctuations in prices and ruble
rates and its inconsistent economic policy. In particular, these
factors caused economic decline in a majority of the CIS states,
which continued until 1998-1999, and a second trade shock after the
collapse of the ruble during the financial crash. Since 2000, there
has been a parallel and largely shared improvement of the economic
situation and economic growth in those countries. Processes in the
energy sector played a special role in those developments, although
we believe that role was overexaggerated. Naturally, skyrocketing
energy prices in 2004-2006 were advantageous for countries with
hydrocarbon resources, such as Azerbaijan, as regards their budget
revenues and production costs (as a result of a difference between
internal and export prices).

 

The CIS countries largely
implement three approaches to their further development: the
migration (“starting over”), industrial (preserving assets), and
resources (oil and gas) ones, while the Baltic States had their
rather different way of development.

Table 2. Social and Economic
Indices of Post-Soviet Countries, Grouped According to the
Transitional Development Models 
(2004, if
not specified otherwise)

Source: ILO, CIS Statistics
Committee, WDI, WEO IMF, Eurostat, estimates by the Institute
for
 Energy and
Finance.

 

* Russia also belongs to the
resources model of development.

 

** Ukraine also belongs to the
industrial model of development.

 

We believe that the nature of market
institutions and political aspects of the transformation correspond
to the basic industrial assets and financial sources of
development. This refers both to the post-Soviet countries and
groups of regions in Russia. The Baltic States, for example, have
preserved and effectively use their old assets, such as the Tallinn
port and the Ignalinskaya nuclear power plant. Georgia and Moldova
have failed to use much of their industrial assets. Investments
made in these countries’ industries over the last 15 years have
been insignificant, and their main revenues come from the agrarian
sector, services, transit, and other spheres. The program for these
countries’ integration into the global economy for the last two to
three years has been rather simple (Model A). First of all, it
provides for maintaining the stability of state expenditures (and
the ruling elite) by means of transit revenues, grants and loans.
Second, these countries seek to develop the primary sector,
services, primary processing, and small businesses. They also work
to attract foreign capital, and gradually improve the business
climate in the hope for medium investors and the re-investment of
money transfers from labor migrants. Naturally, it is difficult to
expect high-value-added goods from this program, nor the
development of research on a major scale. Actually, economic growth
in these countries brings only a gradual increase in the standard
of living and a reduction in the poverty level, but it does not
restore their development level.

 

Transdniestria, a break-away part of
Moldova and an industrial enclave between agrarian regions of
Moldova and Ukraine, provides an example of an attempt to survive
according to Model B, although in highly unfavorable conditions. It
is very important to note in this respect the similarity between
the Russian and Ukrainian industrial regions that found themselves
in a difficult situation: the opening of the economy and reductions
in state orders revealed the low competitiveness of Soviet
industry.

 

In the medium term, however, factors
that must have greater influence on the development of business
include privatization, the competitive environment, and the
guarantee of property rights by the state. Attempts to rely on
productive assets and human capital provide for the establishment
of competitive firms in countries in transition. Effectiveness of
these firms depends not only on production costs, product quality
and the execution of contracts, but also on understanding of global
markets, strategies for the development of industries, the logic of
financing, mergers and amalgamations. In other words, they compete
with firms with experience that are gained over decades. New firms
are large in size and they by far exceed the boundaries of local
markets and must survive full-scale and ruthless global competition
– no allowances are made here for the “transition period.”

 

In those sectors of the economy that
have retained the potential for development, universal conditions
are necessary, such as stability of property rights, execution of
contracts, and acceptable macroeconomic conditions. Also important
is the predictability of state policy, taxes, and economic policy
in a broad sense of the word. Preservation of more advanced sectors
of the economy (clusters, including special education) makes it
possible to consolidate the educational level achieved earlier,
together with a more qualified labor force, and this creates
prerequisites for improving the country’s place in the
international division of labor. Countries’ efforts in this respect
are usually connected with competition on export markets and are
intended to turn export revenues into a national development
resource.

 

Countries that have to use revenues
from oil exports and transit fees include Azerbaijan, which has a
chance for integration into the global economy on the basis of its
oil exports. Kazakhstan is making strenuous efforts to preserve its
scientific and industrial sectors, and to wisely use its oil
revenues to enter the global economy as a developed country rather
than an oil enclave (Strategies B and C). From the point of view of
the global market, Azerbaijan and Kazakhstan represent another “oil
space” that is necessary for maintaining the global balance. (These
countries must decide for themselves how to avoid the “Dutch
disease” and what will be left for the generations to come after
the oil boom.) These countries use their vast hydrocarbon resources
both to maintain consumption and resolve various state tasks
(turning these revenues into a source of funding modernization
projects poses a more difficult problem).

 

MIGRATION AND DEMOGRAPHY

 

The main factor in the social realm
during this period has been mass impoverishment and the resultant
migration. The first upheaval came with the crisis, which led to
unemployment and a drastic decline in income levels. The second,
and more telling blow came with migration; this involved separation
of millions of people from their families, motherlands, and the
native language and culture. At this time, the migrants saw a
decline in their social status and a loss in their cultural
identity. As a general rule migrants were unable to use their
education to work in jobs they had been trained for. Thus, vast
amounts of human capital were lost on par with production
assets.

 

The transition crisis of the 1990s
evolved as the majority of the FSU states saw a dramatic decline in
births. This holds true for the demographic situation throughout
Europe. Demographics played a key factor in the development of the
labor market, labor migration, and an economically active
population. Populations in the majority of European countries
shrank in the 1990-2005 period.

 

Predictably, the Central Asian
countries saw their populations grow rapidly. Russia was able to
maintain a stable population level due to immigration, although its
demographics were “as bad as in Italy.” By 2005, the absolute
decline in Russia’s population was a little higher than in Ukraine
(5.5 mln as compared with 4.9 mln, respectively). Within 15 years,
Ukraine had lost one in every 10 citizens, while Georgia lost one
in every five. Although this means that these countries are a
little better placed to restore the pre-crisis per capita GDP
level, this is small consolation. Needless to say, shrinking
populations somewhat alleviated the unemployment problem, but it
also increased the pressure on those who are employed, especially
considering that large numbers of working-age people, including
young people, have emigrated.

 

The dynamics of an economically
active population points to a more complex employment structure. On
this point, it would be useful to provide statistics on three
categories of the population: those working at home, in the EU, and
in Russia (as in the case of financial flows with regard to net
recipient and net donor countries). Russia has generally maintained
its employment level: the loss of 2 mln people (according to the
census) has been compensated by illegal immigration. Moldova,
Ukraine (especially its agricultural regions), Azerbaijan, and
Georgia lost huge amounts of their workforce. While Moldova’s labor
migration moves to Russia and through Romania to the EU, Georgian
migration is more oriented toward Russia. In Ukraine, the labor
migration flow moves from the country’s western (relatively poor)
regions into the EU, and from its central and (more developed)
eastern parts into Russia.

Table 3. Economically Active
Population, Employed Population, 
and the Level of Unemployment in FSU Countries
(1990-2005), 
mln
people

  

Source: ILO, Euromonitor, CIS
Statistics Committee, estimates by the Institute for Energy and
Finance

 

As evident from the figures, there is
a marked difference between labor migration to Russia and the EU
countries. In the EU, people from the FSU countries have to compete
with Polish and Lithuanian workforce, as well as with migrants from
the Balkans, Africa, and so on. Wages are higher, but the language
barrier and the difficulties of cultural assimilation are also
greater. At the same time, labor migrants from the FSU countries
have a better chance of acquiring a permanent residence status.
This is beneficial for the EU, since this workforce is cheaper than
hiring “natives.” As for the “donor” country, it loses its human
capital forever.

 

The situation in Russia is different.
Language does not present a problem since most immigrants from the
FSU already speak Russian and their adaptation is much easier than
in the EU. Meanwhile, the local authorities are not particularly
friendly to outsiders. With open borders, there is no much
difficulty for workers’ remittances to reach their families.

 

While for some CIS countries labor
migration has a positive effect, the macroeconomic consequences of
labor migration are moot.  This view
seemed validated in 2003 when IMF experts identified the negative
impact of migrant money transfers on economic growth. We believe
that workers’ remittances played an outstanding role in the region
during the transition crisis by maintaining personal consumption,
compensating for the lack of social security, etc. in many CIS
countries. Russia has made a valuable contribution to the
stabilization of the economic situation in those countries and
their economic growth through these small yet numerous migrant
money transfers, rather than by financial aid for their governments
or even by investments made by businesses. In this respect, Russia
served as a source of incomes for these countries in the same way
as the United States did for Latin America, Germany for the Balkans
and Turkey, France for North Africa, and Saudi Arabia and other oil
exporters did for Egypt, Pakistan, Palestine and other
countries.

 

One notable element of the migration
process has been the movement of ethnic Russians and
Russian-speakers (as well as mixed families) to Russia. Large
numbers of ethnic Germans, Greeks, and Jews also left many CIS
republics, leading to a decline in population and skilled
workforce. Russian-speakers were primarily squeezed out of
government positions, industry, and education, especially if the
new political elites saw Russian culture as a threat to the
formation of their titular nation. Not surprisingly, non-titular
minorities in the FSU were fully or partially excluded from the
privatization of Soviet assets.

 

The exact scale of migration from the
FSU countries to Russia is unknown. For example, according to the
2002 Russian census, there were 621,000 ethnic Azerbaijanis in
Russia, but considering that a large number are in Russia
illegally, their actual number must be much higher. According to
Azerbaijan’s Foreign Ministry, the number of Azerbaijanis working
is Russia is as high as 1 mln, which means that their total number
may be between 1.5 mln and 2 mln. There is no visa regime between
Russia and Azerbaijan, so a large proportion of migrants only
arrive as seasonal labor.

 

Labor losses are bound to affect the
countries’ future economic growth, especially in new dynamic
sectors of industry. Table 4 shows population fluctuations in the
FSU countries.

Table 4. Total Population Forecast
for the FSU Countries, 
million, 1990-2030 

 

Source: UN Population Forecast (2004
revision)

 

World economic and social sciences
have been rather heartless in the treatment of the millions of
people who had to leave their homes in the wake of the collapse of
the Soviet system and its member states. Whereas the situation of
ethnic minorities in their “natural habitat” is a subject of close
scrutiny by the international community, as reflected in
international conventions and national loan agreements, the many
millions of displaced people are only considered as labor migrants.
It should be noted that the education and qualification levels of
migrants from the FSU countries to the EU and Russia are higher
than average.

 

In closing, it should be pointed out
that Russia’s demographic prospects through 2030 do not look very
bright, but they are not entirely hopeless, considering its ability
to attract labor with a temporary or permanent residence status. It
is important to provide workforces from neighboring countries with
respectable (cultural and administrative) conditions, despite the
fact that Russia will not be in a position in the foreseeable
future to pay labor migrants as much as they can make in any of the
EU-15 countries.

 

INTEGRATION AMIDST
GLOBALIZATION

 

The 15-year development of countries
in the post-Soviet space and in Central Europe has shown how the
reserve and structure of production and human capital influences
the means and costs of integration into the global economy. The
transitional crisis has removed many barriers to integration; on
the other hand, it has complicated adaptation to global
competition. Today, when dreams and disappointments are in the
past, countries have to decide anew what to do about integration
under the modern conditions of globalization.

 

During the first few years of the
transitional period, the transformation of society, the state and
economy was a top priority. Later, these issues became intertwined
with efforts to overcome the social, economic and political
consequences of the transition crisis. The need to keep society in
a stable condition and to complete the formation of new democratic
and market-economy institutions for a long time overshadowed what
usually is the focus of economic and social activity of any
government: the solution of acute problems pertaining to economic
development, poverty, modernization, regional and social
inequality, international competitiveness, etc. Insufficient
attention, together with a lack of funds, has aggravated the social
and economic conditions (education, public health, the position of
children, jobs for educated young people, etc.) in Russia and
elsewhere.

 

Today, there have emerged new,
although imperfect, market institutions in the CIS space, and
economic growth has begun. Thus, there are really no grounds for
postponing the solution of serious economic problems “until later,
after the reforms are over.” Therefore, the choice for a way out of
the transition crisis for the post-Soviet countries is also a
choice of ways for modernization, and determining the role of
society, businesses and the state within the global economy.

 

The intitial five-year crisis
(1990-1994) cost the more advanced and homogeneous countries of
Central Europe a good part of their heavy industry. However,
structural changes in favor of services and increased foreign
investment have helped these countries to restore their pre-crisis
GDP level. The more difficult a country, that is, the lower its
starting level, and the less homogeneous it is, the more difficult
will be its integration. Poland, for example, is experiencing
fierce competition against its domestic agriculture; it is still
unable to solve budgetary problems; its debts continue to grow,
even though part of its debts was written-off in the early
1990s.

 

Inherent weaknesses of the newly
independent countries include not only high social costs and poor
product quality, but also a shortage of managerial capital with the
experience and abilities required to successfully compete on the
global market. The most difficult problems confronting Russia are
the highly uneven development of its regions, the loss of some
industries, and the acute shortage of investment in infrastructure.
Russian economists still argue whether the country’s oil and gas
wealth is a gift or a curse, tending more and more to agree with
the latter variant. On the other hand, this wealth gives Russia
more room for maneuver (although creating some problems), which a
majority of other countries do not have.

 

Countries of the former Soviet Union
have to adapt to global competition with large starting production
and human capital, but a deficit of managerial capital. They also
have undeveloped financial sectors, and suffer from gaps in
regional development. Although states and regions may employ
different instruments in their economic policy, the nature of their
development at the first stage of market-economy formation always
stems from their resources and geographical location. Whether it is
a country, a part of the country, or a territory within a larger
region, each seeks to improve its economic situation. They achieve
this objective by relying on its assets, economic policy, or the
frameworks of international economic organizations or
associations.

 

Different models of economic
development operate side by side, interacting with the broad
transitional space of the former Soviet Union and the huge European
Union market. Even when general economic growth rates of countries
and regions increase and eventually even out, the initial levels of
development, structure of production assets, human and managerial
capital, and actual developments during the transition period have
an impact on the objectives and methods of addressing economic
problems associated with modernization.

 

In a way, overcoming the transition
crisis involves the elite and society’s objectives and aspirations.
Some countries may set for themselves the task of developing on the
basis of an agrarian economy, money transfers from labor migrants,
some revenues from transit and tourism, while entertaining dreams
about industry, universities and science. Russia and other
countries set themselves the goal of transforming themselves in
order to effectively use their accumulated human capitals and other
assets. This would help them become full-fledged members of global
civilization known for their scientists, sportsmen and authors, who
produce something important for the world. Certainly, the second
option is very difficult to implement after sustaining huge losses
from the transition crisis. Finally, a country may use its oil
revenues to achieve a higher level of development through a
raw-material economy, which usually takes a long period.

 

From the standpoint of economic
growth and development, for some FSU countries, fifteen years have
been lost. After transition to a market economy, most countries
have started growing, although far from all have achieved their
pre-transition GDP levels. Some countries have achieved high
production and consumption rates, but are still falling behind by
structural changes in the economy. Sustainable economic development
has not been reached so far in the FSU. Yet it is perhaps too early
to judge the long-term results of the transition
period.