Privatisation in Russia - a successful experiment on the way to a market economy?

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More state-run firms will also be allowed to raise capital by issuing bonds. The new stage of reform will be to ensure that larger state firms become more profitable, while smaller firms are allowed to merge, go bankrupt or be sold. Over the next 25 years, the World Bank expects the Chinese economy to undergo a transformation which took about 65 years in Latin America and 80 years in the world's most advanced economies. China's particular strengths are its high rates of savings, its pragmatic reforms, a disciplined and relatively well-educated workforce, and rich overseas Chinese eager to invest in the country of their ethnic and cultural origin.

The challenge for policy makers is to find a sustainable balance between long-term economic needs for SOE reform and the short-term political need for subsidies. Immediate government priorities are to standardize bankruptcy practice, encourage mergers, and promote employment of people released from SOEs. The Government long-term objective is to concentrate state resources on building-up a core group of one thousand companies that can dominate China's major economic sectors and compete on a global scale.

Meanwhile, , smaller SOEs will be released to the private sector. Further expansion of the rural non farming sector and the private sector will requires further liberalization of capital and labour markets. Even though the economic cost of "gradualism" is high, at least its social costs are much lower than the alternative "shock therapy". At the same time, delaying the reform of loss-making SOEs for too long will only protract inefficiency at the micro-economic level, and eventually will result in inefficient resource allocation at the macro level.

In the near term, China will probably concentrate on redoubling central control over its biggest state enterprises, especially in "pillar" industries such as arms, energy and steel, to avoid the social strain of throwing large numbers of workers onto the street. The above fiscal and financial reforms can only be addressed in tandem with a strong and assertive state. Successful devolution of authority from central Government to local Governments and from the Government to enterprises and households requires a strong state that can ensure that the reform moves in the desired direction reducing uncertainty and instability.

In a country where political reform has lagged behind economic reform, the emphasis on an active role for the state may have some drawbacks for economic reform. The prime ambition of the new leaders is simple: They are supported by the people who profoundly fear disorder. While the Chinese now want to concentrate on private concerns, they want to do so in a context of political stability and public order.

That allows the regime to maintain a degree of authoritarianism and maintain Deng's dual system of economic progress and political rigidity as long as people's social expectations are being met. A striking lesson of transition in many countries is the importance of the new businesses that emerge in response to the lifting of restrictions and liberalization.

To be widespread and effective, entry must be cheap and administratively easy and new firms must have broad access to markets for their products and inputs. China started its reform with liberalization for new entrants to the market and the majority of new entrants were at first community-owned township and village enterprises. Most recently, new private firms and joint-ventures have constituted the most dynamic sources of growth, employment and exports.

In Russia, the main emphasis was first on state property privatization, delaying opening of the market to new entrants. The first attempt in this direction was made by Gorbachev when he tried unsuccessfully to spur the development of cooperatives and new small firms. Even today in Russia the most attention is given to the privatization of SOEs and much less to the development of new firms. As a result, China alone, among all the economies in transition, has had sufficient resources in output and productivity growth - and has not needed to address privatization in an urgent way.

Only now, after almost 20 years of reforms, is China getting to the task of privatizing SOEs. It deliberately chose to start with the simplest tasks and leave the most difficult ones until later. At the beginning of the reforms the Chinese were wise enough to realize that they did not understand all the possible consequences, and they thus set out in an experimental way, trying out different kinds of small changes and seeing what worked best. Though the Chinese did not have a detailed plan, it does not mean that "gradualism" was not a strategy. Gradualism was implicit in Chinese culture and the reform approach from the beginning, and became explicit at the start of the urban reforms in Because of disagreements among the leadership about how far the reforms should go, official policy was developed in the gradual and tentative manner necessary to maintain a consensus.

Given the problem of political backlashes seen in some Eastern European countries the rise of extreme left and right , this too must be seen as another plus for the Chinese reformers. They avoided major political and social destabilization. An example of how the gradualist experiment has worked successfully in China is the household responsibility reform started in a limited number of regions.

When household farming clearly became the most successful system economically, it was adopted as a national model. Another key factor was that the overall direction of policy remained firm. New problems were addressed by further reforms and not by major retreats. What the Chinese discovered by employing these inductive methods was learning by doing.

It was a reform dynamic in which partial reform measures created both significant success as well as a need for further reforms. China's lessons stand as evidence that it is not necessary to have all major sectors of the economy operating under free markets at the same time in order to obtain rapid increases in efficiency and living standards. Another advantage of the Chinese approach is that it created a self-sustaining process in which small reforms aimed at relatively easy problems led to economic expansion, which in turn led to increased political support for further reforms.

It also limited the amount of change that the Chinese people had to deal with at any one time. Change, especially increased uncertainty, is extremely stressful - as the people of Russia have already discovered. The Chinese idea has been to let people come to the market rather than to force it on them. Reforms in China have been drastic, gradual, broad and pervasive.

They have ranged from agriculture to manufacturing, services and trade, and from price to fiscal and financial matters. In summary, reforms have been deepening and widening not because there has been a grand plan to pursue a complete transformation from a planned economy to a market economy, but rather because reforms have been pushed forward when the economic, political and social climates have permitted and were propitious, and when altered expectations and the urgency of readdressing newly emerging problems have required action.

Consequently, reform in China has typically followed a path of uneven development in which balance is restored as a result of pressures, incentives and compulsions, and where in emerging disequilibrium there calls for new development which in turn leads to similar disequilibrium. Vast social transformation thus involves a complicated process of institutional change which is not only incremental and gradual but also includes a series of subsequent changes.

At the same time it would be a mistake to state that Russian reformers were completely wrong and that they should have followed the Chinese way. Many countries were just not in a position to choose between gradual and rapid strategies. In Russia the economic reform parallelled the dismantling of a repressive political system. It had to overcome huge trade declines as well as severe macroeconomic imbalances and structural distortions created by central planning.

As yet it has not been able to generate the savings necessary to sustain its greatly overbuilt state sector. Russia faced an extremely difficult choice: The latter worked in China, but in Russia it would lead to spiralling inflation and economic and political disarray. Rapid reform has been easier when political change has been rapid and fundamental. Citizens who supported the new political system also supported market-oriented policies. In Russia, quite a large part of the population did not support either the political or the economic changes.

China had favourable initial conditions for gradual reform. Its policy-makers did not have to confront the same immediate obstacles that Russia faced. China had to devise and implement a set of market-oriented reforms that provided growth-promoting incentives to farmers and workers while maintaining macroeconomic control. Unlike Russia, China embarked on its transition with a very large oppressed rural economy and a relatively-speaking smaller state sector. The effects of initial rural reform were very positive.

Partial liberalization and the development of a non-state-sector created almost million new jobs between and and sparked rapid productivity gains without imposing sharp adjustments on state industries. As a result, rising incomes from the first wave of reforms were able to build momentum for further, more difficult changes in a self-reinforcing process.

Adjustment in Russia, by contrast, has involved painful downsizing of an overbuilt state sector previously sustained by large cross-subsidies, especially from the energy sector. Another reason for China's strong performance is that growth and effective macroeconomic management encouraged a high rate of savings from initially low levels of monetization.

Russia's economy, on the other hand, was already highly monetized in with a large "money overhang" representing resources that had already been supplied to the planned economy. This overhang caused high inflation when prices were freed, eroding confidence in financial savings. Therefore, starting conditions for economic reforms in Russia and in China were very different.

No transition economy can escape its starting conditions, but reformers can and do make choices that critically affect the early success and longer-term stability of market reforms. Despite the fact that Russian conditions differed significantly from China's, the Chinese experience should still be studied for possible application. The major lesson that policy-makers could learn is the benefit of starting small and focusing on reforming those aspects of the economy that offer the greatest probability of success.

These successes can be built by gradually moving on to more difficult problems, thereby maximizing the chance that the vast majority of people will see the reforms as a positive factor in their own lives. Where transition has accompanied rapid and broadly-based growth, as in China, poverty has fallen even though income disparities may have increased.

In Russia, declining output and rising inequality caused poverty to rise. What is essential is long-term economic growth, and privatization is just one of many possible tools. In this controversy, the authors of this study are not inclined to champion either extreme position. We do not feel it makes sense to assess the state of affairs in Russia's economy as arising merely from self-serving political interests or ideological prejudices. We believe there exists an inexorable over-and-above-party logic predetermined by the actual state of affairs which can be abolished by anyone. This research is neither a fresh round of perestroika nor an indictment of present-day reformers.

The paper is an effort to sort out the goings-on impartially. Hence, before an assessment of the results of privatization, we think it is worthwhile to consider the root causes of privatization itself and of the whole array of economic reforms. In assessing the present state of affairs, one should note that the main structural problems and the dismal state of Russia's economy are rooted in the militarized planned system built up for the war that has outlived its day by something like a half-century. The continued orientation towards export of non-renewable resources, living off fixed capital, economizing on innovations, and neglect of the environment over a period of several decades created a semblance of production growth and kept people's well-being at a minimum level.

But this approach ultimately plunged the system into bankruptcy, for it was a system in which the economy was directed not by common sense but by bureaucrats often in a state of ignorance who arrogated the right of planning and distribution proceeding from subjective, politicized, and often purely careerist motives. The list of "sad records" set by the Soviet-planned economy is a long one.

Here is just one typical example epitomizing the absurdity of the old system. The Soviet Union led the world in the turnout of low-grade machines. While lagging behind the United States by close to one-third in the production of grain, we were 6. It would have taken US industry some 70 years of hard work to turn out as many grain harvesters as we had lined up for repair in 4, As a result of that kind of economic management, the country faced by the end of the s a national income growth of zero per cent.

Collapse was in the offing and the leaders of the state tried to avert it through useless ways and means, and what is more, without changing the economic mechanism. The first step to economic disaster after was the "acceleration" idea, which made the investment burden even heavier and further intensified structural disproportions. At the time, the fall in world energy prices turned Russia's foreign-trade balance negative and shrank the import of consumer goods and foodstuffs, initiating disintegration of the market.

The chaotic anti-alcohol campaign aimed at cutting down production and not demand, dealt another heavy blow to the economy. The second economic disaster struck the USSR at the end of when inflation was still latent. This was evident in the disappearance of goods from shop shelves and the irretrievable devaluation of people's savings and the state budget deficit exceeded all the admissible norms more than 20 per cent of GDP.

At the time there was still a chance to halt disaster, but the Government's failure to understand the significance of macroeconomic equilibrium threw finances into a crisis which began to break up the administrative system. In an effort to slow investments, government put a freeze on earlier construction projects totalling R24 billion, but at the same time started up new ones - valued at R59 billion.

The debt arrears of enterprises on loans and inter-firm credits went up by R A spasmodic drive for cash incomes got under way and the anti-alcohol campaign capitulated: In fact, it was the collapse of the financial system and not the ill will of "democrats who sold themselves to America" that made the system "ungovernable". The disintegration of finances resulted in shrinking production and the resulting higher tax on wages sparked off a strike movement and led to the breakup of trade unions as a "school of communism"; confidence in the rouble evaporated and shop shelves were left bare - hence the emergence of a cornucopia of reformist programmes.

Regrettably however, these programmes, including the memorable " Days" programme, became the object of fierce political infighting. Mutual destruction became the main aim of the legislative and executive arms of power, and at this point the economy was put on the back burner because unity of political will had disappeared. The Union Republics fled from the sinking ship dealing yet another blow to Russia's national economy. The Council for Mutual Economic Assistance disintegrated and the social basis of reform was destroyed due to lack of nationwide support. Finally, by the beginning of , fear of famine spread across the country.

Now people easily forget the gravity of that crisis, but this forgetfulness provides evidence of some indisputable achievements of the present-day reformers. By the start of the s an economic disaster could no longer be averted and it was clear that something had to be done. It is one thing to carry out reforms under political stability and a budget surplus, and it is quite another to try to restructure an economy during a political earthquake with the disintegration of production-and-trade ties, the destruction of the national-economic system which had up to then operated on the single factory principle , and a rapid growth of foreign debt and "demise" of fixed assets with material and foreign-currency reserves at zero.

Therein lies the key to understanding Russia's present-day economic problems, including those of privatization. What then are the results of the past five years since the start of the "Gaidar" reform? These cannot be assessed simply. First of all, there is a need to reject accusations that "market liberals" plundered the country. It is clear that Russia had been stripped of its wealth and plunged into economic disaster due to lack of a market. The reforms launched in produced some positive results and there were prospects of a healthier economy. The people developed a taste for business and ownership, the rouble gained strength and became convertible, and the shortage of goods on the market lessened.

According to Anders Aslund 1, , there are five distinct features proving that a market economy has already been set up in Russia:. The economy has been depoliticized with the end of domination by ideology and politics. Centralized state allocation, with central orders to enterprises on physical output targets and deliveries, has ended.

While horizontal trade between independent enterprises has begun. Most of the export and import quotas have gone and protectionism amounts to customs tariffs. Allocation has been depoliticized. State ownership has been reduced to less than half, and the remaining state enterprises are independent as in a market economy. Ownership has been depoliticized. The economy has been monetized and the rouble has become a real, reasonably convertible currency with a unified exchange rate that is market-determined and floating;.

Hard budget constraints have been introduced for enterprises. The budget deficit has been reduced to 10 per cent of GDP. A financial market has emerged and credit constraints have lowered the rate of inflation. The credit and financial systems have also been depoliticized. Evidence that a real market economy exists in Russia also comes from the market-oriented restructuring which is under way. The proportion of produced GDP is becoming less distorted.

The share of consumption in the national income has been growing, though inadequately. More small enterprises are starting up and the structure of foreign trade is being normalized. Enterprises have finally begun to show concern about cost-cutting. The production of goods and services for which there is no demand is coming to an end. Prices are being adapted to the conditions of the market. At the same time, economic reforms in Russia have turned out highly contradictory and their positive impact has been limited. First of all, they caused a sharp social stratification causing growing tension and disappointment as election results have shown.

Even Patriarch Alexis II, head of the Russian Orthodox Church, remarked in his New Year's message that "the differentiation of incomes in Russia poses a threat to the equality of people's civil rights". Indeed, the ratio of incomes of the richest 10 per cent to the poorest 10 per cent now stands in Russia at 15 to one or even 20 to one according to other sources is yet another "sad record" 6, In short, privatization in Russia has not attained its main goal yet; namely, the creation of a class of "healthy owners".

The struggle against monopolism has ended in failure. Far from being reduced, the bureaucratic power of the state has in fact increased while in some ways becoming subtler but no less inclined to authoritarianism and corruption than it used to be. The spheres which ensure the country's tomorrow - education, culture, science and public health care - have been sidelined.

All this poses a threat to the general prospect of transition to a developed market economy. There are grounds for anxiety because Russia's economy has yet to retreat from the red line beyond which irreversible degradation of the country's industry and labour potential sets in; according to some it has already gone beyond that line. Estimates 6,11 indicate that the decline of GDP with respect to the basis level in Russia is 50 per cent, while the level of food dependence the share of imports in consumption of foodstuffs is also 50 per cent, and the appropriations for science is 0.

The effects of this are painful, together with the reality of systemic deformation. But one should not take a totally negative view of events, even of the drop in production, because in some cases it is not a misfortune but rather a reasonable way out. Artificially-supported ineffective lines of production in whatever industrial sector, are, in fact, additional motors giving inflation a push.

Even in raw material industries, the main problem today is not growth of extracted resources, but their effective use. On the whole, the state of the economy has to be declared unsatisfactory. What is the main reason? We believe that the main reason for most of the reverses of current reforms lies at the very heart of these same reforms, namely in the conception of liberal monetarism.

There is no doubt that monetarist measures are necessary and important to prepare the conditions of transition to a market economy, but nowhere in the world and at no time in history were they able to generate an economically harmonious market system alone. They fail to create incentives for constructive economic activity, particularly in the situation Russia finds itself in today where: In developed countries the share of the state in national income fluctuates between per cent, and any partial change in ownership does not cause any fundamental socioeconomic change on a national scale.

But things are different in Russia where state ownership, up to recently, was virtually the sole form of ownership more than 90 per cent. This is why in contrast to other countries, what is happening in Russia is not just partial transfer of property from one set of owners to another, but rather a radical transformation of all forms and relations of ownership. At the start of privatization in Russia, the first thing was to determine the limits of admissible de-nationlization and identify the productive factors that were truly public assets.

We have in mind lines of production which by virtue of their vast scientific capital and labour resource-intensiveness may, in principle, not be initially feasible for privatization. In determining this boundary, it was necessary to take into account Russia's specific features including its natural and climatic conditions, vast distances, historical traditions and questions of military security. The establishment of a boundary for admissible de-nationalization should not, of course, have meant maintaining old methods of management within the area of direct state interests.

1. COMPARISONS OF PRIVATIZATION RESULTS:

There was a need for a parallel effort to solve two problems: Regrettably, the concept of privatization was based on the notion of complete inadmissibility of the state's direct participation in economic activity. This was borrowed from the free-trade theoretical arsenal of the 19th century in contradiction to world experience of the second half of the 20th century.

The result was that a large-scale reassignment of property was started from the ruins of the state economy. There is also every indication that no amount of sacrifice, abuse or social problems could shake the conviction of the advocates of the doctrine that a mere switch in control of resources and their use by private persons constitute the essence of the ownership problem and a crucial determinant of renewal of economic incentives and renaissance of entrepreneurial activity.

The main mistake was that privatization was started as merely a formal and legal process of replacement of the state owner but was not preceded by the shaping of new effective owners to whom it could be reliably turned over. Experience has shown that without an effective owner operating in a favourable investment climate, paying taxes fully and regularly, and providing the society with quality jobs 3,9 , privatization is not only pointless, but can be harmful. The absence of these three factors in Russia today renders the existence of state, private and mixed enterprises ineffective.

Three other mistakes were made in the practical effort of privatization: The present state of Russia's finance and credit, and gaps in the monetary system produced a massive phenomenon of illiquidity, and one could say that an "objective" prerequisite was created for declaration of bankruptcy and cheap sale and asset appropriation for virtually any enterprise in Russia.

Those were the conditions for "shock" privatization in Russia. The above-mentioned problems are described in greater detail below. To conclude this section, we offer a quote reflecting another specific feature of privatization in Russia: These methods are applicable to organisms with an ability to react, to provide feedback connections, and are capable of responding to external influences.

Our enterprises are, in effect, not organisms, but mechanisms which cannot improve themselves: The results of this breakup are well-known. The absolute volume of production in Russia continues to fall and unfavourable structural shifts are taking place in the economy. Thus, whereas in the USSR, the proportion of raw-material and power industries came to about 8 per cent of the total of GNP, today it is over one-third. With the overall decline in the level of production by 51 per cent in , the volume of output in light industry has dropped to one-sixth sic!

The process of "allocation" of state property got under way in Russia then part of the USSR long before the adoption of official decisions on privatization. It started the adoption in of the State Enterprise Association Act whose task was to give economic independence to state enterprises and destroy the managerial pyramid of "Gosplan State Planning Committee - ministries - enterprises".

In , new entities appeared in Russia's economy. Work collectives began to take out leases on state enterprises with or without buyout , and a great number of cooperatives, joint-stock companies and partnerships were also set up. The commercialization of the state sector proceeded to such an extent that it even affected the Ministry of Defense, including army units.

All this took place in the absence of a requisite system of special accounting and control, which is why the real magnitude of the first stage of privatization is still unknown. We use approximate quantitative assessments according to the OECD estimate, some 2, enterprises underwent spontaneous privatization or take on trust assertions like the following: Indeed, if an official the director of a state enterprise or the head of a department sells highly valuable raw materials at throw away prices, or buys absolutely useless goods at exorbitant prices, there is, technically speaking, no breach of law it is virtually impossible to prove that a bribe has been given or taken " 3, Prior to the enactment of new legislation on privatization, Russia's Parliament authorized the State Committee for Management of State Property hereinafter "SCP" to check the results of the "spontaneous" privatization - lease contracts with the right of buyout concluded without an auction; the legality of transfer of state enterprise property to the balance sheet of cooperatives, joint-stock companies and partnerships; and any other wrongful acts in privatization deals.

However, the SCP has failed to carry out this work. The Privatization Act vested the SCP and its territorial divisions with the task of pursuing a single state policy of privatization. It is now authorized to deal with the planning and implementation of the normative base for privatization; the assignment of work in the valuation of units aimed for privatization; the analysis of the privatization process and its results; the disposal and management of state property; and arrangements for control and effective use and safety of property held in Federal ownership.

The Privatization Act also served as the basis for the creation of the Russia Federal Property Fund hereinafter "FPF" operating under the RF Government as a specialized financial institution to sell facilities held in Federal ownership. Until time of sale it exercises ownership and after receives and remits dividends and earnings from privatization to the RF budget. The FPF is a "legal person" and is in possession of separate property belonging to it by right of operational management.

It is financed from the revenues received from privatization. Yet another state institution was set up in September as part of the institutional mechanism of privatization: Among its main functions are to pursue a state policy designed to avert bankruptcy of enterprises and to keep a record of enterprises unable to pay; to represent the interests of the state in settling matters connected with the initiation of judicial proceedings in cases of bankruptcy and adoption of decisions on the bailout of state enterprises; to render assistance to enterprises showing signs of bankruptcy; to nominate candidates for receivership and bankruptcy trustees; and to organize operations in attracting RF and foreign investments for restructuring to organize work in setting up norms and methods of bankruptcy procedures based on the Bankruptcy Act.

The FBB is financed from the Federal budget and from the sale of debtor enterprises and enterprise property undergoing liquidation. At this stage, the executive branch has actively involved foreign organizations and specialists in preparing the normative framework for privatization. Fifteen foreign advisers have been working on it in the central apparatus of the SCP alone. These efforts involved the European Communities Commission, the European Bank for Reconstruction and Development and a host of Western consulting firms. However, in the opinion of specialists - and as later confirmed by developments - positive world experience in privatization, notably that of Western Europe in the post-privatization phase, was not duly taken into account in the developing of this normative base.

Despite the adoption of relevant legislation during this period, practical privatization in Russia did not fully go forward, and special measures had to be taken by the President and Government to step up the process. Instead, according to the SCP, only 46, enterprises In August , the President issued Edict No. The State Privatization Programme announced the following goals: As the process of privatization proceeded, it became clear that none of the tasks set by the State Privatization Programme, except the fifth one, were being fulfilled. That substantially altered the mind set of the population and supporters of reforms in those two years reduced by one-third and the number of opponents rose to over 60 per cent 9,9.

There was a sharpening of disagreement on this score between and within the executive bodies and the legislature. The main point at issue was the assessment of the value of assets owned by the state which was carried out during the early stages of privatization by enterprises themselves on the basis of their balance-sheet reports. The management of enterprises had a stake in understating these data, and there were even cases of enterprises being acquired for next to nothing with a subsequent fold-up of economic activity and resale of blocks of shares.

This happened, for instance, with the ZIL motor works, the largest engineering enterprise in Moscow. Thus, if the market value of the Gazprom concern which owns 30 per cent of the world's proven reserves of natural gas is divided by the volume of its explored reserves, one will find that the per-unit value is equal to 0. Here is another example: Reports on the use of these monies have never been published. Another essential characteristic of this stage of privatization is that the process now and again acquires a criminal hue, as is exemplified by the Novosibirsk Tin Works which produces the world's highest-quality tin and is the biggest in the country and in Europe.

Its former state director fraudulently violated the law by understating the value of shares many times over and including in the list of shareholders representatives of local authorities, officials of the Ministry of Metallurgy, and members of the militia and procurator's office. He also founded a semi-fictitious Russo-British firm Armet, putting into it 3, of his own sic!

Since then, the pace of privatization has markedly slowed down and has become lax. This is due to the fact that the State Privatization Programme has been, for all practical purposes, fulfilled. Only a few odd units remain to be privatized and also a period of "sobering up" has set in as the mistakes made during the privatization "race" have become quite clear and time has come to put things in order. There is now the need to improve accounting and recording; to analyse the state of the normative framework and to adjust it; to exercise control of the effect of restrictions imposed by legislation on the privatization of state-owned property; to put in order the system of post-privatization supervision and support for enterprises; to set right matters in investment auctions whose share of sales came to only 2.

It is understandable that the Russian Parliament is insisting on a review of decisions on privatization of some of the major enterprises, notably because of incorrect assessments of the value of assets, precedents of criminal privatization, fraudulent auctions, and illegal deals with foreign persons and their intermediaries who have even acquired shares of defence enterprises, and so on. Most breaches of legislation on privatization and abuses in this area were allowed to occur at the stage of creation, reorganization or liquidation of enterprises.

There are numerous breaches of law regulating lease relations especially of the right to property buyout and leasehold and contracting relations. Cases have been noted of registration of founding documents contrary to legal standards in effect; of "lobbying" through SCP officials and its local agencies for decisions infringing the property interests of the state or of competitors; of entry by managers of state-owned enterprises into the authorized capital of commercial structures and of their own "intellectual property" evaluated at extremely high rates; and of use by persons in office of imperfections in legislation for their own interests on lease, incorporation, intellectual property and know-how, etc.

The fact that enterprises can now be purchased for money is a distinctive and key feature of the present stage of privatization. But this does not increase the intensiveness of privatization because the capital acquired by Russia's "nouveaux riche" during the period of "primitive accumulation" is still being sent abroad, while foreign business is still not rushing into the country because of lack of a favourable investment climate. As for the people of Russia, they simply have no money.

The monetary backup of Russia's GDP dropped from 76 per cent in to 8. Investment activity connected with privatization can be illustrated by Federal Property Fund FPF efforts to attract into production Russian and foreign capital through the sale of enterprises and blocks of shares held in Federal ownership. The FPF and its territorial agencies arrange investment and commercial contests tenders for the largest enterprises.

In they held such contests, including investment contests. Investments came to R1. Foreign firms and joint-ventures with foreign capital won 21 contests 17 per cent of the total. Their investments added up, respectively, to 18 per cent and 6 per cent of the total amount in roubles and dollars.

In , 23 out of 30 contests were held with one participant. However, this practice was prohibited in with the enactment of the Russian Civil Code Article , Clause 5. An analysis of fulfilment of FPF-concluded purchase and sale contracts and of investment programmes, brought to light a great many breaches of contractual obligations. Among them, late submission of documents at admission of investments, delay in the admission of investments and admission of investments short of the full amount, etc.

Altogether, according to FPF data, the actual fulfilment of investment obligations on completed stages of programmes involving contracts came to 53 per cent in rouble investments and 47 per cent in dollar investments by the beginning of An analysis of contest participants shows that most of them belonged to a limited number of banking groups engaged in a struggle using less-than-proper methods. There have been cases of unwarranted debarring from contests of participants with registered bids. The organization and practical method used in attracting investments in Russia's economy is, on the whole, primitive.

Investors and issuers are not expected to work through investment programmes seriously in conformity with generally accepted requirements, or invite independent experts, nor to coordinate investment programmes with the issuers. In June , the FPF organized the sale of state-owned blocks of shares of privatized enterprises. The shares of the major joint-stock companies were sold at all-Russia and interregional specialized auctions. However, the planned revenues were not realised. In order to compensate for this, the SCP initiated additional sales of the most highly-profitable enterprises in the fuel-and-power and chemical complexes, marine and air transport, the gas industry, communications and the forest industry.

A special timetable was established for this purpose to sell the shares of enterprises most attractive to investors. Out of the 57 blocks of shares up for sale, 16 blocks were not sold and no information was issued on the remainder. Experts believe that such an approach to privatization and sales is absurd from the standpoint of economic common sense.

In , the FPF held 8, sales.

The sum-total price of shares offered had a nominal value of R billion. Shares with a nominal value of R Total revenue came to R1. Altogether, by the beginning of , proceeds from the sale of assets held in state and municipal ownership came to R3. Despite the fast pace of privatization, revenues from it did not become a stable or significant revenue source for the state budget. The fiscal goal of privatization has not been attained. In , earnings from privatization came to only 0. The Government's expectations that privatization would help reduce the budget deficit, promote the process of financial stabilization, and provide funds for social protection and development of social infrastructure facilities, were not fulfilled.

Budget targets for non-tax revenues were met not through effective privatization, but through the sellout of state-owned reserves. This yielded over 95 per cent of this type of revenue without taking into account the results of collateralized auctions. The fulfilment of budget targets in revenues from privatization in came to These figures take into account revenues from collateralized auctions but which should not be counted as a matter of principle because the pledging of shares does not amount to their sale or to privatization of enterprises.

The collateralized auctions tend to increase the internal debt and the aforesaid amounts must be put into the same basket with debts. Once the preceding figures have been cleared, we will find that the initial budget target for revenues from privatization was fulfilled only by 3. This is an indication of the competence of the Federal privatization agencies in attaining publicly declared goals having budgetary impact on the economy.

Privatization is being carried out on the basis of the Privatization Act, the President's edicts, the Government's decrees, and departmental normative enactments. Some aspects of privatization are also being regulated by the Civil Code enacted on November 30, and the Joint-Stock Company Act November 24, Following the conflict between the President and the Parliament in October , the drafting and adoption of normative enactments on privatization was conducted entirely by the executive branch.

The new body of Parliament State Duma which was elected in December , at once devoted attention to matters of privatization, adopting in February two special decrees on auditing the course and results of privatization. Consequently, the differences between the two branches of government on this matter continue. An analysis of the state of the legal framework for privatization carried out by specialists 11, has shown that on the whole it "fails to meet the goals of the State Privatization Programme, is internally contradictory, has mutually exclusive provisions, and is in breach of the principles of the supremacy of the law".

The norms of the law are being replaced by the President's edicts with instructions and statutes of departmental agencies of executive power, which, for the most part, are not executed 11, Many enactments on norms and methods issued by the SCP, the FPF and the FBB not only engage in arbitrary interpretation by the higher authorities, but are not even subjected to legal expert examination and registration with the Ministry of Justice.

This has already led to the declaration by the General Procurator's Office of the illegality of some transactions, notably, at collateralized auctions. From the lengthy list compiled by experts on the shortcomings of this normative base now in effect, let us identify those which affect the interests of RF industry.

First, the process of privatization does not take into account intellectual property, modern technologies or the science-intensive nature of production. No normative mechanisms for the management of state property in all its forms have been elaborated. The role of state property in ensuring the country's independence, security and defence are yet to be defined. There is no list of the special interests of the state where privatization could be inadmissible for the time being, including defence enterprises.

Nothing has been done to establish measures to prevent the loss of state control of strategically important enterprises. In , 1, enterprises of the military-industrial complex were incorporated, and of these 20 per cent have already been declared bankrupt. In , of the 1, enterprises in engineering, 1, No effective measures have been taken to protect, at least temporarily, national sovereignty and the rights of Russian entrepreneurs. The only effective restriction has been imposed on privatization to foreign enterprises in the fuel-and-power sector and in the processing of precious metals and radioactive and rare-earth elements.

At the same time, no provision has been made to control monopoly buy-up by foreign capital in the secondary market of shares of enterprises strategically and economically important to Russia. Thus, Russia's aluminium industry is now almost entirely in the hands of foreign capital. For example, the US corporation that has acquired through dummy firms blocks of shares from 7 per cent to 34 per cent in 19 aircraft enterprises, several of which are very well known.

Finally, the creation of equal conditions for foreign and Russian investors for participation in privatization, despite their unequal financial strength and level of development, tends to infringe on the rights of Russian citizens and channels national wealth abroad. This is also due to the gap in the rouble's purchasing-power against the US dollar and the foreign-exchange rate of the rouble which halved between and There have also been problems with regulating relations between the centre and the regions in the management and disposal of state-owned property, distribution of rights and responsibilities, or appointment of state representatives to joint-stock companies.

The norms restricting monopolism are designed for the domestic market and are not suitable for an open economy because they fail to promote the competitiveness of Russian enterprises on the world market. Measures for post-privatization control and audit have not been worked out and responsible organizations and sources of required funds have not been designated. No provision has been made for measures to prevent the suppression of commodity producers, and no sanctions are applied for nonfulfillment of post-privatization obligations.

The absence of restrictions and measures for state regulation of the buy-up of controlling blocks of shares leads to a violation of the technological unity of major producer associations and hurts the country's macroeconomic interests. The normative base for privatization requires development and correction. In particular, there is a need to improve the norms connected with procedures for forced bankruptcy and the voluntary liquidation of enterprises through investment contests, etc.

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Some shortcomings could be eliminated immediately, for instance, a single legal base could be created for leasing. Two different methods confirmed by the SCP and a variety of different procedures worked out by the localities are being used around the country to draw up lease contracts and to assess leasehold payments. Due to this, receipt of respective revenues into the budget is not ensured, and effective control of the use and safety of property held in Federal ownership is rendered impossible.

At any rate, legal instruments to regulate privatization in Russia are still far too weak. International experience shows that "privatization without adequate legal regulation and an effective juridical system facilitates criminalization of the economy". In Russia there is no single register of state-owned property, especially for shares and holdings and stakes belonging to the state. The databases in use are too sparsely filled and are not up to date.

The data presented by official RF statistical yearbooks makes it impossible to assess the proportion and weight of enterprises in various forms of ownership, nor the role and importance of the non-state sector in the economy. There are no official comparisons of information in light of similar international practice. The level of privatization in industry is higher than in the national economy as a whole.

In the proportion of large and medium-sized non-state-owned enterprises in industry was With small and joint-venture enterprises these figures were 85 per cent and 79 per cent, respectively. For some subsectors of industry, the level of privatization comes to 90 per cent and over. Within engineering, the percentage of enterprises converted into joint-stock companies are as follows: The relative level of privatization of small enterprises is higher than the level of privatization of the national economy as a whole, especially in the sphere of trade and public catering.

The proportion of non-state-owned enterprises in the national economy as a whole comes to 96 per cent. In industry, where the proportion of small enterprises is 14 per cent, 93 per cent of these have been privatized. In agriculture, these figures are respectively 1 per cent and 84 per cent; in construction - 14 per cent and 95 per cent; in transport and communications - 2 per cent and 95 per cent; in trade and public catering - 49 per cent and 98 per cent; in housing and public utilities and in everyday services for the population - 1 per cent and 90 per cent; in science and scientific services - 6 per cent and 96 per cent.

The share of property under state control is considerably larger than the share of state-owned enterprises. By the beginning of , the state had about 20 per cent equity in the pulp-and-paper industry, 15 per cent in metallurgy, 38 per cent in telecommunications, 55 per cent in engineering, and 42 per cent in oil and gas extraction.

This is due to the fact that state-owned enterprises were mostly converted into joint-stock companies - 30, being created from to In any case, per cent of them remain under substantial control of the state, i. At the moment, a sizeable proportion of state property is dispersed among many privatized enterprises. This reduces the impact of the state on their management but also does not change the form of ownership among the largest and most asset-intensive enterprises.

Joint-stock companies in which the controlling block of shares is held in state or municipal ownership are now very few in Russia - there are some , or just over 25 per cent. Joint-stock companies with a "golden share" number or Some specialists believe that the market price of vouchers was artificially depressed so as to buy up these vouchers from the people in an atmosphere of high inflation and get them into the hands of a few "privatizers".

Indeed, that is just what happened. A study carried out by the SCP at major joint-stock companies in showed that: Thus, one of the social consequences of privatization in Russia is the fact that rank-and-file shareholders are being removed from enterprise management, while a handful of owners hold large blocks of shares. The influence of rank-and-file people on their own companies has not improved. In addition, the possibility of receiving dividends on the shares held by employees dividends which could make a difference to their well-being is, for all practical purposes, insignificant because of the deepening decline in production, the crisis of nonpayments, and the loss-making nature of most privatized enterprises.

Even where joint-stock companies do make some profit, they almost never pay dividends, using the money either to increase their authorized capital or to increase the volume of working capital and strengthen their financial condition, or to renovate fixed assets whose physical wear and obsolescence is a nationwide problem for Russia.

By the end of the voucher privatization, Voucher Investment Funds VIFs designed to ensure the market reorientation of the least socially-active strata of the population, accumulated about one-third of the vouchers. The vast majority of these funds turned out to be low-income or loss-making. In the light of results, dividends were paid out by only of the VIFs 11, The hope that non-state commercial organizations and foreign investors would become the main owners of former state-owned enterprises has not been fulfilled.

With the exception of enterprises in raw-materials and fuel-and-power and also some major enterprises in trade , the purchase of large blocks of shares was as a rule effected with the aim of subsequent resale in order to obtain speculative earnings. Here again, employees were left to the sidelines.

In the initial stage of privatization, the vast majority of privatized enterprises passed into the hands of their work collectives and VIFs. It should stop being repeated. There is another narrative that says that I was ruthlessly in favor of a market economy and uninterested in the rule of law, institutions, or social justice.

This is even more patently wrongheaded. I have always regarded economic reform, institution building, and social justice to go hand in hand. I have always fought corruption, and resigned from Russia in because I found corruption to be growing and out of control.

I have always paid attention to the plight of the poor, and looked for progressive measures to support macroeconomic objectives e. For 27 years, since the start of my work in Bolivia, I have been a consistent champion of debt relief for over-indebted low-and-middle-income countries, precisely to help these countries find the economic and fiscal space to support the poor and the investments needed to end poverty. In , as a Professor of Economics at Harvard University, I began to combine academic research and teaching with a role as macroeconomic adviser to governments in crisis.

In the case of Bolivia, I recommended strong fiscal actions to end a hyperinflation [1] of 24, percent and rising , and I recommended a continuing default on external debts as a prelude to a fundamental renegotiation and cancellation of those debts. The key fiscal action at the start of the program was to increase the price of petroleum products sold by the state-owned enterprise to the public from roughly one-tenth of world market prices to full world-market prices. Raising oil prices was a coup de grace that ended the hyperinflation by refilling the public coffers with revenues, and thereby enabling the government to stop printing money, the underlying source of the hyperinflation.

It may seem counterintuitive that raising a key price, petroleum, would stop hyperinflation, but the key lies in the government budget. The ultimate source of hyperinflation is a large budget deficit being financed by the central bank, i. Close the budget deficit decisively, and one ends the hyperinflation quickly and decisively.

The end of the oil price subsidies was a progressive step, that is, one that put the extra burden on the middle class and upper class. The poor paid the burden of hyperinflation disproportionately, by the loss of value of the cash they used in transactions. The rich benefited from the very low prices of gasoline.

The huge beneficiaries were actually the smugglers, who bought petroleum products in Bolivia and smuggled them to Peru. Following the end of the hyperinflation in August , the government took two more decisive steps to bring the budget under control. First, at my urging, it negotiated with its creditors to cancel the overhang of foreign debts.

Debt servicing was in suspension by the time I arrived in July Yet the IMF started to insist in early that Bolivia should resume debt-service payments. I strenuously objected, noting that any resumption of debt service payments would kill the stabilization program and throw Bolivia back into hyperinflation. This was a battle royal with the IMF and the banks, since the principle of debt reduction was not yet established in international circles. I led the negotiations, and Bolivia prevailed.

It cancelled around 90 percent of the external debt on the books. The second step was a measure of tax reform in the spring of This time, the opposition came from large landowners who would face taxation, some for the first time. In the spring of I conceived and helped to establish a new, major social program, which became known as the Emergency Social Fund [2] ESF , supported by the World Bank, to help cushion the ongoing macroeconomic shocks in poor communities. This fund provided resources to local communities for poverty alleviation projects, for example building local schools, clinics, and infrastructure.

All of these measures were carried out peacefully and under democratic, constitutional rule. There was a short-term constitutional state of siege for 90 days at the very start of the emergency measures, and this was carried out peacefully, without violence, and without any deaths. The emergency period ended within a few weeks. The few who were arrested were all released. The country was open and democratic. This peaceful and democratic approach was all the more remarkable because Bolivia was a tumultuous and unstable country with a tradition of coups, violence, and military rule.

I ended my active advisory role by the end of , but continued to watch Bolivia from afar. In the years after stabilization, Bolivia enjoyed a restoration of economic growth, low inflation, democratic governance, and improvements in social indicators [3] such as life expectancy and infant mortality. To this day, Bolivia demonstrates a precarious reliance on a few primary commodity exports. Bolivia is also an ethnically highly divided society, and for more than a century has suffered from strained relations with one of its key coastal neighbors, Chile, which offers the natural exit to the Pacific and which Bolivia lost in the War of the Pacific in I emphasize again that I went to Bolivia as a macroeconomist, not as a development economist.

I did not know enough about development then to play a useful role as a long-term development advisor. Bolivia helped to reorient me towards long-term development issues but my reorientation towards development was not part of the roughly two years of macroeconomic advising in Bolivia. During , I was asked by national leaders throughout Latin America to comment on their national reform strategies, and I discussed those reform strategies with government leaders in Argentina, Brazil, Ecuador, and Venezuela.

I also wrote a book of recommendations [6] for Peruvian economic reforms, and continued part-time advising for the Bolivian Government. In January , I was contacted by the Polish Government, then a reform-minded communist government, with a request that I come to Poland to advise on the management of its external debt. I declined to come on the grounds that the Solidarity Movement, led by Lech Walesa, was still outlawed.

I explained that I would be happy to come at a future date, when Solidarity was legalized, and when I could act perhaps as an adviser both to the Government and to the Solidarity movement. Wonderfully, I was called back several weeks later and told that the Solidarity Movement would indeed be legalized in early April The trip to Warsaw was added at the tail end of a three-day visit to Moscow to a conference on Soviet Economic Reforms, hosted by then-Gorbachev adviser Abel Aganbegyan. That was my first trip to the Soviet Union since a tourist trip in Starting with the April 5 visit to Warsaw, I began to work closely with a team of economists in the Solidarity movement, as well as meet with officials in the government.

The Solidarity economic team was headed at the time by Prof. During this time, I was joined by Dr. David Lipton, with whom I worked closely during the period During June and July, Lipton and I had extensive discussions with the Solidarity leadership about a strategy for economic reform. I urged the leadership to adopt an economic plan and to use their electoral success in the partially free June 4 elections to organize the next government, the first post-communist government in Eastern Europe.

At the request of Jacek Kuron, Lipton and I prepared a document [7] that, as far as I know, became the first attempt to write down a strategy and timetable for the dismantling of a centrally planned economy and its replacement by a market economy. We presented this blueprint to the Solidarity leadership, including Lech Walesa, in July, and in testimony to a Solidarity-led Senate Commission on economic reform during the summer months. I shared the podium on that day with then-Senate majority leader Robert Dole, who was visiting Warsaw to offer congratulations and support to the new Government on behalf of the U.

In my speech, I outlined the basis of a rapid transformation of Poland to a normal, market-based European economy. As was central in my thinking, I believed that Poland would need a combination of factors to achieve success, including relief from an overhang of unpayable debt.

As of mid, Poland was suffering from hyperinflation [9] and economic decline. There were massive shortages in the retail outlets, and widespread fears of hunger in the cities. Many people thought that Poland would descend into civil war. Moreover, there were real fears of a Soviet crackdown at some point, given the long history of aborted reform movements in communist Central Europe in the post-war era. The situation was fraught with uncertainty, risk of panic, and extreme deprivation in many Polish households. My recommendations in Poland contained the following major points: I put off the issue of privatization of major state-controlled industries in my early recommendations, since I did not have much of a detailed strategy, but I warned that it would take several years, perhaps around five, to complete.

In my first meeting with Prime Minister Tadeusz Mazowiecki on August 24, , I suggested the need to adopt rapid and decisive economic reform measures. Lipton and I met Balcerowicz in early September He showed us outlines of his plans for reform and for organization of the economic team, and he asked us for continuing help as advisers. We of course gladly accepted this request. During September , we worked closely with Balcerowicz and his team, helping to prepare the outline of an economic program to be launched on January 1, , based on the principles of rapid stabilization and transformation to a market economy.

We returned to Washington with Balcerowicz, and provided further assistance during those meetings. I had an important role in formulating the international assistance strategy. It was based on four components: The debt cancellation ideas were highly controversial at the start. Policymakers in the U.

Government and Bretton Woods institutions told Polish officials that the ideas were dangerous and unrealistic, and warned them not to listen to me. Fortunately, the proposals were in fact sound financially and politically, and Poland did indeed achieve a 50 percent reduction of its debts by So too, IMF officials initially opposed the Zloty Stabilization fund, claiming that it would be impossible to raise the funds.

I met with Senator Dole, National Security Adviser Brent Scowcroft, and others to describe, explain, and justify the request for the fund. In the end, the U. The Polish program was launched on January 1, Despite huge controversy, deep fears, and great intellectual and political debates, the program proved its worth. Janos Kornai in and 91, though the depth of the recession is unclear even till today.

Official data recorded a decline of 11 percent of GDP in and 7 percent of GDP in , followed by economic growth thereafter. Several studies have argued, however, that the actual size of the decline was much less, the difference reflecting problems of over-measurement of declining sectors and serious under-measurement of rising sectors such as services. In any event, Poland was growing solidly by , and by the mids Poland was one of the fastest growing countries in Europe in some years the fastest and in the world. I remained as a part-time adviser to Poland during and , but my involvement became less intensive than in I continued to work closely with the government in international negotiations, in monitoring macroeconomic indicators, and in discussions on privatization strategy.

The privatization strategy was not agreed at the start of the Polish reform effort, since the focus was initially on stabilization, liberalization, commercial law reform, integration with the European Community, and the fostering of a new small business sector. To see my own uncertainties surrounding privatization, see my Economist article at the beginning of I began to support the idea of national investment funds NIFs as methods of creating private ownership combined with adequate corporate governance for the large enterprises for the smaller enterprises, I supported direct sales and auctions, as was successfully carried out.

The proposal for a limited program of NIFs was adopted, but implementation was slow and controversial. I think it fair to say that since the NIFs were both unnecessary and highly experimental, it is probably a good thing in the end that they were not adopted on a large scale.

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Based on the experience in Poland, I was asked by many other governments in the region to offer short-term technical assistance, though nowhere near the level of involvement as in Poland. Ante Markovic, asked me for advice in November , and I worked with him to design a last-ditch stabilization attempt. The early results of the stabilization program, between January and June , were highly successful.

However, Europe and the U. After the breakup of Yugoslavia, I became an adviser to the first post-Communist Government of independent Slovenia in , and helped to design [15] the introduction of the new currency, the Tolar, and the early reform measures. These reforms helped to put Slovenia on a path of financial stability and economic growth that has also been exemplary in the region. The economist Grigory Yavlinsky went to Poland early in to observe the Polish experience. When he tried to telex a favorable report back to the Kremlin, it was blocked by the Soviet Ambassador in Warsaw.

Undaunted, Yavlinsky assembled a team of young Soviet reformers, to begin to draft a program of radical reform. This first was proposed as the day plan in mid, and then later as the day plan [17] in early I met Yavlinsky and his team when that group took a trip to the United States in the fall of We discussed the practicalities of radical reform in the Soviet Union. I agreed to provide whatever support I could. That is still a number that I would endorse. Alas, nothing like that ever materialized. Mikhail Gorbachev was in contact with Yavlinsky while the latter was at Harvard, hopeful that a grand bargain could indeed be assembled.

Gorbachev actually traveled to the G7 Summit in Houston in search of aid. By this time, of course, the Soviet leadership had lost all power and initiative, and the break-up of the Soviet Union was increasingly expected. The Bush Administration, however, was still dealing almost exclusively with the Soviet Government, at least in the economic sphere. I was asked by Gaidar to come to Moscow to help with the planning of economic reforms. I would be able to provide lessons and insights from the Polish experience, and maybe some pointers as well as to how to mobilize large-scale Western assistance, as I had been successful in doing in the case of Poland.

I was eager to try to help. Dismantling the Soviet-era system seemed to be a mission of great moral rightness. I certainly hoped, and rather expected, that Russia would feel a wave of elation at the new freedom. In this I was somewhat mistaken. The period of elation was remarkably short, and the period of political civility was even shorter. Two meetings with invited foreign economic advisers took place with the President, on December 11 th and 13 th. President Yeltsin was extremely coherent and engaged in these two meetings, asking detailed questions and taking extensive notes.

I was asked by the group of external advisers to serve as the spokesman for the group, laying out our understanding of the reform tasks facing Russia. In a remarkable moment, President Yeltsin entered the room and began with the announcement that the Soviet Union was no more — specifically that in a meeting with the Soviet military leadership, he had reached agreement with them concerning the dissolution of the Soviet Union.

In the meetings with Yeltsin, I laid out the reform challenges as I understood them and as per agreement with the broader external advisory group. The main themes [25] were:. This basic approach was summarized in the Economist article of December President Yeltsin received the two briefings with great interest and asked the group to continue to work with the Russian Government as economic advisers.

We were given the ultimate measure of trust in those days: I planned, as I had with Poland, to commute to Russia approximately once every six weeks, for a few days at a time. I fully understand from the start that the reform task would be vastly more difficult and complex than in Poland. There were several critical and quite obvious reasons for this concern:.

Russia and the other republics bear the deep economic cancer of seven decades of communism: Now, on top of systemic disease, the republics face a financial crisis. Inflation has become hyperinflation. The foreign-exchange coffers are empty. The old administrative structures have collapsed. A deeper need for industrial retrenchment and restructuring will last for years, even decades, as the former Soviet Union scale back its old heavy industry….

Indeed, a constant theme [28] of mine was that the transformation was going to be so difficult and harrowing that the Soviet Union and later Russia would need vast Western aid for success. Far from preaching a miracle cure, I was trying to preach realism to the United States — that market reforms could not, by themselves, solve deep structural and societal problems, and that large-scale help would be needed from the West.

Many of the terrible dislocations that were to befall Russia in the early s were the result of powerful forces that predated the reforms, and that would destabilize Russia right through the reform period. Nonetheless, the reforms were often blamed for the hardships, something like blaming the emergency-room doctor for the poor condition of the patient just arriving by ambulance.

Yet outsiders and armchair critics did just that. Probably the least appreciated but most dramatic reality of the Russian reforms is that Russian oil production and earnings were in a state of sharp decline. The quantity of oil production was plummeting as old oil fields were depleted and new ones were not being developed. At the same time, the world price of oil collapsed in the mids, putting the Soviet Union, and then Russia, into a terrible fiscal vice.

The Soviet Union faced that squeeze initially by borrowing from abroad, but its access to foreign credits dried up during The ensuing balance of payments crisis played a huge role in the Soviet collapse and the ensuing hardships in Russia. The combination of falling oil earning, balance of payments crisis, and soaring budget deficit, led to a combination of intense shortages, soaring black market prices, and a collapsing value of the ruble in the black market.

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The economy, in short, was spinning out of control, into high inflation, mass shortages, and a breakdown of production. Moreover, with the collapse of Soviet power, the forced allocation of resources by central planning was dead. This set of considerations led Yegor Gaidar, the acting Prime Minister and head of the economic team, to adopt a decisive end to price controls at the start of Prices were decontrolled on January 2, Gaidar rightly feared that with the collapse of central planning and the lack of incentives for delivery of food supplies from rural to urban areas, the cities might even be without food unless price controls were quickly lifted.

There was not an option to move gradually. Either the economy would move to markets based on supply and demand, or it would face devastating shortages of food and other critical goods, with massive black markets and corruption. With or without development aid, Gaidar insisted, it was necessary to end pervasive price controls.

As in Poland, this price decontrol led to a large one-time jump in price levels because of repressed inflation. I had suggested to Gaidar some possible steps to moderate the effects of this one-time elimination of the overhang of money, but he felt that anything other than a simple straightforward elimination of price controls would be politically impossible. Goods began to return to the shops within days, and after a few weeks the surveys of goods availability carried out for the Government showed that extreme shortages were being eased. But the similarities between Russia and Poland ended at that point, both for me personally as an adviser, and in the course of the economy itself.

Let me summarize the main issues in the Russian reform debate, the position that I took, and the outcome. This will help to clarify what I actually believed and recommended, and to compare that with what actually happened. I believed that price controls should be eliminated to enable supply and demand to operate. This was largely done at the start of I believed that the money supply should be tightened and subsidies to firms should be ended. This would stabilize prices but at the cost of initial unemployment. This advice was rejected. High inflation continued unabated for several years.

I believed in the need for a strong social safety net, partly funded by the West. This was not accomplished. The health care system, for example, fell into shocking collapse. I believed that the West should provide large-scale and timely foreign assistance to Russia, as it had to Poland. Russia fell into a deep balance of payments crisis.

This was generally done. Care should be taken to prevent corruption. This was not done. The privatizers went ahead outside of transparency and the law. Corruption and insider dealing were rampant. I believed that the large natural resource companies should remain in state hands. This was to ensure that the Russian Government got the revenues from the production of metals, hydrocarbons, and other valuable commodities.

The natural resource sector was corruptly privatized, giving rise to the new oligarchy. My area of responsibility for advising was macroeconomics, not privatization. I had no responsibility for the corrupt privatization, though I was often blamed wrongly for it. I actually opposed it strenuously, but was no longer even an advisor to the Russian Government when it occurred especially The three main areas where my direct advice went unheeded were the following: This safety net can be financed through foreign assistance, a standstill on debt servicing, or other emergency means.

The lack of Western assistance was grim and was my greatest frustration [32] during late and The early days were inauspicious to say the least. There was no discussion of the upcoming economic reforms, and no realism among the G-7 deputies about the extreme desperation of the economic scene. Gaidar was warned by the assembled powers that day that any suspension of debt payments would result in the immediate suspension of urgent food aid, and that ships nearly arrived at the Black Sea ports would turn around.

Russia in fact continued to service the debts for a few more weeks before completely running out of cash by February

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