Changing the Economic System in Russia.

This book focuses on the first eight months of economic transition in Russia, from November 1991 to June 1992. The authors of ten of the twelve chapters have been deeply involved in Russia's change of economic system, either as senior members of the Russian government or as foreign economic advisors. They are driven by a belief that it is possible and desirable to build a democracy and a market economy based on private property in Russia.

The book is divided into four parts. The first assesses the initial reforms; the second explores government strategies in broad terms; the third covers privatization; the final part investigates money and foreign trade. Two major themes emerge from the book: (1) contrary to some social scientists who describe Russia's transformation as "shock therapy", the authors of this volume argue that the transition has been slow and half-hearted, and (2) the power of those with vested interests in the old regime to slow or detail reform is greater than is commonly understood.

Marek Dabrowski assesses the first half-year of Russian transformation from the point of view of Polish experience. Dabrowski maintains that the initial conditions for Russia's transition were worse than Poland's and that Russia's concept of reform was not sufficiently comprehensive and radical to overcome significant barriers to reform. The result was a closed economy, high inflation, lingering shortages, deep recession, and growing social impatience.

According to Anders Aslund, the Russian government sought a comprehensive and swift transition, but a gradualist approach took hold. The Russian debate became stuck in the old mindset of Marxism, the socialist command economy, and ordinary populism. Aslund concludes that the only means to curtail resistance to reform is parliamentary elections.

Sergei Vasiliev, a leading thinker on reform in the Russian government presents a fascinating, though pessimistic, account of the social, political, and institutional aspects of Russia's transition. The transition involves more than a radical stabilization and deregulation of the economy; it requires a "change of its basic elements, setting in motion a different mechanism".

Vasiliev identifies serious impediments to market economics in the Russian national character: a communal spirit opposed to individualism, contempt for commerce, mistrust of the rich, and a grudge against prosperous neighbors. These traits can be observed in most societies, but usually to a lesser degree than in Russia.

It is the Russian attitude toward power and law that strikes a discordant chord with many non-Russians and represents a serious impediment to reform:

For a Russian, power is always more authoritative than law.... Law was seen as just a nuisance in everyday life. While the boss's instructions or orders might occasionally be ignored, laws were never observed. Lodging a complaint with the powers-that-be, that is, the boss, the chief, or the superior administrator, was the most natural way of upholding one's right in Russia. Turning to the court of law was condemned as petty solicitation.

The Russian lack of respect for law undermines property fights and contractual relations, encourages corruption, and impedes reform.

Anatoly Chubais and Maria Vishnevskaya present the main issues of privatization in Russia. Maxim Boycko and Andrei Shleifer discuss the voucher program. Boris Fedorov draws on his experience with privatization in St. Petersburg to address practical issues and problems in privatization and foreign investment in Russia. Up to June 1992, privatization had only been practiced on a small scale. Among some of the critical issues that remain to be tackled, even now, are the undermining of privatization by local authorities and government employees, hostility toward forward investment and the state of flux of the legal system.

Jeffrey Sachs and David Lipton investigate the monetary problems facing Russia which are, perhaps, the most complex in world history. The key issue is to clarify the extent of the ruble zone and its monetary policy. The steps which Sachs and Lipton outline for achieving a market-based monetary system in Russia are to create monetary institutions which will restore the usefulness of the ruble as a money, support price and exchange rate stability, and depoliticize monetary policy.

The book presents other useful chapters on Estonian monetary reform (Ardo Hansson), Russian inflation (Michael Ellan and Richard Layard), Russian and IMF negotiations (Alexei Mozhin), the behavior of commercial banks in Kiev (Simon Johnson, Heidi Kroll and Mark Horton), and Russia's balance of payments prospects (Peter Boone).

The book's success lies in its insider analysis of the change of economic system in Russia. It explains the major political and economic policy issues facing Russia in its transition, and explores the motivations for the decisions of Russian authorities. Nevertheless, the reader is left groping for a comprehensive perspective or model of transition as opposed to a series of piecemeal policies. The book does not contribute directly to the development of transition theory, but provides some date and background that should prove useful in that development.

The book would have benefitted from one or two chapters on Russia's defense sector. During the heights of the Cold War, military production accounted for 20 percent of Soviet GNP. The United States is in the midst of reducing its defense sector from about 5 percent of GNP to about 3.8 percent of GNP over 5 years. This will require decreases in defense spending of about 0.25 percent of GNP per year on average. In Russia, a reduction in defense spending from 20 percent to 5 percent of GNP over five years would require spending cuts of about 3 percent of GNP per year, roughly twelve times the magnitude of U.S. defense cuts. The economic and political transition in Russia can not be adequately understood apart from the major obstacles and opportunities presented by the defense sector.

Understanding and promoting the change of economic system in Russia will require input from almost all fields of economics, especially the relatively new ones. Fruitful applications and opportunities to advance economic transition theory await Public Choice because the "main vested interests of the Russian economy behave like rent-seekers rather than profit-seekers". The economics of property rights and contracting can contribute to our understanding of Russia's ideology and resistance to reform. Economists who incorporate coercion in their models will find applications in the political machinations and mafia-like behavior in Russia. Institutional economists can delve into the impact of Russian institutions on reform and explain the emergence of new institutions and decline of old ones. Mathematical economists specializing in systems analysis, chaos, and catastrophe theory and economists critical of equilibrium approaches will see Russian transition as a challenging application.

The change of economic system in Russia is likely to be a long-term project fraught with oscillations of optimism and pessimism. Some progress has been made, but success is not guaranteed. Whatever the future outcome, this book provides a valuable assessment of the first phase of Russia's economic transition.