Lost Opportunity: Why Economic Reforms in Russia Have Not Worked.

Marshall Goldman, a long-time observer of the Soviet scene, has distinguished himself in the past, demonstrating a real talent for mixing colorful anecdotes and trenchant analysis to highlight the many failures of central planning. Here, I believe he has produced the first, single-authored book to chronicle and evaluate economic reform in post-Soviet Russia. The thesis of Lost Opportunity is that the radical liberalization program launched in January 1992 was doomed to failure. The institutional infrastructure, passed on by the Soviet system to Russia, could only respond in distorted and destructive ways to the price and profit incentives thrust upon it. The governments of Mikhail Gorbachev and Boris Yeltsin both missed chances to resolve the problems created by this inheritance. Russia, in essence, had not been readied for the shock of shock therapy.

The book can be divided into three parts. The first is a more or less chronological treatment of the events leading up to the dissolution of the Soviet Union. Goldman focuses on Yeltsin's rise and very personal rivalry with Gorbachev. There is little new material here for experts in the field, though for those not acquainted with the chronology or who need memories refreshed, this part should be useful. Perhaps the strongest chapter in the book describes the two leaders' reliance upon professional economists for policy advice. Goldman points out that prior to Gorbachev's tenure as General Secretary, Soviet leaders had generally sought counsel on economic matters from a small group of peers inside the Communist Party. By bringing in professional analysts from outside this limited circle, both leaders quickly expanded the range of ideas being debated at the highest levels. Ultimately, Yeltsin was the more receptive of the two to their liberalizing influence.

In the second part, Goldman explains why he feels reforms did not work. His bottom line here is that too much attention was paid to macroeconomic policy, while not enough was given to the lack of institutions capable of responding to market pricing and profit incentives. Private trade, agriculture and production had been largely suppressed by the Soviet system, and their state sector equivalents were incapable of responding rationally in the new environment. So instead of marketization leading to growth, production levels declined. Furthermore, the post-reform landscape came to be dominated by industrial monopolists and the Russian mafia, both of whom were interested in dampening the supply response to market liberalization.

Goldman describes all this as a failure of shock therapy. The young Russian reformers and their foreign advisors just did not understand the institutional framework in which they were working. Of course, it can be and is argued that shock therapy never was fully implemented in Russia. A central bank, unresponsive to Yeltsin's reform team, heedlessly stoked inflation by extending cheap ruble credits to bankrupt enterprises. The stabilization component of the radical reform program was thus never put in place. But this "was it or wasn't it" question is not of primary importance here.

The crucial issue raised by this book is the extent to which Russia should have gone slower and first laid down an institutional foundation upon which to later build a market-oriented economy. On this matter, it is doubtful that much of the missing infrastructure referred to by Goldman could have been introduced by government policies in a way that would have strengthened the Russian economy. Liberating, as he suggests, a small number of sectors from such a highly integrated system of planning could well have produced unintended and disastrous results. Partial reforms of this sort could only have been applied successfully to sectors with little or no interface with the rest of the state planning system. Otherwise, planned flows would have been severely disrupted and firms in the newly liberalized sector could have responded in privately rational yet socially inefficient ways to fixed state prices. Small-scale, private service establishments, such as restaurants, were indeed tolerated without creating disruptions. However, there were few sectors that could be easily cordoned off from the planned portion of the economy. They were comparatively small and could hardly have been expected to provide Russia with a big supply response after liberalization.

With regard to marketing infrastructure, Goldman rightly points out that Russian reform has been hampered by a dearth of commercial information. He errs, however, when suggesting that this could have been addressed by actions taken prior to rapid market liberalization. He specifically refers to the absence of industry guides and Standard and Poor-type directories to guide micro-level decisions, implying such publications might have been put together by a government commission prior to January 1992. But there can be no institutional substitute for the learning-by-doing and reputation building that must occur during the transition from plan to market. New and old firms alike must find out for themselves which suppliers make prompt deliveries and produce quality output as well as which customers pay their bills. And indeed this type of knowledge has been rapidly developing in Russia. Commercial banks, to take just one example, have become much more adept at evaluating risk and assessing the creditworthiness of potential borrowers. And those potential borrowers now can consult any number of industry guides and informational sources to help them select a banker. Anything which would have been produced before January 1992 would have been quickly dated and useless.

The concluding portion of the book attempts to put the Russian reform experience in comparative perspective. As he has done consistently in the past, Goldman extols the virtues of Chinese gradualism, giving particular attention to the successful agricultural reforms launched in the late 1970s. Nearly all observers agree that breaking up the communes and granting rural families limited land ownership rights helped propel China to its rapid growth rates over the past fifteen years. But would an "agriculture first" approach have been the appropriate model for Russia? In making his case for why it would, Goldman glosses over the fundamental structural difference between the two economies. The Chinese agricultural sector was highly labor intensive and never as fully integrated into a centralized planning system as the capital intensive Soviet agricultural sector. For reasons pointed out above, it would thus have been much more problematic to free up the countryside in Russia. Goldman is correct when he says the Yeltsin government has been slow to move on the agricultural reform front. Continued subsidies to highly inefficient state farms have imposed a great burden upon the Russian economy over the past several years. But this does not make the ex post case for Russia adopting the Chinese model any stronger.

Perhaps the most surprising aspect of Goldman's search for lessons and models outside of Russia is his dismissal of Poland's experience with radical reform. He actually finds the experiences of post-war Germany and Japan more relevant to Russia. In Poland, Goldman admits that shock therapy was successful. But he attributes this to the institutional infrastructure already in place - a third of its labor force and over eighty percent of peasants already worked in the private sector. There is likely some truth to this explanation. It is wrong, however, to suggest that the same economic program produced better results in Poland only because of this difference in initial conditions. The Poles, in part because of a more conducive political environment, were able to go faster with liberalization and were much more successful in implementing a strict macroeconomic stabilization. Their success in implementing this approach contrasts sharply with the performance of East European countries that chose to follow a more gradual path.

This book does not, in sum, present as grim a perspective of the Russian economy today as perhaps suggested by its title. Neither though does it give an optimistic spin to the developments since Yeltsin launched his reform program. The turbulence of post-Soviet Russian society - civil wars, extremist politics, etc. - makes it easy both to understate the economic transformation that has taken place and to point out and perhaps exaggerate the obstacles that remain to future development.

William Pyle Duke University