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Economic reform in Russia.

Little of what has been visibly happening in the former Soviet economy over the past two years reflects the intentions of its policymakers. Central planning has been abrogated and many prices freed, but the Russian authorities are struggling to establish financial stability and to create the legal and institutional framework for extensive privatisation of large enterprises. National output has fallen sharply (as elsewhere in Eastern Europe), because the disciplines and incentives of central planning have been removed, while those of the market are not yet in existence. The economy has been kept going at a lower level with the help of a much expanded barter network among enterprises. Prospects for avoiding economic collapse and anarchy are reasonably good, but a fully-fledged market economy remains a long way off.

The advent of the Yeltsin government in Russia in the aftermath of the failed conservative coup of August 1991 and subsequent dismantling of the Soviet Union marked a certain watershed in efforts towards economic reform as well as in the purely political domain. Mr Yeltsin's team of economic ministers headed by Yegor Gaidar has made no bones about seeking to accelerate the introduction of market mechanisms across the economy, and has been vigorous in its confrontation of parliamentary and other critics. In important areas, words (or plans on paper) have given way to deeds. Most retail price controls have been removed, especially on foodstuffs. Motor fuel prices have been adjusted to more realistic levels. New elements of taxation have been introduced as part of an effort to bring the fiscal and monetary situation under better control and to strengthen the ruble both internally and externally. Recent months have also seen advances in privatisation, notably the first auctions (in the city of Nizhny-Novgorod) of state-owned small enterprises to private buyers.

While the economic landscape as well as the political has thus altered radically in the past twelve months, one must beware of exaggerating both the discontinuities and the accomplishments. Leaving aside specific precedents such as the large price increases introduced in the first half of 1991 (which itself recalled the monetary reform of 1947 - see Kaser (1963)), it is a fact that the erosion of centralised state planning and control of production - the first phase of strategic change on the road to market - had mostly occurred before the August 1991 coup. And while this was mainly a negative achievement, it stands out as the only clear-cut achievement so far.

The position at present is that the disciplines and incentives of the command economy have been removed, but have not yet been replaced by those of the market. Such replacement requires far more extensive privatisation of property than has so far been accomplished. Until this happens, managers of large business units, whether industrial or agricultural, have no clearly defined objectives. Under the old regime, when all large enterprises belonged to the state, managers were charged with obeying instructions and fulfilling (or over-fulfilling) production targets. For the time being ownership is now in limbo and systematic government instructions - and supplies - are no longer forthcoming. Until productive assets are privatised and the new owners can make their wishes felt, managers have no clear incentive to keep capital intact, to earn a reasonable level of profits or indeed do anything beyond helping to meet the day-to-day needs and requests of their workforce, and otherwise defending their own management position and perquisites.

The disappearance of motivational guidelines for the organisation of production is the universal factor which accounts for the big fall in output experienced by all the former Communist countries of central and eastern Europe. The decline may in particular instances be aggravated by country-specific factors, such as the 1990 financial stabilisation programme in Poland or the abrupt exposure of East Germany to West German markets after re-unification. In the former Soviet Union political fragmentation has played an important role. One may ask in this light why the falls in output have not been still larger. Wholesale collapse into anarchy and starvation has at times been feared both by economists with a deep knowledge of the former communist countries (see for example Nove 1991, Addendum) and by economists prodigal with advice on how to put a market system in place (two categories with limited overlap). A fully satisfactory answer to the conundrum is not possible. What one can say for Russia and the CIS is that the network of interfirm barter has been a key part of the institutional mechanics that have kept the economy running, as it were, on air in its current transitional state.

The remainder of this article falls into three sections. The first sketches the main features of the reform process and of economic developments up to 1992. The middle section outlines some key aspects of the way in which the Russian economy has recently been operating, and the final section looks at current problems and prospects, including the possible contribution of assistance from Western governments and enterprises. The discussion focuses mainly on Russia. Some other former republics of the USSR are mentioned incidentally.

The abrogation of central planning

For the first two or three years after Mr Gorbachev's appointment as Communist Party General Secretary in 1985 there was no attempt to reform the then Soviet economic system in a fundamental manner. Rather, the authorities (not unlike some of their predecessors) sought improved performance from traditional structures by heightening people's sense of participation and responsibility through political liberalisation (glasnost), emphasis on quality control and the drive against alcohol. Efforts were also made to increase fixed investment, which was reported as declining by more than 1 per cent a year in the first half of the decade.

Results were limited. The rate of decline of investment apparently slowed somewhat, but total output growth showed no improvement - and is in any case believed to have been overstated as a result of the underestimation of price increases in Soviet statistical methodology. The anti-alcohol campaign illustrated vividly the erratic nature of policy and its impacts. Besides generating ill-will towards the administration, it reduced fiscal revenues and led to widespread destruction of established vineyards in southern areas of the country, a piece of vandalism quite irrelevant to the availability of vodka which provided the main form of excessive drinking.

Prospects were worsened by the 40 per cent drop in world oil prices in 1986, which meant a cut of some 20 per cent in hard-currency export receipts. The Soviet authorities responded in traditional conservative fashion by reducing imports, thereby further handicapping efforts to revive industrial investment. The export decline also lowered tax revenues, contributing to a sharp increase in the fiscal deficit from 2-5 per cent of GDP in 1985 to 8.5 per cent in 1987. Any widening of the fiscal deficit implies faster growth of the broad money stock since the Russian economic system still lacks any other means of financing government deficits (such as, for instance, the issue of government bonds to pension funds or insurance companies). On the other hand, as is emphasised below, there has not been a close linkage between monetary aggregates and total expenditure.

In 1987-88 serious reform moves were initiated. The 1987 Law on State Enterprises led to the replacement of the old Gosplan system of output determination by the marginally more flexible system of state orders (goszakazy). The Russian word means orders in the sense of order books, not in the sense of instructions. The system involved compulsory purchases by state authorities of specified quantities at officially controlled prices, either for direct use (e.g. in defence) or for re-sale to other establishments (usually through the state supply system - Gossnab) in the case of machinery or intermediate products. State orders typically absorbed 85-95 per cent of the output of large enterprises. The remaining 5-15 per cent represented a margin of manoeuvre for participating in market activities, in practice mostly barter. Managers' aspirations to increase the freely disposable output of their plants were curbed by the fact that the state system furnished scarce inputs in amounts sufficient only for the fulfilment of state orders.

Piecemeal easing of state control also occurred in pricing (enterprises being permitted from 1988 onwards to negotiate contract [dogovorniye] prices for a limited range of |new' products) and in foreign trade (where any enterprise willing to register was authorised to engage in trade, and experiments were conducted with foreign exchange auctions and retention schemes. A large fraction (50 per cent or more) of enterprises' foreign-exchange transactions continued, however, to be directed through official channels, and there was a reversion to differentiated exchange coefficients prescribed by the central authorities, a central planner's form of multiple exchange rates.

Nove (1991, p. 86) points out that the partial loosening of controls over enterprise behaviour unmatched by any tightening of financial constraints encouraged both a sizable increase in money wages and the initiation of an excessive number of enterprise-financed investment projects which could not be brought to completion and which thus merely aggravated shortages and resource misuse.

From 1987 onwards the government also pursued a programme of |converting' military industrial production to civilian. The potential importance of this cannot be overstated, since a huge proportion of Soviet manufacturing had been devoted to defence or quasi-defence (e.g. space research). At a guess, the proportion was two-thirds for heavy industry and at least 40 per cent for Soviet manufacturing as a whole. Concern about the burden of the arms race, and about the impossibility of maintaining let alone increasing Soviet living standards while retaining strategic parity with the United States, was after all a key factor behind perestroika, antedating Gorbachev. By the end of 1990 it was claimed that civilian goods accounted for half the total output of defence enterprises. This included a very high proportion of the country's output of household durables such as refrigerators, washing machines, vacuum cleaners, TV sets, and so on (Pockney, 1991, p.25). There was a major question, however, about the amount of actual conversion as opposed to diversification of output that was actually going on (Erickson, 1992). Producers of high-technology defence equipment were understandably reluctant to jettison existing expertise and lines of development. Ballistic missile experts found it hard to be enthusiastic about turning their hands to shower heads and mixer taps instead (an actual example from Perm in the Urals). Managers therefore tended to seek additional capital allocations in order to establish civilian goods production alongside whatever they were otherwise turning out. Excessive capacity in the defence sector was thus preserved.

More promising in principle was the encouragement given to the development of private business by the 1988 Law on Co-operatives. These were enterprises owned jointly by their staff, with the size of individual shareholdings or proprietary rights subject to proportional limitations. Some limitations of this kind continue to be enforced, even though there is now more encouragement to simple one-person proprietorship. By the autumn of 1990 it was estimated that over 200,000 non-agricultural co-operatives had been set up, employing more than 5 million people - between 3 and 4 per cent of the USSR labour force.

Here too qualifications are necessary. First, private ownership was not extended to significant capital assets. Land, buildings and machinery have had to be rented at arbitary prices from state authorities. Secondly, the new enterprises have been subject to capricious increases in tax rates determined partly by finance ministry and partly by local government (ispolkom) decisions. In one way this simply represents a carry-forward of a familiar feature of the old-style command economy. High enterprise profits were always liable to be taxed away, to help pay for subsidies to loss-making establishments under the system of |soft' budget constraints (Kornai, 1992). In a market context, however, such arbitrary and ad hoc tax adjustments (motivated in part by resentment at individuals' commercial success) have highly negative incentive effects. At best, they promote displacement of activities to the black economy. At worst, they throttle private enterprise altogether.

Thirdly, some of the co-operatives - how many is impossible to estimate - are phoney, in that they consist of departments or sub-units of large industrial establishments, with no genuine independence or scope for commercial initiative outside the establishment of which they are part. Such re-packaging of existing structures is a typical response by old style managers or former party functionaries seeking to safeguard their position and avoid substantive institutional change. Moreover, even private enterprises that begin as genuinely independent concerns are liable to be propelled by the difficulty of obtaining supplies into partnership arrangements with powerful state enterprises, which on their side employ private firms as a vehicle to safeguard or enhance managerial remuneration and status in a more or less corrupt manner (Glaziev, 1991).

A further aspect of the shift from central planning after 1988 was a transfer of authority in economic matters away from all-union ministries in Moscow to the separate republics, who were called upon to strengthen links between their own finances and the operation of enterprises located in their territory. As Nove (1991, p. 86) points out, this move to so-called republican profit and loss accounting reflected the mistaken notion that any weakening of central government in the economic sphere would contribute to marketisation. In reality, this change mainly served to encourage national separatism.

As the old command system began to unravel, all semblance of economic growth disappeared, and during 1989 total output in the Soviet Union entered on a declining trend which continued for the following three years. Undue importance should not be attached to precise figures, which arguably convey an exaggerated impression of the decline. Output of |non-material' services omitted from the Marxist concept of net material produce (NMP) has been increasing, and now absorbs almost one-quarter of the Russian civilian labour force compared with 21.4 per cent in 1980. Part of the fall in industrial output was in defence items which make no direct contribution to economic well-being (and were evidently not exportable). More generally, the absence of a rational pricing system makes any aggregate output valuation open to dispute. For what they are worth, year-on-year statistics (Table 1) show NMP in the Russian Federation declining in real terms by 3-6 per cent in 1990 and by 11 per cent in 1991. The first quarter of 1992 saw a further year-on-year fall estimated at 14 per cent. Thus the decline in 1992 as a whole seems likely to match that of 1991. Industrial output fell less than agricultural in 1990 but considerably more in 1991-2. Fragmentary data on other territories of the former USSR (Ukraine, Belarus, Moldova, the Baltic states) point to output falls at least equal to those in Russia. Falling output has not been accompanied by closure of any state-owned enterprises, and open unemployment has shown in absolute terms only a very modest increase, though proportionally large - in Russia from 16,000 registered unemployed in mid-1991 to nearly 70,000 at the beginning of 1992.
Table 1. Russian Federation: growth rates
 (in comparable prices; percentages, year-on-year)
 1989 1990 1991 1992(*)
Net material
product 1.9 -3.6 -11.0 -14.0
Industry 2.0 -2.2 -8.0 -13.0
Agriculture 2.8 -6.2 -4.7 N/A
Investment -6.1 -22.5 -11.0 -44.0
Consumption 5.4 2.0 N/A N/A
(*) First quarter compared with first quarter 1991.

The accelerated loss of industrial output was partly a result of disruption caused by political and ethnic conflicts. This applies especially in the Baltic states, Moldova, the southern republics of Georgia, Armenia and Azerbaijan and sub-regions of Russia such as Chechen-Ingushetia. The importance of such conflicts stems from the structure of the country's industries, notably the preponderance of large firms and the lack of alternative suppliers. Nearly three-quarters of the former Soviet Union's 47,000 industrial establishments have over 1,000 employees, compared with 25 per cent in the United States(1), and a sizeable fraction of industrial output consists of items for which there is only one supplier. Thus, to take only the most important single example, disruption in the production of oil drilling and maintenance equipment in Azerbaijan made a decline in oil production in western Siberia impossible to avoid.

Soviet oil production peaked in 1987-88 at some 620 million tons per year. Since then it has fallen, reportedly to about 515 million tons in 1991, and a projected 470 million in 1992, a figure more than 25 per cent below the peak. The Russian Federation accounts for almost 90 per cent of these totals. The declining output figures are closely parallelled by reported export totals, which came down from over 180 million tons in 1988 to barely 90 million in 1991. The decline is almost certainly overstated, as oil-producing enterprises have contrived to conceal a modest but increasing proportion of both production and export earnings from the foreign-trade Ministry and Central Bank. The scope for such activity was increased in 1991, when remaining trade between former Comecon countries was put officially on to a world-market basis, i.e. with prices at international levels in convertible currency. Like smuggling and capital flight in western countries, such unauthorised retention of foreign exchange earnings by particular exporters or exporting organisations worsened the official balance-of-payments picture.

The Soviet authorities in 1990 and early 1991 once again responded to shortfalls of export revenue by drastically cutting import authorisations. The import bill in dollars fell by some 45 per cent in 1991, against a 30 per cent fall in recorded exports. While this involved cancellation of investment plans and aggravated the decline in national output, the current-account deficit was all but eliminated, and net inflows of medium- and long-term capital were sufficient to finance a modest reduction in the country's short-term indebtedness. (Table 2). Even so, this still left external debts of the former USSR totalling around $55 billion,(2) some 80 per cent above the total outstanding at the end of 1987. The Russian government has provisionally assumed responsibility for the whole of this foreign debt, pending an agreed settlement or division. In the first quarter of 1992 import values recovered sharply (by 15 per cent year-on-year) but exports declined further, so the current balance of payments swung back into sizable deficit.
Table 2. USSR territory balance of payments 1990-1
 (US $ billion)
 1990 1991
1. Merchandise exports 103.8 70.2
 of which:
 oil 27.1 11.1
 natural gas 11.1 11.8
 other 65.6 47.3
2. Merchandise imports -120.7 -68.2
3. Invisibles, net -6.6 -7.8
 of which:
 interest payments,
 net -3.5 -3.8
4. Gold sales (excluding
 swaps) 2.5 3.4
5. Current account
 (=1+2+3+4) -21.0 -2.4
6. Capital account, net 2.3 5.3
 (including errors and
7. Overall balance (5+6) -18.7 2.9

The decline in national output was accompanied by further deterioration in the budgetary and monetary situation. The Soviet government budget deficit widened again in 1988-90 to around 10 per cent of GNP, as fiscal receipts lagged behind rising outlays on consumer subsidies, which swamped any cuts in defence expenditures. The deficit continued to be financed with bank credit, increasing the money stock by some 15 per cent a year - this with output on a downward trend and the official price index rising by 5 per cent a year.

As a deflator for calculating the real purchasing power of money incomes the official price index was increasingly useless, as more and more goods became less and less available at official prices. At the same time, consumers were disinclined to engage in a wholehearted scramble for goods on free markets. For many items these markets were still illegal; search costs were often high (e.g. travelling 30 miles or more in quest of car parts on the basis of hearsay or vague assurances) and vendors would often want other goods in exchange rather than cash. In addition, fear of possible unemployment and general uncertainty may have strengthened the wish to cling even to depreciating precautionary balances.

The net result was a growing monetary |overhang', i.e. an abnormal and ultimately unsustainable rise in the ratio of cash balances to income. By the end of 1990 the overhang was estimated at 250 billion rubles (about one-third of the stock of financial assets) for households and enterprises combined, with two-thirds of it comprising households' cash and bank deposits. A two-pronged assault on the overhang was mounted by Finance Minister Pavlov early in 1991. First, high-denomination banknotes (at that time 50 and 100 rubles) were declared no longer legal tender; and a sizeable fraction of household savings deposits was blocked. Then, a few weeks later official prices of basic foodstuffs and certain other essentials were raised by up to 200 per cent. Success was very short-lived. Attempts to ration the exchange of cancelled 50-ruble notes into smaller denominations proved unenforceable, and money wages were soon raised to compensate for the price increases. Payment of higher salaries into partially blocked savings accounts provided no more than a temporary mode of non-monetary finance for the government deficit. Above all, the deficit itself, the root of the problem, continued unabated and indeed widened to something nearer 20 per cent of GNP in 1991 as the general economic and political situation deteriorated.

Some domestic prices, notably of air and rail transport, were heavily increased in the summer of 1991 from the absurdly low levels previously charged, but most official prices were held steady until the end of the year. On the other hand, shortages in the shops were aggravated, as goods were increasingly withheld for diversion into unofficial markets and the barter network. And the free exchange rate at which foreign currency was transacted for certain purposes (for example, tourists' cash outlays) shot up by a factor of five, to about 100 rubles to the dollar, in the fourth quarter of 1991.

On balance the monetary overhang continued to expand, and at the end of 1991 the new Russian government decided to cut subsidies and to permit a corresponding fivefold increase in prices of numerous goods and services, excluding, for the time being, only certain basic foodstuffs (vodka among them), fuel and housing. Petrol prices and remaining food prices were similarly raised in April/May 1992. Money wages and other incomes were also substantially increased, but not enough to give full compensation. Pensioners were particularly hard hit.

The freeing of many prices was accompanied by a corresponding shrinkage of the system of State orders. Although there is a dearth of official statements and the present position is somewhat obscure, it would appear that goszakazy remain an important mechanism in the major sectors of agriculture, energy and defence, but are now of slight significance elsewhere.

The need for a drastic narrowing of the budget deficit was emphasised - by the International Monetary Fund as well as the Russian authorities themselves. Besides cutting subsidies and enforcing a measure of restraint on money incomes, the government introduced new taxes: a value-added tax from the beginning of 1992 (at a rate of 28 per cent) and a system of oil and gas taxes, on both domestic consumption and exports, a few months later. These taxes represent a substantial step towards western-style fiscal systems and away from dependence for fiscal receipts on enterprise profits (whether state-owned or private). Oil and gas taxes also constitute a revenue source payable to the Russian exchequer by other component states of the former USSR. In principle these new instruments are capable of making a major contribution to eliminating the excessive budget deficit in the Russian federation, and initial results in the spring of 1992 were encouraging. VAT collections in the first (Jan-Mar) quarter came to 100 billion rubles, equal to more than 20 per cent of total budgetary outlay. The budget deficit for the quarter came to a mere Rbls 25 billion (1 1/2 per cent of GNP).

Subsequently, however, parliamentary opposition to the economic reform programme, including the enforcement of financial discipline, strengthened, reflecting a mixture of genuine popular discontent and opportunistic behaviour by former Communists endeavouring to retain or regain positions of influence under a variety of political labels. In mid-July parliament voted to reduce the general rate of VAT to 20 per cent from 1 January 1993, and to 15 per cent immediately on certain essentials, mainly basic foods. Massive upward amendments to the government's expenditure proposals were also voted. Although the government warned that other taxes would have to rise, the threat lacked credibility, both because of the need to obtain parliamentary support and because adequate machinery for extensive alternative tax collection, notably personal income tax, does not yet exist. The likely result is that the budget deficit will revert to the region of 15-20 per cent of GNP (annual rate of Rbls. 1,000 billion), instead of coming down to 5 or 6 per cent as the government had pledged to the IMF.

At the same time parliament and the government accepted the resignation (mooted at earlier junctures) of Mr. Georgy Matyukhin as head of the Russian Central Bank. His replacement by Mr. Victor Gerashchenko, former chairman of the Gosbank (the central bank of the USSR) was likewise seen as confirming earlier moves to ease somewhat the attempted credit squeeze on industry.

Transition and the barter network

In theory one might expect a close connection between the dismantling of Russia's state planning apparatus and reform of the pricing system. Both are steps towards establishment of a market economy. Prices are meant to become guidelines for producers as well as consumers, replacing the quantitative commands previously emanating from the central planning authorities. But prices can perform this function only in the presence of well-defined managerial objectives - profit maximisation, sales maximisation or whatever - and clearly enforced constraints both on access to finance and on exploitable market power. These conditions are far from being fulfilled in the State-owned sector which still constitutes the overwhelming bulk of Russia's productive apparatus; and it is widely accepted - although not logically demonstrable - that they will in practice not come to be fulfilled without extensive transfer of ownership of productive assets into private hands. Be that as it may, price reform has for the time being had little effect on managers' response to the demise of central planning. How, then, has the economy operated?

The decline in output of the past three years and the disruption of even the erratic and unreliable distribution systems which existed before has led to a massive enlargement of inter-firm networks for both barter trading and cross-firm investments linked to subsequent deliveries of goods. For example, mining enterprises and engineering firms have purchased equipment or greenhouses for collective farms (sometimes nearby, sometimes hundreds or even thousands of miles away) in order to secure supplies of particular foodstuffs for their own employees.

What is new is not the concept of the barter system but its extent. There has always been a need for informal producer networks inside the country, supplementing official organisations such as the now defunct state supply agency (Gossnab) in enabling firms to acquire the materials and equipment needed for the fulfilment of production targets. As part of these networks firms have been accustomed to holding excessive inventories of anything storable, in order to maximise their prospects of obtaining necessary supplies by barter when needed. (Analogously, households have habitually kept inventories of consumables, because of the unreliability of supply.)

The range of items traded through barter networks has now been greatly extended, covering not only raw materials, semi-manufactures, machinery and spare parts but also consumer goods for employees. A textile plant, for example, may persuade its staff to work overtime only by offering them the chance to purchase washing machines, obtained by bartering the firm's output. The machines themselves, in this example, are imported. For western trading partners barter deals have always been a feature of east-west trade, handled in western countries by specialised agencies. The difference now is that western organisations are liable to deal directly with a Russian enterprise and not or not habitually) through ministry channels in Moscow. Trade between Russia and former Comecon countries has been conducted on the same basis, since the former clearing arrangements ceased to operate in 1990.

In short, it is the inter-firm barter network - coupled with a widespread instinct for self-preservation on the part of managers and employees alike - that has for the time being replaced central direction in the organisation of production. Two additional factors have also encouraged the process. One, applying both to large enterprises and to the non-agricultural private business (|co-operative') sector whose emergence was noted above, is the nature of financial regulation. Firms complain that success in establishing new export markets has in the past been rewarded with quasi-confiscatory foreign-exchange and tax regulations which removed up to 80 per cent of hard-currency earnings from the control of the enterprise, mostly at unfavourable exchange rates. Reported alleviations of these rules were quite frequent(3), but were ad hoc and unpredictable. A general alleviation was, however, introduced in June/July 1992, with the abrogation of |official' exchange rates and the application of a uniform market rate to foreign exchange surrender requirements.

Ruble profits from domestic business are, however, likewise subject to arbitrary increases in the tax rate. This is a matter partly of Finance Ministry and partly of local government decision. For example, the local authority rules on whether social expenditure by a co-operative enterprise does or does not entitle the enterprise to alleviation of profits tax (which is also an obvious source of corruption). Recourse to barter can diminish recorded profits and hence vulnerability to these various regulations.

The other factor is the social responsibility falling on large enterprises in particular - again a familiar feature of the Communist system in its heyday, but intensified in the transitional circumstances of the present. Absence of a proper fiscal system and especially the lack of adequate budgets for regional and sub-regional governments means that basic social facilities such as housing, hospitals, creches and leisure amenities have had to be organised and constructed by enterprises. This, besides representing a diversion of managerial time and effort from the task of running the enterprise itself, widens the range of expertise and products which the enterprise needs to buy in, thus again reinforcing the incentive to barter wher such items are in short supply.

In the past informal barter relations were organised or facilitated by |fixers' (tolkachi). These persons were normally on an establishment payroll and indeed originated as a type of purchasing agent whose job was to make up for deficiencies in the quantity, quality or detailed composition of inputs (e.g. sizes of screws) supplied through official channels. Their status was always ambiguous. They were tolerated in practice because they were necessary to the achievement of industry's production targets, even though in principle their activities represented an abuse. Direct contacts between firms were supposed to be discouraged, lest they undermine the completeness and effectiveness of central control. And, of course, where a fixer's activity developed into a conspicuous source of personal wealth or influence, he risked criminal prosecution for |speculation'. In to-day's very different circumstances not only have firms built up their direct network of contacts (albeit still hampered by patchy telecommunications), but official bodies such as the regional offices of the former Gosplan - renamed the Ministry of Economics and Forecasting - themselves act as intermediaries and information channels between firms. Not surprisingly there have been calls for the release of people - up to 127,000 of them - still serving prison sentences for |economic crimes' committed under the Soviet regime.(4)

Probably more important than the intermediary activities of ministries are the widely publicised commodity exchanges that have been set up in many Russian cities with direct telephone and other links between them. These are not primary commodity markets as observed in London, New York or Chicago. Rather, they are elaborate brokerage institutions to facilitate direct and indirect bartering of all sorts of products between firms, mostly in quite small quantities and sub-divided into various qualities, sizes, etc. The defence industries have participated actively. A Military-Industrial Exchange was established in 1991 as an offshoot of the Russian Commodities and Raw Materials Exchange in Moscow, and the military also has at least one brokerage firm of its own, called Oborona (Defence) (Erickson, 1992, pp. 11-12).

The enlargement of inter-firm relations and barter is of course part of an improvised reaction to shortages and disruptions and not a considered strategy of economic reform. It is welcome in that it involves the bulk of the business sector - not merely enthusiasts for marketisation but also the more reluctant managers, for instance in parts of the military-industrial complex - learning to conduct its own deals and production arrangements in detail and to abandon reliance on the old channels of ministerial direction and ministerial privilege guaranteeing orders and correct materials to favoured producers.

Further possible benefits can be specified. Opportunities for indirect barter should encourage a more sophisticated approach to inventory management. To the extent that barter networks succeed in easing supply bottlenecks for Russian enterprises, they may do something to cure factory managers of their penchant for autarky. Unlike western firms, Soviet factories have not normally been able to choose amongst competing suppliers for their inputs, and have therefore had no leverage against unreliable deliveries, poor quality or wrong sizes and types. Tolkachi might engage in ad hoc searches for particular components, but in the end the only general backstop remedy has been to improvise and |make it onself'. The result has been excessive diversification of output and small-scale production of semi-finished items and components. In other words, inside the huge enterprises that characterise the Russian economy is a great deal of inefficient small-scale output which needs to be eliminated through the development of competing suppliers. Until this comes about, the barter network can serve as a makeshift device for keeping industrial production going.

In other respects, however, the inter-business network is retrograde, representing a retreat both from money as a means of exchange and from an efficient division of labour. Not surprisingly, therefore, it has been unable to compensate fully for the dislocations caused by removal of the old channels of command, clumsy, rigid and incomplete though they were. Besides the shrinkage of industrial and agricultural production, wholesale and retail distribution in particular has been shifted into everybody's workplace, while many shops are empty. Apart from the special hardship thus caused to retired persons, it is no less absurd for a textile manufacturer to spend time searching out washing machines than it is for the manager of a petrochemical plant to be directing hospital or apartment construction. The uncertain availability of consumer goods also adds to negative effects on work incentives.

As it happens, the retreat from money has brought the incidental benefit of helping to fend off, at least temporarily, the threat of uncontrolled inflation inherent in the shortage of goods and the overhang of purchasing power. There has been little tendency for money to chase after goods, because the prospects of acquiring goods by this route are seen as unreliable: better to use employer networks, personal contacts, brokering services and so forth. Commodity exchanges among households have also greatly expanded. In the past year the established second-hand goods (kommissioniy) shops have been overshadowed by mass street markets in which householders sell and buy all sorts of miscellaneous items from knitted socks to bottles of vodka. A comparison with car-boot sales in Britain suggests itself (with the proportion of stolen goods probably lower in Russia). In short, unorthodox transactions mechanisms have functioned in the ex-Soviet economy as a partial barrier to hyperinflation and have not arisen simply as a consequence of it.

The same phenomenon is illustrated by the elements of |dollarisation' that have occurred. Russian citizens able to acquire hard currency have access to a range of durable goods at present hardly obtainable for rubles. The emergent markets for apartments in major cities have so far operated almost exclusively in foreign exchange, because the vendors have usually been emigrants who need hard currency in their new country of residence. And the tourist hotels and other facilities run as joint ventures with western companies form a kind of enclave economy, in which foreign customers, so far from enjoying the benefits of an under-valued ruble, are charged hefty prices in western currency.

To be sure, there have been massive increases in the price level and in money incomes in both 1991 and 1992. The timing of these increases, however, was determined by government policy. There has been no sign as yet of western style wage-wage or wage-price spirals. Widespread strikes by coal miners in 1991 achieved exceptional pay rises, but this did not turn out to herald any general wave of industrial unrest or stronger trade-union pressures. People appear inured to hardships and arbitrary measures of policy, and evidently feel that public expressions of indignation against particular decisions serve little purpose. Many probably also believe that alternatives to the present regime in Russia would turn out to be worse rather than better.

Even so, the monetary situation remains fragile. As observed above, Russian government finances are not yet under control. In addition, relations between the Russian budget and those of other republics in the CIS have still to be clarified and stabilised - for instance in relation to taxes levied on oil or oil products. Similar considerations apply to the control of money and credit. The Moscow authorities have been endeavouring to contain growth of the money supply not only through fiscal restraint (though that is clearly of primary importance), but also by discouraging bank lending to the business and household sectors. The main approach has been to impose stiffer terms on commercial banks for recourse to the central bank. At the beginning of 1992 central-bank rediscount rates were raised from 2-9 per cent to 20-35 per cent, and efforts were made to enforce quantitative limits on the growth of central-bank lending to the banks. The commercial banks' own interest rates on both loans and deposits were simultaneously freed from all restraints. In April 1992 bank reserve requirements were raised to 20 per cent.

It is impossible as yet to discern positive results from these efforts. |Distress borrowing' is familiar to western banking systems as a factor magnifying the growth of monetary aggregates at times of economic downturn. In the former Soviet Union (and other East European countries) the problem is compounded by absence of operational criteria for insolvency and by lack of experience of bankers and managers alike in handling market-style relations between business enterprises and financial institutions.

Increased costs and attempted rationing of bank credit have stimulated a large expansion of inter-enterprise debts. The total in Russia and the CIS was estimated to have reached at least Rbls. 1,000 billion (20 per cent of Russia's GNP) by mid-1992. Here too Russian and CIS experience is similar to that of other former Comecon countries. The phenomenon may be viewed as a natural concomitant of the growth of inter-firm barter, a view supported by the observation that inter-firm indebtedness under former command-economy regimes appears to have been unusually low by western standards (Begg and Portes, 1992). There is also a more narrowly political dimension. The authorities in the non-Russian territories of the former USSR, notably the Ukraine, have not supported Russian efforts to contain credit, but have rather run up vast ruble debts to finance government outlays and support loss-making industrial producers. This has not inhibited the Ukrainian government, incidentally, from experimenting with transferable coupons as a means of reserving Ukrainian farm produce for residents of the Ukraine and preventing its export to Russia.

The way ahead

Little of what has been visibly happening in the former Soviet economy over the past two years reflects the intentions of its policymakers. On the microeconomic side, the notion of comprehensive central planning of the economy's output has been renounced. But over 80 per cent of the workforce (both in Russia and in other former republics of the USSR) is still employed in state-owned enterprises, and this percentage is likely to fall only slowly in the next few years. Many prices have been freed from central control and left to vendors and purchasers to negotiate. But some of the most important prices in the economy - farmgate prices of foodstuffs, energy prices, housing costs and public utility and transport rates - continue to be set by government and the products in question purchased by the state machine. Ironically, many of these items are subject to a large measure of government price-determination in western industrial countries too; but the overall context there is very different. Western government influence in specific sectors operates against a background of most market prices roughly reflecting opportunity costs, and is not a remnant of a command-administrative structure with near-universal state ownership and extravagant subsidisation of basic goods. As for inter-company relations and marketing procedures, the present situation in the ex-Soviet economy is one of improvisation through the barter network and ad hoc trading.

On the macroeconomic side, neither the government budget nor the credit system is under adequate control. The ruble remains for the time being the currency of (pretty much) the whole of the former USSR. The non-Russian republics find it an advantageous source of (purchasing) power without (economic) responsibility. It also parallels the structural interdependence of the republican economies, as is re-emphasised below. Frequently there is a measure of conflict between nationalistic pride and perceived economic self-interest. The Baltic states in particular would have been quicker to introduce their own currencies were it not for their industrial and commercial inter-relationship with the former USSR economy. Estonia took the plunge on midsummer day 1992, replacing the ruble with the kroon as legal tender.

In short, having set aside the command-administrative system, the Russian (and other republic) authorities are struggling to establish a coherent market alternative, and in the meantime exercise very limited influence over the march of economic developments. In one sense, of course, this was precisely the purpose. But in another sense, one would have preferred a postponement of the loss of control until something more like a fully-fledged market system was in place, including both microeconomic structures (competitive markets, wide-ranging private ownership of productive assets and opportunity cost pricing) and macroeconomic policy weapons.

The dilemma is analogous to that of the Walrasian auctioneer. His only means of ensuring general economic equilibrium is to identify the equilibrium set of prices before permitting any transactions. Otherwise, there is liable to be trading at |false prices', and equilibrium becomes a goal of uncertain attainability, because equilibrium values are subject to continuous alteration by the process of searching for them.

The search for a viable - one hardly dare say |optimum' - policy path for an economy in process of marketisation is known as the sequencing problem.(5) The problem was initially formulated in terms of the temporal priority to be accorded to the three elements of pricing reform, privatisation and de-monopolisation respectively. De-monopolisation involves some mixture of reorganisation of domestic productive structures, regulation of the economic conduct of large enterprises and import competition. At least two other components were latterly added, namely financial stabilisation and external liberalisation in its own right, including both trade and inward investment.

General rules about sequencing are few. Much depends on the circumstances of each case. The acceptability of rapid de-monopolisation may depend on how much unemployment results, or on the efficiency of social security arrangements. Financial stabilisation becomes pressing only if monetary aggregates get out of hand or serious fluctuations in the value of financial assets are in prospect. Attempts to draw lessons from the experience of other types of economy - for instance, less developed countries which switched from |inward-' to |outward-looking' development strategies - must fail because these economies already possessed the legal and institutional infrastructure of the market system.

Two general points may be made. First, there is no reason why identical sequencing should apply to the whole of an economy. Good policy may vary from sector to sector. For example, in the case of small businesses (on any reasonable definition of |small') privatisation is the only goal to pursue, since they will anyhow search out their own prices and assortments of goods, and monopoly is not an issue. Secondly, the urgency of pricing reform must depend on the scope for responding to price incentives, both on the supply side and on the demand side.

In this respect, the Russian government's price reforms face problems. Take as a crucial example the case of foodstuffs, where supply-side incentives are of the greatest importance in both production and distribution. Economic relations between town and country, and especially the terms and conditions on which farmers supply food to the towns, have been a key theme in Russian economic history of the past century. (See for example Nove (1980).) The recent raising of food prices has been mainly a matter of eliminating subsidies. It has not (so far) been accompanied by major privatisation of farming, land ownership or food distribution. Nor, obviously, has it involved any comparable increase in farmgate prices, which remain for the most part a matter of government determination. Thus there is deep uncertainty about the supply response to higher prices and by the same token, about the future course of prices themselves. To be sure, the private plots of collective farmers, amounting to at most 10 per cent of the cultivated land, and the associated free market in food products have long accounted for a quite disproportionate share of agricultural and especially horticultural output; but even they have not been significantly enlarged, and in any case the composition of food output could become seriously unbalanced if large areas of farmland were left in collective hands but deprived of labour and capital inputs.

In the case of energy resources and minerals supplyside incentives are less controversial. For oil, gas, diamonds and other products it is a relatively simple matter to negotiate a share-out of earnings between the central government and regional authorities or producing enterprises, analogous to the taxation arrangements applied to oil production in western countries. Major technical tasks remain, for instance to reduce oil and gas transmission leakages, to improve oil reservoir management and to curb or reverse massive environmental damage.

In these cases, however, problems arise on the demand side, and for technical reasons as well as lack of individual responsibility and property rights. Energy-intensive equipment in factories will take years, sometimes decades, to replace. In domestic or commercial buildings the individual householder or office user has at present no means of controlling his heating bill because there are no meters, radiator valves or thermostats. It is relevant to recall that in western economies, where such technical handicaps are much less extensive, market responses to the jump in oil prices of 1973-74 took the better part of a decade to bear much fruit. In addition, the idea of relative price change as an incentive to economise is totally unfamiliar to the Russian population and is unlearnable in present circumstances. The entire pricing system is in a state of upheaval. Many goods whose relative prices ought to be falling (such as household durables, tools, paint, bicycles, sewing machines) are typically not available, while some key items whose cost must sooner or later rise - housing above all - have not yet been touched.

To amplify somewhat on the housing point, what is at issue here is the basic cost of urban housing for the ordinary citizen. Summer cottages in the country (dachy) have long been open to private ownership, albeit in principle without the ground on which they stand, and have been an important repository of household savings and investment. Mention has been made of the emerging market for city flats priced in foreign currency. The principle residence of the average citizen, however, is an urban flat (sometimes still shared between more than one family) for which the rent is not merely uneconomically low but includes the main public services (heating, electricity and water) at no extra charge. Some of these flats are now being privatised like UK council housing, i.e. sold to their occupants at a modest price. Besides transferring ownership of the apartments, such sales help to absorb household savings deposits. They need to be followed, however, by a system of metering and charging economic prices for utilities (which again will take years to introduce), as well as encouragement for residents to organise the maintenance of apartment buildings. This too is likely to be slow to catch on, because of materials shortages as well as scepticism among the population as to the economic worthwhileness of this kind of self-help.

Optimists may point to the impressive list of further measures promised by the government for the foreseeable future. These do include, in no very clear order, gradual approximation of crude oil and other energy prices to world levels; privatisation of land ownership and the food sector; de-monopolisation and privatisation of larger enterprises; drastically improved unemployment benefit and other social security arrangements (at what cost to the budget position?); and wide-ranging liberalisation of external trade and payments, including current-account convertibility of the ruble for residents as well as non-residents at an exchange rate significantly higher, at any rate in real terms, than the quasi-free-market rate of 100-120 rubles to the dollar obtaining in the first half of 1992. At the beginning of July a unified exchange rate of about 135 to the dollar was established. Resident nationals remained subject to stringent exchange control, but at the end of July were given the right to purchase amounts of up to $500 per head for foreign travel. The exchange rate fell to 160 following Georgy Matyukhin's resignation from the central bank.

Sceptics will recall that in the latter stages of the Gorbachev era programmes of this sort were announced, debated and rejected or abandoned in a more or less continuous procession. The |500 days' plan of Professor Shatalin and colleagues in 1990 was the fullest and most celebrated of them. It in turn was modified by Aganbegyan to try to meet conservative criticisms, and then replaced by the Ryzhkov-Abalkin plan which envisaged a more centralised Moscow-based system. Admittedly, the Yeltsin government has adopted bolder measures than its predecessor in the pricing sphere; but these do not involve the major institutional change implied by general privatisation of agriculture and of large industrial establishments. Such privatisation, if it is to be truly successful, sooner or later requires the creation of a capital market; and this in turn depends in practice upon the formation of appropriate financial intermediaries - universal banks and possibly investment funds. The fact that not one East European country has yet made really significant headway in this area may be taken as an indication of the difficulty of the task.

A number of observers have argued that privatisation programmes should in fact begin with banks, and should involve as a necessary preliminary a general |clean up' of balance sheets both of banks themselves and of their debtor companies in the non-financial sectors (Rybczynski, 1991; Begg and Portes, 1992). The point is that under the old regime a large amount of bank credit was simply a form of open-ended subsidy to loss-making enterprises, part of the system of soft budget constraints which happened to take monetary rather than fiscal form, and was not intended to be repaid except by chance good fortune. Such claims, whose identification should not for the most part prove too difficult, ought simply, it is argued, to be cancelled, and the gap in bank assets plugged initially with some form of government obligation. The banks can then begin market-style operations with a clean slate. Any transitional or continuing subsidies to industry should be channelled strictly through the government budget.

The blueprint is impeccable. Putting it into practice is another matter. Begg and Portes emphasise that such recapitalisation must be seen as a once-for-all operation, not a government pledge to underwrite banks in quasi-perpetuity. Noting that most of the 60-odd Polish banks founded after the start of Poland's economic reforms have already been bankrupted by inept management, they underline the need for much more effective banking supervision. Considering the mixed record of western central banks in the area of banking supervision over the past two decades, this seems rather a tall order to the new central banks of eastern Europe.

Apart, however, from the restoration of private ownership of the means of production, it would be valuable if any renewed monetary overhang in the next few years could be absorbed by asset transactions - in land, housing or newly issued securities, and compulsorily if need be - rather than by further inflation of the price level.

Pessimists, alas, could make a case that all such goals are pie in the sky and that the economy is heading in the foreseeable future for total collapse and political anarchy. Such prognoses and talk of the economy being |in free fall' have become familiar in the last few years. The cumulative decline in GNP during 1989-92, possibly totalling as much as 20 per cent, is admittedly a serious matter, even if a significant fraction of the decline is in defence- or defence-related activities whose economic value is doubtful. It is difficult to say how great a decline would be needed to generate serious and widespread suffering and/or a fundamental breakdown of law and order (as opposed to the merely unaccustomed level of street crime which urban authorities are currently facing). It is somewhat easier to give a definition in terms of activity in vital sectors. The Russians have long been accustomed to intermittent shortages or even prolonged unavailability of |essential' items ranging from light bulbs to basic medicines, and an intensification of such routine privations is unlikely to bring the country to a halt. This is also true of monetary and financial disorder. What is necessary for the avoidance of economic collapse and anarchy is the maintenance of a satisfactory level of output in three key interdependent sectors: food, transport (which is necessary for food distribution) and energy (particularly oil and gas, which is necessary for transport as well as for heating and power). Should collapse in these sectors occur, it is unlikely that Western aid could do much to retrieve the situation, mainly because of the problem of transport and distribution within Russia but also because the quantities available from western sources would be too limited. Humanitarian aid (food, medicines) given by the European Community and others over the past two years has been a nice gesture of support but economically insignificant.

Between successful acceleration of reform and total collapse lies a broad range of economic paths involving a blend of muddling through, institutional innovation, corruption and entrepreneurship. A key question is the relation between economic prospects and the country's fragile political structure, with the Baltic states and Georgia already acknowledged as independent, the non-Russian members of the CIS displaying varying degrees of attachment and of assertiveness and a number of Russia's constituent republics and regions likewise jockeying for status and power. The fear has been expressed that wildcat assertion of sovereignty by former republics or autonomous regions could bring the economy to a halt by interfering with inter-regional trade in vital components. To some extent, however, the boot is on the other foot: the dominance of large firms and single producers in formerly Soviet industry means that interdependence between regions will for the time being limit the aggressive exercise of sovereignty in the economic sphere.

The point is reinforced by the high cost of physical re-structuring and re-location of giant plants, most of them in the defence sector. For the time being the authorities must seek as far as possible to turn over military facilities and outputs directly to civilian ends without having to engage in major investment first. In some areas, such as goods transport and telecommunications, this is basically uncontroversial. In others, such as the promotion of arms exports to gain urgently needed foreign exchange, it may be viewed as destabilising internationally even if indispensable for Russia. Reports in late July spoke of an imminent $2 billion arms deal with Iran, including large numbers of Tupolev TU-22 |Backfire' bombers.

Nonetheless, thoroughgoing marketisation of the economy - as opposed to improvised barter networks - requires a coherent system of property rights, contract and commercial law, as well as financial institutions. Legislation on these matters is being delayed by the fragmented state of political power across Russia and the often subtle obstructionism of those in positions of influence who feel their status and livelihood to be under threat. After legislation is in place, many years of operational experience and case law will be needed to develop a fully satisfactory system.

In the short run one of the major costs of political uncertainty and inaction is the discouragement to foreign firms from investing in the country either on their own or in joint ventures. Foreign firms need an assured legal and contractual basis for their operations, and this is impossible to achieve where there are disputes within the host country about sovereignty and the entitlement to make laws, issue licences and enter into agreements for the use of local resources.

So long as these matters remain unsettled, low-cost firm-to-firm co-operation would seem to be the only basis on which western enterprises can prudently involve themselves in the Russian economy and its transformation. This need not, however, be a negligible matter. Such co-operation can bring a great deal to Russia's economic reform process by showing how product design, delivery and marketing, including the sourcing of appropriate inputs, are in practice handled by firms with long experience of the market economy. Even if the socioeconomic opinions and values of Russian citizens are not as different as is often supposed from those in the west (see Shiller et al, 1991), they still have little concrete notion about the work habits and procedures induced by the competitive system. Western technology may also have important contributions to make, for example in tackling the problem of safety of Russia's nuclear power stations and in reducing leakages in gas and oil transmission.

Co-operation with western firms carries the additional merit of setting up at least a potential vested interest in the west against the maintenance of market barriers towards Soviet manufacturers. The combination of low-cost labour and high technical skill - albeit hitherto poorly harnessed towards meeting ordinary consumer choices - offers the possibility of very competitive supply sources in future.

Co-operation with western firms is also promoted through technical or micro-economic assistance such as the UK Know-How Fund and similar sources available from the European Commission and elsewhere. The only disadvantage of such assistance is that it is mostly allocated in response to bids by western organisations. This can encourage opportunism on the part of such organisations, which would not necessarily benefit Russia's reform process.

At macro-economic level the G7 announced a commitment in April 1992 to a $24 billion aid package for Russia and the CIS, of which $6 billion was intended for a |ruble stabilisation fund'. $4 billion of the overall total was to come from the IMF, of which Russia and other republics of the former USSR are now members and whose support was made a condition by G7 governments of their own contributions. All this was another useful gesture of support for Mr. Yeltsin; but its technical rationale was not evident. For one thing, the market exchange rate for the ruble has not been particularly unstable during 1992. And for another, no timetable for disbursing the money has been agreed. In July 1992 the IMF promised an initial payment of $1 billion at the beginning of August, on the usual IMF conditions of a short-term financial stabilisation programme involving restrictive targets for the government's fiscal deficit (5-6 per cent of GDP by the end of the year) and for credit growth. As observed above, there is now slight prospect of these targets being met, and the G7 package is therefore in jeopardy.

For political reasons the IMF is bound to impose on East European clients the same sort of conditions as are applied to any other borrower. However, the economies in transition from command to market systems are a new category of which neither policymakers nor outside analysts have previous experience. Given the difficulty of meeting IMF criteria in Russia's case (for both political and institutional reasons), it might have been wiser to detach early economic assistance from the IMF approach and instead (a) avoid suggesting official |aid' in the form of loans, and (b) seek ways of furthering the reform process which themselves might make it easier to fulfill IMF or other loan criteria at a later stage. An obvious use for a genuine $24 billion of aid would be to forgive a corresponding amount of the country's external debt. Deferment of scheduled debt repayments is saving the Russian authorities $11 billion in 1992 (out of $21 billion falling due); a long-term postponement or write-off would translate this temporary lump sum into a modest permanent gain for the country's balance of payments. It would also imply a reasonably just distribution of the gain within the former Soviet Union, given that the Russian authorities have taken on the full external debt of the USSR, some of which was certainly incurred on projects in the other republics.

There may also be a case for using western aid to establish an EPU-style settlements mechanism among former Comecon countries and (if the ruble ceases to be in general circulation in the CIS) among the CIS States as well. The collapse of Communism in Eastern Europe was followed by an abrupt 60 per cent shrinkage (aptly termed an implosion) in the region's international trade, as countries sought vainly to re-orient their external trade to western markets. (For discussion see UN Economic Commission for Europe, 1991). This represents the international dimension of the fall in output which has everywhere accompanied the dismantling of the command-administrative system. Russia's raw-material exports to Eastern Europe were effected from the beginning of 1991 at world-market prices and with (in principle) hard-currency settlement. All countries of the region sought where possible to reject each other's manufactures as inferior in quality to western goods. By the same token, however, few east European manufactures were competitive in western markets; and those that were faced quotas and other trade barriers, as did exports of agricultural products in particular. A temporary mechanism of international settlement which provided for a systematic element of credits between participating countries along EPU lines, thereby relieving pressure on convertible currency resources, could help to revive trade among Eastern European countries and to wean interrepublic trade within the CIS away from the barter network on which much of it currently rests. Needless to say, any such payments scheme should not become a pretext for western, especially west European countries, to further delay widening market access for Russian and other east European exports.


The Yeltsin government has moved with more vigour and determination than its predecessor down the path to market. But it has still covered only a limited distance. Many prices have been freed, but some of the most important remain subject to government control. The Russian pricing system as a whole is still far from being aligned with opportunity costs. Availability of many simple goods is still patchy and consumer opportunities to respond to price incentives very limited.

Perhaps more important, the processes of privatisation and commercialisation of enterprises are still in their extreme infancy. Without much further advance in this direction managers in large enterprises will have no satisfactory objectives or criteria to work to. The establishment of appropriate legal, banking, auditor, shareholder and customer relationships requires much legislation to begin with and many years of operational experience and experimentation thereafter. There are no adequate historical precedents for industrial command economies undergoing such a process, and no well established theoretical analysis either. Western economic advisors, both official and non-official, are well able to specify textbook end-states which it is desirable to reach; but their ideas on the adjustment or transition path are necessarily ad hoc and improvised.

Meanwhile in Russia and the other former Soviet republics managers and consumers are engaging in improvisation on the ground. Barter networks are helping to keep economic activity at a reasonable level, limiting the fall in output brought about by the removal of most of the command-administrative structure which previously directed industry. National output has nonetheless continued to fall; and the uncertain and fragmented nature of sovereign authority in the CIS at large and within the Russian Federations itself is delaying legislative moves towards the extension of private ownership. Even the really pessimistic scenarios for the Russian economy, of mounting anarchy and serious hardship, cannot therefore be wholly discounted.

They are, however, improbable. In the past two winters (1990-1 and 1991-2) critical food shortages feared by some observers failed to materialise. And in the spring and summer of 1992 earlier reports that economic uncertainty and dislocation were leading to a drastic shortfall of crop sowing for the coming year on state and collective farms were declared to be baseless. Admittedly the prices to be paid for this output by the government remain a matter of uncertainty and anxiety, not least because of the implications for the budget deficit and inflation. At the same time liberalisation was leading not merely to chaotic street trading but to occasional signs of household goods and clothing returning to ordinary shops. Examples of consumer resilience in trying circumstances could be multiplied - for example, motorists continuing to keep their engines tuned and their petrol tanks full despite long queues at petrol pumps and an apparent total absence of service stations and spare parts.

Perhaps most important of all, there has been no renewed disposition in political circles, whether of government or of parliamentary opposition, to seek a return to authoritarian government or to reimpose curbs on the press. Anxieties are occasionally voiced about the danger of another attempted coup. Serious political differences and even conflicts remain, notably over the status and treatment of minority Russian populations in other republics, such as Estonia and Moldova. The Russian parliament has reacted to discriminatory measures in Estonia by calling for sanctions and threatening to raise the matter in the United Nations (Press reports, 19 July 1992). But compared with the sabre rattling which would have been standard practice a year or so ago, this is, in its limited and ambiguous fashion, a distinct mark of progress.


(1) Data from Stanley Fischer, |Stabilisation and economic reform in Russia', Brookings Papers on Economic Activity 1992, cited in Financial Times, 13 May 1992. (2) Source: OECD and BIS Statistics on External Indebtedness, July 1992. (3) For example, in December 1991/January 1992 Karelia and the Komi Autonomous Republic were permitted to retain 75 per cent of hard currency earnings of enterprises on their territory. In March 1992 Kolmorogovsky Colliery was allowed to retain hard currency from the export of 140,000 tonnes of coal in order to build apartment houses. (Russian press reports.) (4) Reported in Financial Times, 17 July 1992. (5) Recent contributions to the literature include Kaser (1990), McKinnon (1991), Rybczynski (1991), Journal of Economic Perspectives (1991) and Centre for Economic Policy Research (1992).)


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Author:Oppenheimer, Peter M.
Publication:National Institute Economic Review
Date:Aug 1, 1992
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