Russia's Failure to Reform
To commemorate its founding 25 years ago, PS will be republishing over the coming months a selection of commentaries written since 1994. In the following commentary from 1999, Jeffrey Sachs argues that only new, honest, and democratic leadership in Russia, combined with a real Western commitment to help, could hope to correct the country’s perilous political and economic situation.
CAMBRIDGE – Russia continues to stupefy and amaze. Ten years after the Berlin Wall fell, and nearly eight years since the end of the Soviet Union, Russia has failed to find its way in the world. The economy has collapsed, with little sign of recovery. Corruption is everywhere. The political system lurches from crisis to crisis without any apparent connection between the political leaders and Russian society. President Yeltsin is ill and erratic. There are no trusted Russian voices on the world stage.
So the age-old Russian question echoes: “What is to be done?” One view holds that the problem lies in the strategy of economic reform that Russia adopted after 1991. Some people argue that Russia reformed “too fast,” that it should have adopted a gradualist reform strategy, something like that pursued by China. Others argue that Russia put privatization ahead of institutional reforms such as establishing a judicial system. According to this view, the key to Russia’s stabilization and eventual economic growth lies in a reinvigoration of state control over parts of economic life.
It is a big mistake, in my view, to blame Russia’s problems on the “speed” of its economic reforms, especially since there were so few actual reforms! I was an economic adviser to Poland (1989-1991), Estonia (1992), Slovenia (1991-1992), and Russia (1992-1993). I watched all of these countries (and many others) up close. I gave similar general advice in these countries. Estonia, Poland, and Slovenia have prospered; Russia has not. The reasons for these differences lie not in any excessive “speed” of Russia’s reforms, but in geography, structural conditions, and of course politics.
Geography is critical, though often neglected by commentators. The countries closest to the markets of Western Europe (Poland, Hungary, the Czech Republic, Slovakia, Croatia, Slovenia, and the Baltic States) have had a much easier transition to capitalism than the more distant economies of the former Soviet Union. When a Western European enterprise, say Volkswagen, decides to purchase parts from a firm in Eastern Europe, it almost surely goes first to a neighboring country – for example Poland – rather than to Ukraine or Russia. Therefore, the countries closest to Western Europe have received the largest flows of foreign investments from Western Europe, and have also been able to expand their exports to the European Community. Foreign investment and exports have been the two main engines of economic recovery in countries like Poland, Slovenia, and Estonia.
Russia’s structural conditions have also been important. Russia, of course, has traditionally depended on its exports of oil and gas, but the value of those exports plummeted in the 1990s. Oil production in Russia has fallen sharply, and world energy prices have also been low since 1986. Moreover, before 1989, the Soviet Union could sell its outmoded technologies to the communist countries of Eastern Europe. As soon as Soviet power in Eastern Europe collapsed in 1989, those countries could switch to the superior Western technologies in computers, telecommunications, transport, pharmaceuticals, and many other areas. Russia’s investments in technology were quickly wiped out, causing a further loss of income.
Russia’s structural conditions also precluded Chinese-style gradualist reforms of the state enterprises. China, after all, was a peasant society in 1978 when it began its own market reforms: 70% of the Chinese population lived in rural areas, and only 18% worked in state enterprises. China could therefore be gradual about the problems in the state-enterprise sector, because the non-state sector was so large. (China, by the way, has still not solved the problems of its loss-making state enterprises!)
In Russia, by contrast, more than 90% of the population worked in state enterprises as of 1992. Russia (and the other countries of the region, including Poland) had to proceed much more decisively with state-enterprise reform and privatization. They could not rely on China’s approach.
Politics is the third and crucial dimension explaining Russia’s failures. The Soviet Union had crafted a system of corrupt, immoral politics that has continued in Russia until this day. The old Soviet nomenklatura became the new political managers of Russia. The Soviet Union had repressed or destroyed every vestige of civil society, including professional associations, religious groups, charitable societies, and the independent media – the types of social organizations that would normally help to limit widespread government corruption. Poland, by contrast, had strong civic groups – including the church, peasant societies, and the Solidarity trade union. In Poland, therefore, corruption has been kept under control, while in Russia it is pervasive and deeply damaging to society.
There is also an international dimension to Russia’s political crisis. Western governments were much more prepared to help Poland than they were to help Russia. For example, Poland received a partial cancellation of its debts; Russia did not. Poland received early help from the West in stabilizing its currency; Russia did not. In general, the West never tried very hard to help Russia. This may have been a strategic consideration, or simply a decision made in ignorance. We can say surely, though, that the lack of Western help of the right sort and at the right time has gravely worsened Russia’s chances for economic recovery.
In the end, Poland (and several other countries in Central and Eastern Europe) carried out reforms honestly and effectively. Such countries took advantage of their favorable geography to attract large-scale investments from Western Europe. Poland, and some others, received timely help from the West. Russia, by contrast, failed to reform, and has descended farther and farther into corruption and decay. It has received little real help from the West. The situation in Russia remains unstable and therefore dangerous. Only new, honest, and democratic leadership in Russia, combined with a real commitment to help Russia from the West, can help to correct this perilous situation.
https://www.project-syndicate.org/commentary/russia-s-failure-to-reform?referral=c50051