"Shock therapy"
comes to Russia
RUSSIA 25% of the shares in their enterprises free of charge and another optional 10% at a discount. However, these are to be held individually, not collectively. The workers will also receive 10% of the wholesale price. Under this scheme — and this is the major consideration - the work collectives will not be able to exert real power in the privatized enterprises.
WHILE the Polish "shock therapists", faced with an increasingly cranky patient who threatens to rebel against the continued, and apparently futile, infliction of pain, have decided to moderate their treatment', their Russian colleagues, seemingly oblivious to the depressing experience of their Slavic brothers to the west, began on January 2 to subject their own population to the same cruel course of treatment. Left with little option, the other republics of the former Union followed suit.
DAVID MANDEL
T closely to the now familiar neoliberal formula promoted by the
IMF and posed as a condition for its aid. Its guiding logic is to allow the market full sway in determining the allocation of resources and goods in the econ-
This requires the restoration of a free, capitalist market, including a currency that can play an active role in the economy and that is convertible. Accordingly, prices are freed and allowed to rise until a market equilibrium is reached. This occurs at a level that reduces the mass of population to poverty, making all but the most basic goods inaccessible. On the other hand, the expectation is that shortages and lines will disappear.
At the same time, subsidies to enterprises are cut and credit tightened, forcing inefficient producers to reduce costs, including labour costs, and, hopefully, to restructure, or else face bankruptcy and closure. To further balance the state budget, a central part of the programme, and fight inflation, government spending on social programmes is reduced, taxes increased, and wage rises to employees on the state payroll restrained.
In the former Soviet Union, military procurement, hitherto a massive part of production, is also to be drastically reduced. All this, of course, means massive unemployment, but this is viewed as inevitable if labour resources are to be freed to find their most rational application - as determined by the market.
Besides it makes people work better when they do have a job.
Property relations transformed are through rapid privatization of the state sector. Private ownership is considered the only basis for an efficient incentive system. Privatization is also seen as a means to de-monopolize the economy and help fill the state coffers. Finally, The hope is to rapidly expand exports in needed foreign exchange and bolster the ruble.
First round of price rises
These are the basic elements of the Russian government's reform that began on January 2 with the partial freeing of prices - limits were retained on metals, energy and other resources as well as some services, while retail prices on a series of basic consumer goods (including vodka) were limited to a 25% markup over wholesale prices charged by the
However, the government has announced that most of the remaining controlled prices will be freed by the end of April with the exceptions of medicine, baby food, communal services and mass transport.
Privatization is to begin on a large scale very soon and is expected to earn the state treasury 92 billion rubles in
20-25% of the state's
In the first year, it will predominantly affect the service sector (60 to 70% will be privatized in 1992) and small enter-
But the chairman of the State Committee on Property has said: "We will privatize everything that can be privatized" excluding only "underground resources, nature reserves and military property." Collective ownership, favoured by the movement of work collective councils,
But to mute worker resistance, government is offering work collectives
In the next few months, the government plans to launch a major agrarian reform, forcing the dissolution of thousands of collective farms that are in debt and cannot show a profit. These will be reorganized as joint-stock companies, cooperatives or private farms. It is not clear how much say in this the farm employees will have. In any case, the plan is to eliminate all of the 25,000 state and collective farms in Russia by the beginning of 1993.
Besides the expected income from privatization, the state budget is to be bolstered by increasing tax revenues, which fell drastically in 1991. These include an income tax with a minimum 60% rate, a 28% VAT (later reduced to 18% for catering establishments), 32% profit tax, a 45% tax on profits for mediatory services (the ubiquitous and sundry exchanges). Taxes are to absorb 40% of the GNP (as compared to 20 to 22% in 1991 and 50% in 1990 in the former Soviet Union).3
Massive unempoyment approaching
It is not clear to what extent the subsidies to enterprises have already been eliminated but the process is underway, and massive unemployment, which has so far hit mainly people with higher education, and women above all, is not far off. According to the Ministry of Labour, unemployment could rise from seven or eight million (10 to 12% with 70% of these women) by the fall from its current level on one and a half million. Cuts in military procurement, up to 85% this year according to one announcement, have already brought some shops in military factories to a standstill. In some areas, like the Moscow region and the Urals, military enterprises 60% of employment account for nearly
The government's social policy is to support the "neediest and least protected" elements in society, but otherwise to keep wage rises down to avoid hyperinflation. Pensions, stipends, and other allocations, as well as the minimum wage, were raised on the eve of the reform (remaining well below the poverty, or even subsistence, levels, one third of the minimum 1. See for example, D. Warszawski; "La Pologne veut changer de cap", Le Monde Diplomatique, February 1992, p.3. 2. Interfax, February 7, 1992, in Daily Report on Central Eurasia (DROE), February 11, 1992, p. 49. 3. V. Capelik, "Yeltsin's economic reform", Radio Free Europe Research Report, January 21, 1992, p. 30. 4. Nezavisimaya Gazeta (NG), January 25, 1992; Financial Times (FT), January 30 and February 4, 19 1992; Trud, February 18, 1992.
RUSSIA wage now buys about a kilo of bad meat) and indexed to the cost of living.
Wages of employees on government payrolls were also increased and partially indexed, while enterprises are free to set their own wages within the limits of their budgets, which will presumably be constrained by market forces. Those thrown out of work will receive three months severance pay, after which their income sinks in the course of a year to the minimum."
The effects of the price liberalization so far have not met government expectations. Prices were expected to rise 250% in January, but rose 300 to 350% and by some estimates as much as 500 to 700%. In February they rose another 10 to 12%, and show little sign of dropping, with a series of major new price rises in the offing. At the start of the reform, Deputy Prime Minister Gaidar predicted that in three or four weeks shelves would begin to fill again, but the supply of goods to consumers has so far scarcely improved. Rather than encouraging production, price liberalization has been accompanied by an accelerated decline; according to one estimate, 17% in January in the territory of the former USSR with more to come?
In light of this, once can hardly take seriously Yeltsin's statement in January that the painful part would be over in six to eight months, after which things would start to improve. Even his own ministers do not believe this.
Part of the decline in production is due to the disruption of established relations between enterprises and to cutbacks in subsidies and military orders. But it is also partly a reaction by unregulated monopolistic producers, who completely dominate the economy, to rising costs; they cut production and raise prices. The press cites numerous cases of this. The government's anti-monopoly programme amounts only to rapid privatization However, privatization itself has little to 20 known that prices are set monopolistical- do with promoting competition; it is well International Viewpoint #224 • March 16, 1992
490921 ly (by the "mafia") at Moscow's thirtyodd private producer markets and that prices do not vary among the thousands of private flower sellers — these do not drop their prices even if the flowers go unsold and wilt ("they won't let us"). ' In monopoly regulation even more difficult.
But the main weakness of this programme, which is already clear from the experience of Poland and other victims of neo-liberal therapy, is that the basic problem of modernizing and restructurresources out of obsolete branches that need to be cut back and into modern sectors that require expansion, the replacement of old and used machinery and technology with modern equipment and processes - cannot be resolved through the free play of market resources.
The market - an efficient destroyer
The market can eliminate less inefficient enterprises (including those that by other, non-market criteria of rationality, should not be eliminated) but it cannot automatically create new enterprises, let alone whole new sectors. The amounts of capital, domestic or foreign, required for this, are just not there.
Private capital, even if it were more abundant, could not provide the huge investment in infrastructure and power training required to bring Russian industry up to the level of the world market, to which the economy is soon to be exposed. This investment could only come from the state, but its reform proIndeed, its strict fiscal policy of budget restraint, high taxes and tight credit has drastically reduced investment.
It is not even clear that the government possesses the tools for its declared policy. Last year, state revenues dropped sharply owing to massive tax evasion. How will the Russian government collect its new taxes, when it lacks a functioning fiscal administration? Hard currency earnings of joint enterprises easily find their way abroad into foreign bank
Meanwhile, the accounts.
forces of regional separatism that led to the breakup of the
Soviet state, show no sign of within the Russian abating
Ukrainian republic)
and itself.
The banking system is in chaos. The ruble is the currency not only of Russia but, for now at least, of all the other former Soviet republics. But there is no longer one central bank (Yeltsin destroyed it in his fight to wrest power from the cen tre), but numerous national banks and little hope of a coordinated inter-republican banking policy. Control over the multitude of new commercial banks that have no real criteria for lending and few reporting requirements, is very weak."
Government unable to organize aid distribution
One has to wonder about the capacity of a government to successfully carry out the complex transformation of an economic system when it cannot even guarantee the safe delivery of foreign aid to its legitimate destination — it has to be supervised by foreign officials - or when it cannot ensure the regular supply of bread, the main source of calories for the mass of the population, to its citizens, who must spend up to two hours in line for it (queues for bread have been unknown for decades).
Yet the problem is not a shortage of flour or baking capacity but poor organization. According to one foreign aid officer, the bread problem could be resolved merely by packing the loaves in plastic bags. In fact, with only 10% of what is being spent on aid, he could organize things so that no aid would be needed.!?
But the government is apparently too busy with its free market experiment to worry about such details. Academician
Georgii Arbatov revealed the other side of the Russian reform when he told a recent meeting of parliamentarians that the Yeltsin government is the "most dis-
5. Kapelik, p. 30; Le Monde, February 5, 1992; FT,
6. Interfax, February 5, 1992; DROE, February 6,
1992, p. 45; Le Monde, February 5, 1992; FT, Februагу 25, 1992.
7. FT, February 25, 1992.
8. Le Monde, January 21 and February 5, 1992.
9. Trud, February 6, 1992; New York Times, February
7. 1992.
10. Nedelya, no. 4, 1992, p. 2.
11. NG, February 13, 1992; FT, December 30, 1991.
12. New York Times, January 22, 1992.
13. NG, February 11, 1992.
14. See "Privatization in one district", IV, no. 220, January 20, 1992.
March 16, 1991 • #224 International Viewpoint organized of the six [governments of the USSR and Russia that I have advised]. They don't answer letters, don't reply to phone calls on the special line; they don't carry out their commitments; it is impossible to know who exactly authored Yeltsin's disarmament initiative, or where and when Gaidar's economic reform was discussed... [Besides that], in the new structures of power, corruption is practically legalized and without limit.'
Indeed, although privatization is now officially getting underway, vast amounts of real estate and other state property has already been appropriated privately by officials of the "democratic" state administration. 14 The liberals themselves have had to admit that corruption in government is unprecedented, no small admission when one recalls the freebooting Brezhnev era. 15
Blatant corruption among politicians
A major split in Democratic Russia, the most important liberal movement, occurred in January in part over the widespread practice of combining public office with private business activity and the blatant conflict of interest and opportunity for corruption this creates. The debate at the movement's Council of Representatives over a draft resolution "On Urgent Measures against Corruption in the Government Apparatus" extremely violent and bitter.
But the majority, backing the "Moscow-Popov lobby", voted to omit from the resolution a phrase declaring inadmissible the practice of government officials engaging in entrepreneurial activity at the expense of the tax payer. Gavriil Popov, mayor of Moscow and a close ally of Yeltsin, has himself declared that he has no intention of abandoning his business activities. Ken Livingstone, former leader of the now defunct Greater London
Council, recently remarked while on a visit to Moscow that if Popov were mayor of a British town he would long since have been put behind bars and his declaration would be taken as an admission
This is the other, more real, side of the market reform. It would be naive to think that Yeltsin and his economic advisors lack accurate information on the results to date of the Polish "shock therapy", or for that matter on the real state of the economy of the United Kingdom, Chile and elsewhere.
But what might appear as a failure to the average citizen of these countries, is viewed as a success by the minority striving to acquire and consolidate power and privilege. And the neo-liberal experiments have known a considerable amount of success (even if it is open to question whether it will be lasting) at this task, which is a political, rather than an economic, one.
The declared goal of the market reform — a flourishing economy and general prosperity — is at best a secondary goal, and, more immediately, it is a demagogic cover for the primary aim; the carrying through of a from above", whose task is to consolidate the economic and political situation of a new property owning class drawn from the old "communist" bureaucracy, the former underground businessmen and mafia and well-connected (to the youth. In this sense, it is a transformation similar to other "revolutions from above" in Russian history — Stalin's in 1929 and Alexander II's in 1861 (the emancipation of the serfs) - in which the political goals of the elite were paramount over - and to a large extent in conflict with - considerations of economic development and popular welfare.
RUSSIA
Yeltsin and his colleagues often talk of the need to quickly "make the reform irreversible". This concern might strike the casual observer as strange coming from professed reform has yet to prove itself. Surely, they would want to leave open the option of trying a different strategy if the present one does not the expected
But this concern becomes clearer if one understands that the primary goal of the reform is to allow rapid "primitive accumulation" that is, the private appropriation of the nation's property by the new/ old elite, and, even more important, its legitimation through the market.
The key role of the market is not so much to enourage economic efficiency as to hide the true nature of social relations behind the seemingly neutral workings of a "natural" economic mechanism. If the operation succeeds, the economy is effectively removed from the sphere of democratic control.
This, then, is the gamble of the Russian reformers. Their success or failure will depend on the reactions of the population to the reform, a topic for a following article. But a few things are immediately clear. This reform has no chance of producing even minimal prosperity for the mass of the population within any politically acceptable time. If the reform continues it will be years before pre-reform levels of production are attained again. Dwindling reservoir of trust in
Despite a certain reservoir of trust, which is quickly dwindling, enjoyed by the Yeltsin regime as a democratically elected government, he has no mandate for the reform he is carrying out (during the election campaign, he promised that no one would suffer). The reform was never subject to open, democratic debate, and certainly not to democratic decision.
Second issue of Russian Inprecor THE second issue of Inter-Vzglyad, the Russian-language sister publication of IV, was published in Moscow in mid-February. Its contents include an article on Poland by Cyril Smuga, articles on the immigration policies of the EEC and the crisis of the Western Communist parties by Claude Gabriel and an article on the future of socialism by Michael
There are also articles on the Third World debt, the North American Free Trade Zone, social democracy in Western Europe as well as comments on the self-management movement in the ex-USSR and Yeltsin's economic reforms. Inter-Vzglyad is also publishing the appeal for solidarity with Cuba which appeared in IV no. 215, October 28, 1991
The magazine is being distributed to a broad range of left wing groups and individuals, and has been sold at various left wing gatherings and demonstrations against Yeltsin
The third issue of Inter-Vigiyad is due to appear by late spring/early summer, hopefully to coincide with a speaking tour organized by the
Write to us for further information. *
Indeed, most of the reform measures are introduced by presidential decree "to save time and avoid parliamentary debate"!
Numerous polls (whose liberal bias is notorious) show that the majority of the people, who are still very far from internalizing market fetishism, do not agree with the reform. And the proportion that opposes the reform will surely grow as the pain intensifies.
Thus 45% of Russians surveyed at the end of January believed that only the state control of prices and distribution of goods and resources can save the economy, while 36% still put their faith in free entrepreneurship and 20% were not sure 15. Komsomolskaya Pravda, December 26, 991, NG, January 21, 1992. 16. NG, January 21, 1992. 17. Capelik, p. 30. 18. Tiera Juary 29. 1992, DROF, January 29, 2 1 1992, p. 35; Rossiiskaya Gazeta, January 31, 1992.
International Viewpoint #224 • March 16, 1992
RUSSIA what would help. 43% of Muscovites doubted that the Russian government could extricate the republic from its crisis, as opposed to 31% who had faith in it. (Moscow, with its concentration of intellectuals, is more liberally-minded than the provinces.)I8
Not surprisingly, predictions of, and calls for, an authoritarian regime, a long favoured theme of liberal commentators and ideologues, who curse politicians worried about popularity, are increasingly frequent in the press. Of course, an authoritarian regime already exists for all practical purposes, as far as the promulgation of the reform goes. However personal freedom still remains more or less intact.
### Moves to strengthen repressive forces