Adjustment and Reform in Russia

ADJUSTMENT AND REFORM. IN RUSSIA by Henry Bienen and Mansur Sunyaeu B'uffeted from all quarters, reforms of the Russian economy continue to press ahead. Debates rage on the timing, sequence, and intensity of a formidable range ofareas ofeconomic reform: price and wage liberalization, the freeing of domestic and foreign trade, and the alteration of credit and monetary policies. Should price reform be undertaken before privatization? How much ofa safety net shouldbe put underneath segments ofthe population when subsidies are removed and prices are liberalized? Should structural adjustment ofthe economy1 be undertaken incrementally or, as Lawrence Summers has suggested, should reforms overlap and be undertaken as radical surgery?2 1.Typically, "structural adjustment" refers to policies that free prices and trade, cut subsidies, privatize assets and, in general, contract the role of the state in the economy. "Stabilization" refers to policies such as devaluation, credit contraction, and setting interest rates that would reduce inflation and stabilize the currency. 2.Lawrence H. Summers, "How Should the West Help What Was the USSR," the World Bank, Washington, DC, address on October 22, 1991, The Wharton School, Philadelphia, Pennsylvania. A good deal ofwork on the timing and sequencingofreforms in Russia remains Henry Bienen is James S. McDonnell Distinguished University Professor at Princeton University where he is Dean of the Woodrow Wilson School. His most recent book is Of Time and Power: Leadership Duration in the Modern World (Stanford University Press, 1991). Mansur Sunyaev is Head of the Institute of Economic Forecasting, Russian Academy ofSciences Laboratory. He was a Visiting Fellow at the Center ofInternational Studies at Princeton University in 1992, when he and Henry Bienen collaborated on this essay. 29 30 SAIS REVIEW Reforms seem more difficult to carry out in Russia than in other former communist states of Eastern Europe. Russia confronts unique economic, political and administrative difficulties. What, for example, should be the future of its hybrid structure? These questions are put in the context of a country whose decline in Gross National Product in 1991 was greater than the decline in the worst year of the United States' Great Depression, and whose decline in industrial production was estimated by the World Bank to be 8 percent in 1991. The fall in industrial production is projected to be well above 15 percent in 1992. The International Monetary Fund suggested that the decline was greater in 1991 than official figures, which gives credence to the projected 15 percent drop for 1992.3 It is also significantthat production has declined at a worse rate than policy makers had anticipated. This essay examines why production has suffered and why related economic reforms have so far not worked. The answer lies in supply bottlenecks and the political and administrative problems, unique to Russia, which have exacerbated short-run problems ofunemployment and inflation. We will examine the long term problems hindering growth ofthe Russian economy, which include falling oil and gas production, debt, growing obstacles to trade, and a lack ofinvestment in infrastructure. Although we focus on Russia, part of the discussion necessarily entails a discussion of debt which the old Soviet Union incurred. The problems oftrade relations among the successor states to the USSR also requires an analysis that stretches beyond Russia. As we will show, answers to these myriad difficulties lie in certain approaches to fiscal reform and privatization. We sketch the limits of and possibilities for Western assistance. Reform and the Task ofContracting the State Sector Economists tend to like structural adjustments to proceed rapidly and on many fronts. They like supply and demand to establish prices and they hope that people will quickly adjust their behavior to new situations. Politicians , in contrast, worry that measures meant to achieve long-run growth will yield negative economic consequences in the short run, creating political instability. They fear they will lose the support of too many groups at once and will pay short-run economic and political costs before longer-run unpublished. See Anders Âslund, "The Gradual Nature of Economic Change in Russia," paper presented to the Conference on Change in the Economic System in Russia, Stockholm Institute of East European Economies, June, 1992. See also the World Bank, "Russian Economic Reform: Crossing the Threshold...