Economic Reform and Democracy: Beyond Shock Therapy

Russia entered 1995, the fourth year of its move toward a stable market economy, with uncertain prospects. Doubts centered around three critical issues. The first related to the speed with which economic reforms could proceed under the political arrangements obtaining in Russia. The pace of economic transition could not be rapid in a democratic setting, where consensus-building is a slow but necessary process.

The second issue was the sheer enormity of the task itself, quite apart from any political considerations. How rapidly could the attitudes needed for free markets take root among people long accustomed to central plans and state-run farms, factories, and offices? Decisions that are routine in market economies—what to produce, which technologies to adopt, where to set up a factory, how much to borrow from a bank—turned out to be daunting for those who had never been faced with such choices. Household decisions about which job to select, or whether to borrow money to start a small business, proved no less formidable. The interaction among countless choices like these generates market efficiency. Few reforming economies were ready to leap from centralized planning to a market in which innumerable decision makers had to play by an unfamiliar set of rules. For most of these countries, and certainly for Russia, the speed of the process was unavoidably conditioned by the ability and willingness of individuals to shed old habits and learn new ones.

The third issue was the role of outside advice and funds in the process of economic transition. Learning to work with foreign lenders and experts (such as the staff of the International Monetary Fund) turned out to be exceedingly difficult for Russians, who had lived all their lives in a closed and excessively planned society.

Russian policy makers, unfamiliar with the complexities of aid diplomacy, nursed hopes for aid and credits from bilateral and multilateral sources that ran far ahead of any potential flow. Joining them in these unrealistic expectations were Western advisors like Harvard professors Jeffrey Sachs and Graham Allison, each of whom in early 1991 floated a megabuck aid plan designed to initiate rapid economic reforms in Russia. ¹ Also lacking was the recognition that foreign investors would not send capital to Russia without sound opportunities to turn a profit. At the same time, however, some available credits went unused because government agencies and local businesses could not come up with investment ideas promising enough to win the approval of donors applying market criteria. Here again, an arduous economic-learning process slowed the pace of transition.

How Much Democracy? How Soon Markets?

Taking first the issue of the interaction between the political arrangements and the speed of economic reform in Russia, we may identify three distinct phases with important lessons for such interaction. Together, these phases have covered the last decade, reaching back into the final years of the Soviet period.

The first phase, characterized by accelerating democratization (broadly described under the rubric of glasnost’) and mild economic reform (perestroika), came under Communist general secretary Mikhail Gorbachev (March 1985–December 1991). This period ended with the USSR’s collapse in the wake of the failed putsch of August 1991. There followed a tumultuous interlude of nearly two years (January 1992–October 1993), during which political polarization mounted as the policy of economic “shock therapy” initiated by Russian president Boris Yeltsin and his lieutenants fed a rift between his administration and the Supreme Soviet (Russia’s legislature, elected under the Soviet Communist regime in 1990). This second phase ended with a bang when troops loyal to Yeltsin stormed a group of diehard Supreme Soviet members and armed supporters who had barricaded themselves into the parliament building in Moscow rather then comply with the president’s order to disband. The third phase, under the cabinet of Premier Viktor Chernomyrdin, saw economic reform make uneven progress amid copious political lobbying by interest groups in the successor body to the Supreme Soviet, the new State Duma (whose members were elected in December 1993 under a new constitution adopted by referendum).

Regarding the first of these phases, one cannot resist asking: What...