- Email: [email protected]
The New Russia. Transition Gone Awry
Book reviews
249
The following Chapters 9–11 study energy sector restructuring (power and gas), including the power utility re-regulation in EE during the decade of systemic transformation. Countries attempting radical reforms have faced significant problems (for example, Poland), whereas countries opting for a conservative reform approach (Hungary) show better medium-term results in terms of wholesale and retail prices, cost average ratios and the degree of unbundling and privatization. A more political economy-oriented perspective (Chapter 10) is adopted about gas sector restructuring. Despite attempts by some governments to introduce competition in the sector, results have been poor thus far, particularly in the large CIS gas industries. Resistance to reform is both a matter of political unwillingness and of an inability to introduce reforms in the absence of a market environment. Systemic transformation also has consequences for the economic value of EE—namely Russian-gas reserves. There is a fundamental difference between the former socialist notion of physical reserves and the market economic notion of profitable reserves. In Russia, this re-evaluation is likely to have significant consequences for domestic and export policies. The last chapter derives conclusions from the very different situations prevailing in different EE countries and sectors. There is no reason not to pursue market-oriented infrastructure policies in Central and Eastern European countries. On the other hand, the CIS countries are still far away from having market economy regulation and, therefore, market-oriented infrastructure reforms are less likely to succeed soon. External financial support does not seem to be conducive to enhancing the reform process. Dealing with a rather unheeded issue in transition economics, this book will draw the attention of all researchers and academics interested in the long run outcome of the EE systemic transformation. It must be read by policymakers in the EU and advisers from all institutions involved in the EE restructuring and EU enlargement. Wladimir Andreff Maison des Sciences Économiques, Université de Paris 1 106–112 Boulevard de l’Hˆopital, 75647 Paris Cedex 13, France E-mail address: [email protected] (W. Andreff) doi: 10.1016/S0939-3625(03)00043-8
The New Russia. Transition Gone Awry L. Klein, M. Pomer (Eds.), Stanford University Press, Stanford, NJ, 2001, 454 pp. Russian Economic Reform as Seen by An Insider: Success or Failure? V. Mau, Royal Institute of International Affairs, London, 2000, 56 pp. Russia’s Post-Communist Economy B. Granville, P. Oppenheimer, Oxford University Press, Oxford/New York, 2001, 551 pp. While Russia is now into the second decade of the post-communist transformation, its early transition period still remains puzzling. In the early 1990s, Russia was freed from central planning, but at very high economic and social cost. Was Russian economic reform a
250
Book reviews
success or a failure? Did it go right or awry? Which factors did shape the policy choices in the 1990s? Was there a feasible policy alternative that would have meant lower costs and earlier recovery? Answering these questions is important for explaining Russian performance. And not only for that. Answers may also contribute to a better understanding of the economics and politics of economic reform in general. Therefore, the above-mentioned issues will remain on researchers’ agenda for long. The three books under review intend to further our understanding of these puzzles. They all went to press in the late 1990s when frustration with Russia among international observers had reached its apogee after the 1998 financial crisis. However, they differ radically in their perspectives on Russian economic reform. The editors of The New Russia. Transition Gone Awry have assembled a very impressive team of contributors. The volume starts with a foreword by Michail Gorbachev and an introduction by Joseph Stiglitz. It also includes contributions by several Nobel-prize-winning American economists as well as by top-ranking members of Russian Academia. Readers of The New Russia will find a strongly articulated and sometimes quite emotional critique of the shock therapy approach in the early 1990s. The volume is divided into three main parts. The first provides a critique of economic orthodoxy and discusses the economic role of government. Part 2 discusses the depth and the dimensions of economic crisis in Russia. Part 3 lays out a policy agenda for the future. Each part starts with a ground-setting article by Marshall Pomer, who also authored an introduction to the whole volume. His pieces articulate the general philosophy of the book in the most concentrated form and serve as a framework for other contributors. The chapters fall into three categories. First, there are short essays by American Nobelists, including Kenneth Arrow and the late James Tobin. These essays serve as reminders of the common wisdom on the market economy. Transition takes time and government involvement should not be rejected out of hand. Lawrence Klein also reminds us that economists had known little about the transition before it began. These arguments are largely beyond dispute. Clearly, reformers need to be cautious. However, it is difficult to derive any more far-reaching policy suggestions from these essays. A second set of contributions comes from older members of Russian Academia (O. Bogomolov, L. Abalkin, G. Arbatov). Their short pieces give little new information. They were written as emotional op-ed pieces for a newspaper and contain few new facts or hard evidence. What is felt here is their disappointment that the Russian reformers did not ask for their services—probably because these economists had been in demand in the 1980s. The third set of articles addresses more narrow or sectoral issues. Though uneven in their quality, these articles are more informative. They are better developed and some of them contain facts and data. The main argument running through the whole volume is quite simple: the liberalization of prices and foreign trade in 1992 and the rapid privatization between 1992 and 1994 meant a deliberate imposition of poorly designed recipes from the orthodox Washington Consensus menu. Notwithstanding reformers’ initial intentions, this policy resulted in a drastic deterioration in economic performance and social welfare. The Russian economy was almost destroyed and turned into a supplier of raw materials for the West; the population was robbed and humiliated at a massive scale. Why did the transition go so awry? According to the authors, a two-fold blindness of reformers explains most of the failures of Russia
Book reviews
251
in the 1990s. First, the textbook approach chosen for reforming the Russian economy was wrong. Second, the choice of advisers was incorrect. Shock therapy was deliberately imposed by the ruthless West. Marshall Pomer accuses Western advisers of bringing down Russia: “However well-intentioned, Western aid enticed Russia into adopting ill-conceived, pro-western policies . . . . Metaphorically, Russia played helpless child, with the West as the omnipotent adult” (p. 7). For Pomer, the alternative simply bears the opposite sign: a better textbook and a better team of advisers—both provided by the economic transition group which he had led—would have fixed major problems. The major problem with the general philosophy of the book is the implicit assumption that an economic theory taken from the right textbook provides a good policy. This might be true in the absence of political and social constraints. While designed by economists, however, economic programs are usually implemented by politicians. The latter have their own preferences and face multiple constraints. Politics and politicians are among the most obvious reasons why seemingly optimal policy options can fail. The experience of market-oriented reforms over the last turbulent decade shows that political economy considerations are crucial for understanding what can work and what cannot. The policy proposals by Pomer and associates call for a larger and more activist role for government than during the early transition. One can hardly debate the point that there is a crucial role for government to play. Most of the proposed measures are very reasonable and many are, in fact, on the agenda of the current government. Institution-building is a crucial element of the transition and cannot succeed without government. But what kind of government should this be? Everybody would agree that vesting an inefficient and corrupt state, where incompetent bureaucrats aggressively seek their rents, with additional competencies will bring only more harm. Now let us remember what sort of state Russia inherited from the collapsed Soviet Union. As a matter of fact, this was a completely impotent government unable to perform even the most basic functions. Otherwise, economic and political developments in the late 1980s would not have led to the complete collapse of 1991. Clearly, modernizing the state is as important as reforming the economy. But this results in an even more formidable challenge. While price or trade liberalization can be achieved almost overnight, fixing state institutions takes years. Fostering modern governance and a new breed of civil servants is a daunting and long-term project. Even now when President Putin has moved administrative reform to the top-level agenda its prospects still seem to be quite remote. Does all this mean that the three “-ations” (trade and price liberalization, privatization) should wait until this happier time comes? Unlike the contributors to The New Russia, Vladimir Mau was an insider during early transition. As a close political adviser to Yegor Gaidar, Mau actively participated in designing reforms. Not surprisingly, his short but emotional booklet provides a defense of the first post-communist government. While the book was written as a direct response to Stiglitz’s Whither Reform? (Stiglitz, 1999), it challenges the contributors to The New Russia as well. In his booklet, Mau considers four major issues. Could Russia have followed the Chinese model? What was the role of financial stabilization? How successful was the Russian privatization? What was the role of Western advisers? Mau argues that many Western critics of Russian reforms have very little knowledge of the events which preceded or accompanied the transition. One of Mau’s main points is that the Russian state that had emerged from the Soviet meltdown was extremely weak. As a consequence, policy possibilities were very
252
Book reviews
limited. “In reality, without having proper administrative tools, the Russian government was able to do only one thing, and that was to choose a consistent path of liberalism” (p. 39). For Mau, the early transition in Russia was a revolutionary event (see also Mau and Starodubrovskaya, 2001). Therefore, we should assess these developments not from the point of view of pure economic theory but from the perspective of the theory and history of the great revolutions. If a mighty avalanche comes down the mountain destroying everything on its way, what can those do who are on the slope? First, try to survive the avalanche. Second, clean the slope. Only after that is it possible to build new houses and infrastructure. This approach implicitly moves much of the responsibility away from the first reformist government. Predecessors should be blamed for causing “the avalanche” (the crisis); later governments bear the burden of institution-building. In general, I am quite convinced by Mau’s argument. However, one should not go too far. The fact that there was an acute crisis at the outset of the transition does not mean that there were no policy alternatives at all. Moreover, if we put the blame for initial policies away from the reformers, we should also put away the glory that they often claim. Mau’s book, as well as The New Russia, discusses Russian economic reform on a very general level. If the reader is interested in data and details, he should consult the volume edited by Brigitte Granville and Peter Oppenheimer. It contains 17 academic articles that cover a broad range of issues. Most of the chapters are written by British or Russian scholars. Almost all are of good quality and can be recommended to those interested in the economics of transition. In the introduction to the volume, the editors provide a very insightful account of the challenges to, and outcomes of, the Russian transition. They address many of the key policy issues that are also raised in The New Russia. While they concede the very high economic and human costs paid in the Russian transition, they do not share the basic philosophy of the authors of The New Russia. Unlike them, Granville and Oppenheimer regard the theoretical discussion about the optimal sequencing of reforms as artificial. “Events showed before long that governments had much less freedom of maneuver than was presupposed by such grand conceptual debate” (p. 3). Even in the case of privatization, where the discretionary element was somewhat stronger, “the government was acting from a position of weakness” (p. 7). As Christopher Granville puts it in his contribution, “In short, economic reform was given its chance by the collapse of the system; but the collapse also undermined that chance, as efforts to form a free market competitive economy foundered in the ruins” (p. 22). This position is close to Mau’s arguments. The focus of all three books under review is on the early transition. Today, the latter may look like history. The Russian society and economy have entered its second decade of reforms on an upbeat note. The GDP is on steady rise and the Russian state slowly improves its institutional capacities. However, deep structural and institutional flaws are still present and serve as brakes on more rapid and successful transformation. From a better understanding of recent history we can learn why these weaknesses are so strong and how to overcome them. Without dealing with the past we can hardly explain the present and foresee the future.
Book reviews
253
References Mau, V., Starodubrovskaya, I., 2001. The Challenge of Revolution: Contemporary Russia in Historical Perspective. Oxford University Press, Oxford/New York. Stiglitz, J., 1999. Whither reform? Ten years of transition. Paper Prepared for the Annual World Bank Conference on Development Economics, Washington, DC.
Vladimir Gimpelson Centre for Labour Market Studies, Higher School of Economics 20 Myasnitskava, 101990 Moscow, Russia E-mail address: [email protected] (V. Gimpelson) doi: 10.1016/S0939-3625(03)00044-X
249
The following Chapters 9–11 study energy sector restructuring (power and gas), including the power utility re-regulation in EE during the decade of systemic transformation. Countries attempting radical reforms have faced significant problems (for example, Poland), whereas countries opting for a conservative reform approach (Hungary) show better medium-term results in terms of wholesale and retail prices, cost average ratios and the degree of unbundling and privatization. A more political economy-oriented perspective (Chapter 10) is adopted about gas sector restructuring. Despite attempts by some governments to introduce competition in the sector, results have been poor thus far, particularly in the large CIS gas industries. Resistance to reform is both a matter of political unwillingness and of an inability to introduce reforms in the absence of a market environment. Systemic transformation also has consequences for the economic value of EE—namely Russian-gas reserves. There is a fundamental difference between the former socialist notion of physical reserves and the market economic notion of profitable reserves. In Russia, this re-evaluation is likely to have significant consequences for domestic and export policies. The last chapter derives conclusions from the very different situations prevailing in different EE countries and sectors. There is no reason not to pursue market-oriented infrastructure policies in Central and Eastern European countries. On the other hand, the CIS countries are still far away from having market economy regulation and, therefore, market-oriented infrastructure reforms are less likely to succeed soon. External financial support does not seem to be conducive to enhancing the reform process. Dealing with a rather unheeded issue in transition economics, this book will draw the attention of all researchers and academics interested in the long run outcome of the EE systemic transformation. It must be read by policymakers in the EU and advisers from all institutions involved in the EE restructuring and EU enlargement. Wladimir Andreff Maison des Sciences Économiques, Université de Paris 1 106–112 Boulevard de l’Hˆopital, 75647 Paris Cedex 13, France E-mail address: [email protected] (W. Andreff) doi: 10.1016/S0939-3625(03)00043-8
The New Russia. Transition Gone Awry L. Klein, M. Pomer (Eds.), Stanford University Press, Stanford, NJ, 2001, 454 pp. Russian Economic Reform as Seen by An Insider: Success or Failure? V. Mau, Royal Institute of International Affairs, London, 2000, 56 pp. Russia’s Post-Communist Economy B. Granville, P. Oppenheimer, Oxford University Press, Oxford/New York, 2001, 551 pp. While Russia is now into the second decade of the post-communist transformation, its early transition period still remains puzzling. In the early 1990s, Russia was freed from central planning, but at very high economic and social cost. Was Russian economic reform a
250
Book reviews
success or a failure? Did it go right or awry? Which factors did shape the policy choices in the 1990s? Was there a feasible policy alternative that would have meant lower costs and earlier recovery? Answering these questions is important for explaining Russian performance. And not only for that. Answers may also contribute to a better understanding of the economics and politics of economic reform in general. Therefore, the above-mentioned issues will remain on researchers’ agenda for long. The three books under review intend to further our understanding of these puzzles. They all went to press in the late 1990s when frustration with Russia among international observers had reached its apogee after the 1998 financial crisis. However, they differ radically in their perspectives on Russian economic reform. The editors of The New Russia. Transition Gone Awry have assembled a very impressive team of contributors. The volume starts with a foreword by Michail Gorbachev and an introduction by Joseph Stiglitz. It also includes contributions by several Nobel-prize-winning American economists as well as by top-ranking members of Russian Academia. Readers of The New Russia will find a strongly articulated and sometimes quite emotional critique of the shock therapy approach in the early 1990s. The volume is divided into three main parts. The first provides a critique of economic orthodoxy and discusses the economic role of government. Part 2 discusses the depth and the dimensions of economic crisis in Russia. Part 3 lays out a policy agenda for the future. Each part starts with a ground-setting article by Marshall Pomer, who also authored an introduction to the whole volume. His pieces articulate the general philosophy of the book in the most concentrated form and serve as a framework for other contributors. The chapters fall into three categories. First, there are short essays by American Nobelists, including Kenneth Arrow and the late James Tobin. These essays serve as reminders of the common wisdom on the market economy. Transition takes time and government involvement should not be rejected out of hand. Lawrence Klein also reminds us that economists had known little about the transition before it began. These arguments are largely beyond dispute. Clearly, reformers need to be cautious. However, it is difficult to derive any more far-reaching policy suggestions from these essays. A second set of contributions comes from older members of Russian Academia (O. Bogomolov, L. Abalkin, G. Arbatov). Their short pieces give little new information. They were written as emotional op-ed pieces for a newspaper and contain few new facts or hard evidence. What is felt here is their disappointment that the Russian reformers did not ask for their services—probably because these economists had been in demand in the 1980s. The third set of articles addresses more narrow or sectoral issues. Though uneven in their quality, these articles are more informative. They are better developed and some of them contain facts and data. The main argument running through the whole volume is quite simple: the liberalization of prices and foreign trade in 1992 and the rapid privatization between 1992 and 1994 meant a deliberate imposition of poorly designed recipes from the orthodox Washington Consensus menu. Notwithstanding reformers’ initial intentions, this policy resulted in a drastic deterioration in economic performance and social welfare. The Russian economy was almost destroyed and turned into a supplier of raw materials for the West; the population was robbed and humiliated at a massive scale. Why did the transition go so awry? According to the authors, a two-fold blindness of reformers explains most of the failures of Russia
Book reviews
251
in the 1990s. First, the textbook approach chosen for reforming the Russian economy was wrong. Second, the choice of advisers was incorrect. Shock therapy was deliberately imposed by the ruthless West. Marshall Pomer accuses Western advisers of bringing down Russia: “However well-intentioned, Western aid enticed Russia into adopting ill-conceived, pro-western policies . . . . Metaphorically, Russia played helpless child, with the West as the omnipotent adult” (p. 7). For Pomer, the alternative simply bears the opposite sign: a better textbook and a better team of advisers—both provided by the economic transition group which he had led—would have fixed major problems. The major problem with the general philosophy of the book is the implicit assumption that an economic theory taken from the right textbook provides a good policy. This might be true in the absence of political and social constraints. While designed by economists, however, economic programs are usually implemented by politicians. The latter have their own preferences and face multiple constraints. Politics and politicians are among the most obvious reasons why seemingly optimal policy options can fail. The experience of market-oriented reforms over the last turbulent decade shows that political economy considerations are crucial for understanding what can work and what cannot. The policy proposals by Pomer and associates call for a larger and more activist role for government than during the early transition. One can hardly debate the point that there is a crucial role for government to play. Most of the proposed measures are very reasonable and many are, in fact, on the agenda of the current government. Institution-building is a crucial element of the transition and cannot succeed without government. But what kind of government should this be? Everybody would agree that vesting an inefficient and corrupt state, where incompetent bureaucrats aggressively seek their rents, with additional competencies will bring only more harm. Now let us remember what sort of state Russia inherited from the collapsed Soviet Union. As a matter of fact, this was a completely impotent government unable to perform even the most basic functions. Otherwise, economic and political developments in the late 1980s would not have led to the complete collapse of 1991. Clearly, modernizing the state is as important as reforming the economy. But this results in an even more formidable challenge. While price or trade liberalization can be achieved almost overnight, fixing state institutions takes years. Fostering modern governance and a new breed of civil servants is a daunting and long-term project. Even now when President Putin has moved administrative reform to the top-level agenda its prospects still seem to be quite remote. Does all this mean that the three “-ations” (trade and price liberalization, privatization) should wait until this happier time comes? Unlike the contributors to The New Russia, Vladimir Mau was an insider during early transition. As a close political adviser to Yegor Gaidar, Mau actively participated in designing reforms. Not surprisingly, his short but emotional booklet provides a defense of the first post-communist government. While the book was written as a direct response to Stiglitz’s Whither Reform? (Stiglitz, 1999), it challenges the contributors to The New Russia as well. In his booklet, Mau considers four major issues. Could Russia have followed the Chinese model? What was the role of financial stabilization? How successful was the Russian privatization? What was the role of Western advisers? Mau argues that many Western critics of Russian reforms have very little knowledge of the events which preceded or accompanied the transition. One of Mau’s main points is that the Russian state that had emerged from the Soviet meltdown was extremely weak. As a consequence, policy possibilities were very
252
Book reviews
limited. “In reality, without having proper administrative tools, the Russian government was able to do only one thing, and that was to choose a consistent path of liberalism” (p. 39). For Mau, the early transition in Russia was a revolutionary event (see also Mau and Starodubrovskaya, 2001). Therefore, we should assess these developments not from the point of view of pure economic theory but from the perspective of the theory and history of the great revolutions. If a mighty avalanche comes down the mountain destroying everything on its way, what can those do who are on the slope? First, try to survive the avalanche. Second, clean the slope. Only after that is it possible to build new houses and infrastructure. This approach implicitly moves much of the responsibility away from the first reformist government. Predecessors should be blamed for causing “the avalanche” (the crisis); later governments bear the burden of institution-building. In general, I am quite convinced by Mau’s argument. However, one should not go too far. The fact that there was an acute crisis at the outset of the transition does not mean that there were no policy alternatives at all. Moreover, if we put the blame for initial policies away from the reformers, we should also put away the glory that they often claim. Mau’s book, as well as The New Russia, discusses Russian economic reform on a very general level. If the reader is interested in data and details, he should consult the volume edited by Brigitte Granville and Peter Oppenheimer. It contains 17 academic articles that cover a broad range of issues. Most of the chapters are written by British or Russian scholars. Almost all are of good quality and can be recommended to those interested in the economics of transition. In the introduction to the volume, the editors provide a very insightful account of the challenges to, and outcomes of, the Russian transition. They address many of the key policy issues that are also raised in The New Russia. While they concede the very high economic and human costs paid in the Russian transition, they do not share the basic philosophy of the authors of The New Russia. Unlike them, Granville and Oppenheimer regard the theoretical discussion about the optimal sequencing of reforms as artificial. “Events showed before long that governments had much less freedom of maneuver than was presupposed by such grand conceptual debate” (p. 3). Even in the case of privatization, where the discretionary element was somewhat stronger, “the government was acting from a position of weakness” (p. 7). As Christopher Granville puts it in his contribution, “In short, economic reform was given its chance by the collapse of the system; but the collapse also undermined that chance, as efforts to form a free market competitive economy foundered in the ruins” (p. 22). This position is close to Mau’s arguments. The focus of all three books under review is on the early transition. Today, the latter may look like history. The Russian society and economy have entered its second decade of reforms on an upbeat note. The GDP is on steady rise and the Russian state slowly improves its institutional capacities. However, deep structural and institutional flaws are still present and serve as brakes on more rapid and successful transformation. From a better understanding of recent history we can learn why these weaknesses are so strong and how to overcome them. Without dealing with the past we can hardly explain the present and foresee the future.
Book reviews
253
References Mau, V., Starodubrovskaya, I., 2001. The Challenge of Revolution: Contemporary Russia in Historical Perspective. Oxford University Press, Oxford/New York. Stiglitz, J., 1999. Whither reform? Ten years of transition. Paper Prepared for the Annual World Bank Conference on Development Economics, Washington, DC.
Vladimir Gimpelson Centre for Labour Market Studies, Higher School of Economics 20 Myasnitskava, 101990 Moscow, Russia E-mail address: [email protected] (V. Gimpelson) doi: 10.1016/S0939-3625(03)00044-X