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. Last Updated: 07/27/2016

How Deep Is Reform?

A few days ago an item in the international press told about a huge country, rich in natural resources, especially petroleum, which was experiencing a gasoline crisis. Mile-long lines formed at gas stations. Fights broke out. The problem: Despite the abundance of crude oil, the country's refineries were shut down for repairs that should have taken two weeks, but were dragging on for six months. It appeared that the government might be forced to take the unpopular step of raising gasoline prices to world levels to wipe out the lines and the resulting black market.


Of course, the country wasn't Russia. It was Nigeria. Gasoline lines are history in Russia. Things have changed here. Nonetheless, the story set me thinking about what really has changed in Russia, five years into the era of reform? Forget little changes, like being able to buy kiwi fruit at any Moscow metro station. Let's look at some of the big ones: market prices, privatization, and democracy.


?Prices: A few years ago lines were everywhere in Moscow, for gasoline, bread, shoes, you name it. Learned Russian academics wrote articles explaining why, in the unique circumstances of Russia, lines were inevitable. Decontrol of prices would only lead to inflation, leaving empty stores and long lines. The academics were right about the inflation part, but when prices were decontrolled the stores filled up with goods and the lines disappeared, just as the Western advisers said would happen. Free prices and no lines is a big change, the single biggest step toward a market economy for Russia.


Beneath the surface, though, other things have not changed. The full stores mask some underlying weaknesses, like a shaky manufacturing base and an embryonic distribution system. Also, it still takes a long time to get things fixed in Russia. I don't know about oil refineries, but why does it take six months to overhaul one metro station escalator? I never saw one of the equally long escalators in the Washington, D.C. metro shut down for that long.


The fragile Russian market economy remains highly vulnerable to the reimposition of price controls. Every day we hear talk about reimposing price controls on "just a few key goods," and protecting "just a few key sectors" from import competition, but even small steps in this direction could spiral out of control, quickly producing Soviet-style or even Nigerian style shortages.


?Privatization: Western commentators uniformly praise massive privatization as the shining achievement of Russian reformers. But what has really changed? In a formal sense, quite a bit. Legal title to much of Russian industry has passed from the hands of the state to shareholders. But has the real purpose of privatization been fulfilled?


The reason private property is better than state property, I have always been taught, is that private owners respond to the profit motive. The profit motive puts owners under double pressure: Improve productivity to cut costs, and improve product quality to strengthen consumer demand. But there is a hidden assumption here, namely, that there is a strong link between the firm's profits and the owner's personal wealth. What if that link is weak? What if there are other, more effective channels than profit through which the owner can realize personal wealth? Say, little schemes like manipulating stock registers, or contracting with a foreign partner for phony imports at inflated prices, or arranging a fraudulent bank loan and splitting the loot with the banker? The result might be a system in which there is formal privatization but few of the beneficial incentives of private ownership.


?Democracy: Russia is becoming a democracy. There is a parliament to prove it, and if that were not proof enough, in a few weeks there will be a presidential election. Voters will go to the polls, the most popular candidate will win, and there is a reasonable hope that the loser will not call his forces out onto the streets with tanks or iron bars, as has happened in some other emerging democracies.


Nonetheless, elections remain in some ways a superficial phenomenon in Russia. Consider, for example, the relationship between elections and interest-group politics. In the United States, political interest groups operate primarily through the electoral process. Sometimes this works in ways that we think of as good, for example, when environmental organizations use their members' voting strength to push for improved management of federal parks and forests. Sometimes it works in ways that we think of as corrupt, for example, when corporate or agricultural special interests use campaign contributions to buy votes in Congress. But in both cases, interest groups see elections, legislative bodies, campaign contributions and so on as the principal channels for getting either what they justly deserve or what they corruptly covet.


I don't perceive this as being true in Russia today. Elections here don't seem to have much to do with interest group politics. Interest groups in Russia are said to operate through a shadowy "clan" system, which works not through the ballot box, but through personal ties, often to the bureaucracy rather than to elected officials. One has the uncomfortable feeling that the ability of the various clans to get what they want out of the government won't be much affected by whether Communist Party candidate Gennady Zyuganov, President Boris Yeltsin or someone else wins the presidency.


What is the conclusion? After six years in Moscow, I think I understand the system well enough to be annoyed when outside observers characterize Russian reforms as profound and irreversible. A good project for the next six years will be to try to get a better understanding of the sources of the resistance to change, of how they might be overcome and of whether expecting change, let alone trying to facilitate it, is even a reasonable thing to do.





Edwin Dolan is president of the American Institute of Business and Economics, an American business school in Moscow. He contributed this comment to The Moscow Times.