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. Last Updated: 07/27/2016

Act Quick on Reform

The newly reorganized Russian government has finally had its first session. Prime Minister Viktor Chernomyrdin again tried to underscore the country's economic successes, although there is not much basis for this. At the end of January the prime minister drew attention to the growth of the gross national product, although this rise is nothing more than an allowable statistical error: 0.5 percent in comparison with the same period last year.


Chernomyrdin pointed out successes in matters that are hardly a point of pride: in the lowering of wage arrears, which should not exist at all. And again, the successes are very dubious. The government debt of 2.7 trillion rubles ($470 million) to state workers is only a small part of all its debts. There is still the money the government owes industry for state orders, and most important, the debts that enterprises owe one another. The total amount of debt, which has reached about 50 trillion rubles at the beginning of March, increased rather than decreased. Besides this, there are the pension arrears, which at the beginning of the year amounted to 16 trillion rubles.


The problem of nonpayment of wages and pensions cannot be solved by hastily and haphazardly drawing on the federal budget. It is necessary not to fill in gaps but to change the entire economic situation, at the center of which lies an unusually deep budget crisis. The crisis has crept up on the country for the past two years almost unnoticed, although in fact it should have come as no surprise to the government.


The budget crisis has developed along the lines that were recently described by former prime minister Yegor Gaidar at the Moscow Carnegie Center. He said budget crises occurred to a greater or lesser extent in all the former socialist countries during their transition to market economies. In each of the countries, hidden inflation kept down artificially by planned economies gave way to open inflation. The market economy brought about a wave of inflation and along with it a widening of the tax base.


The next inevitable stage is the slowing down of inflation, which means a decrease in the tax base and fewer sources of budget revenues. At the same time, expenditures on housing, utilities subsidies as well as public transport -- with its rising costs of fuel and energy, the prices of which have been liberalized -- continue to increase. Thus, the fall in budget revenues is accompanied by a rise in expenditures.


If market reform is carried out quickly in such conditions, as was the case in Poland, for example, then the rise in expenditures is overcome before the drop in income takes place. Then the budget becomes relatively stable on a new, market basis, and social costs during the transitional period turn out to be minimal. If the reforms are put off for a long period, then a complete collapse of social services occurs. If the reforms take place at a moderate pace, with fluctuations and hitches, but go ahead nonetheless, then they come up against significant difficulties, which can only be overcome through quick and energetic action. Moreover, after every failed attempt at reform, the conditions for success become all the less favorable.


This is what is happening in many countries today, including Russia. We are moving along the path of reform in spurts, stopping to rest after each step in the hope that what has been done is already enough and there is no longer any need to exert ourselves. Every such stop, however, comes with a price.


Today Russia is faced with an incredibly complex practical task: to overcome the consequences of two or three pauses in the reforms, which were caused by several obstacles. Among these obstacles were the war in Chechnya and the inconsistency of the policies of Chernomyrdin's former coalition cabinet. Finally, the pre-election presidential campaign, which took up an entire year, and then the president's illness, which dragged out the period of ruinous indecisiveness for another half year, had very negative effects on the economy.


Strict measures are now critically needed for maintaining government expenditures and raising the revenues that were set out in the presidential decree to the Federal Assembly. But how can this be done, when this year's budget has not gathered the necessary revenues?


First it is necessary to lower the taxes on industry, without which no transition from economic decline to a stronger economy is possible. For many economists, the answer also lies in taking immediate and decisive steps to lower the enormous outlays on orders for government needs, and above all the army. A narrow circle of firms are charged with fulfilling these orders, without competition. There is thus the possibility for rampant corruption.


Much money is lost through banks entrusted with government funds that use them for free and without control. The losses incurred from the so-called natural and artificial monopolies should also be reduced -- government regulation in this area is clearly not sufficient. After these measures, which could be carried out in the coming months, there will be even greater challenges: public housing, utilities and army reform.


All these painful measures are fraught with the threat of political skirmishes in the government itself. Housing and military reform will likely engender social conflict. Only very decisive, influential and qualified people will be capable of carrying out such measures. This is why Yeltsin's decision to appoint first deputy prime ministers Anatoly Chubais and Boris Nemtsov makes sense. It may well be that the tasks will be beyond their strength, but there are no other politicians today who are more capable of dealing with them.





Otto Latsis, the Free Press Academy's journalist of the year, is a political analyst for Izvestia. He contributed this comment to The Moscow Times.