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. Last Updated: 07/27/2016

Fighting Off Regression

Prominent economists of the Russian Academy of Sciences published an open letter to the new government in Kommersant Daily, one of Russia's leading newspapers.

The letter is, at the very least, a public statement of the views and policy recommendations of Russian economists within the traditionally most prestigious academic body in the country. Kommersant identified the letter as the "main document" to be considered by the government as a basis for economic policies. Many of these policies are now being implemented.

After some seven years of turmoil and trials of transition there remains, at the highest levels of Russian academia, firmly entrenched resistance to true reform. The measures suggested by the signers of the letter amount to a regression to pre-reform central management of the economy, including an abandonment of the hard-won independence of the Central Bank. The beginning of the letter voices a mistrust of foreign advisors, and warns the president of the dangers of experimenting with the economy based on recommendations that have not been "corrected by Russian science."

There are two ways to interpret this text. It could represent the most profound thinking of the most prodigious Russian economists, in which case it is a sad commentary on the state of Russian economics. More likely, it was written to further the political aims of the signers. The fact that well-known academics introduce such obviously flawed economic reasoning into the public debate in the midst of a deep crisis is troubling.

A major issue addressed by the signers was the need to protect the population from the ravages of inflation brought on by the economic crisis. The proposed measure to index wages to price levels, for example, claimed to be directed at helping poor people. Indexation of wages locks in inflation, since wages rise with prices, spurring further price rises, ad infinitum. Research f including work on the Russian economy f has shown that in times of high inflation, low-income households are the first to fall behind.

The Russian people are well-acquainted with the effects of inflation. Now that inflation is spiralling upward again, Russians' fragile confidence in their currency has been broken and the credibility of reform eroded; people are using dollars or bartering more and more to buy goods. The economy is likely to retreat from the successes in stabilization of 1995-97, and investment will fall further. Estimates of annual inflation for 1998 now range from 240 percent to 450 percent.

Considering that the proposals are touted as an effort to first and foremost provide social protection, it is interesting that the letter also proposes to partially index incomes of above-average wage earners. The group also advocates the practice of monetary emissions (printing money) as targeted credits to failing banks and firms. Those positioned to benefit are oligarchs and firm managers. Another point suggests reinstating government agencies to regulate foreign trade and currency transactions. This practice fueled black market activity and corruption in pre-reform days. Is this what the Russian Academy of Sciences believes a "socially oriented market economy" to be?

Once again, we see the proposed policies treating the symptoms, not the causes, of Russia's now lamentable economic state. The nature and scope of foreign inputis important here. There have been many technical assistance programs to help practitioners make better decisions in terms of, for example, how to carry out mass privatization. Still, technical assistance efforts have been no better able to cure Russia's sick economy than have the recent large capital injections.

A necessary complement to technical assistance is the long-term building and development of capacity in modern economics inside Russia. There are well-trained, independent thinkers in Russia who understand what needs to be done; in fact, Kommersant ran a commentary refuting the open letter's claim that economic growth can be achieved through monetary emission. It is important, though, that such commentary come from Russian academic circles, given that Western policy advice is often disregarded.

Capacity-building projects are under way, providing training in analysis of longer-term economic issues to young Russian graduates of new modern economics programs (such as the New Economic School in Moscow). Increasing capacity, however, is of little benefit to Russia unless its newly developed talent stays and works there. The EU-funded Russian European Centre for Economic Policy is pursuing this goal, having attracted the only three Russian graduates of top Western economic programs (including Harvard and MIT) this year back to work in their home country.

As all analysts agree, there are no quick fixes for Russia's problems, but there are ways to encourage deep restructuring of the economy that can put Russia back on track. To fight Russian regression, efforts must be increased to help Russia produce policy-makers and academics who can solve the country's problems on their own.

Erik Bergloef is director of the Stockholm Institute of Transition Economics and project director of the Russian European Centre for Economic Policy. He contributed this comment to The Moscow Times.