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. Last Updated: 07/27/2016

Son of Shock Therapy

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With the replacement of Gazprom CEO Rem Vyakhirev, investors are starting to notice that many fundamental economic reforms are in the works. Many of the state's plans are really just plans to begin planning — for example, a plan to introduce a Corporate Governance Code was announced last fall, with the actual code to be announced and discussed this spring. The government is still working on the code, and with luck it should be introduced to the State Duma this fall.

Nevertheless, the scope and the fundamental nature of the planned reforms are impressive. The first part of a three-part tax reform is already being implemented. A plan for military reform has been adopted, though it's hard to see any results yet. Plans to reform the so-called natural monopolies — Gazprom, electricity provider UES and the railways — are in various stages. An overhaul of the system of paying for residential utilities and communal services is in the final planning stage. Plans to make actual plans are underway for a more convertible currency, the judicial system, the pension system and land ownership. From time to time, I even hear of plans to build a real banking system, although these are best described as plans to start planning for a real plan.

Yes, a great deal of planning for reforms is going on, but solid implementation of these plans is conspicuously absent except in the area of taxes. We shouldn't be impatient, however: Good plans take time to formulate and implement. All the people who will be affected must have a chance to make their contributions and to understand the logic of the proposed plans. Without this discussion, the reforms will not get popular support and will not be implemented.

So much planning with so little implementation reminds me of the shock therapy plans of the early 1990s. At that time, the state planned to stabilize the macroeconomy by reducing inflation and supporting the ruble, privatizing the economy by selling state enterprises and liberalizing the economy by removing price controls and other bureaucratic interference. All this was to be accomplished simultaneously — a plan without priorities.

Economists thought that inflation could not be controlled without privatization, which wouldn't work without the freeing of prices, which wouldn't work if inflation wasn't under control. Fairness in the process of reform was discarded. Discussions of fairness just took too long, resulting in endless debates. It's almost as if economists decided to take the whole menu of economic reform and throw it all at once at the wall of a communist economy, just to see what would stick.

What stuck was an incomplete and unfair privatization. The privatization wasn't supported by the population, but nobody wanted to review it and witness the feeding frenzy again, as the oligarch-sharks ripped apart the nation's economy. Free prices also stuck — at least for some raw material exports and imports. Other prices are still more or less controlled through export levies or state-controlled pipelines, import tariffs or administrative measures.

Other forms of economic liberalization — getting the bureaucrats off of people's backs — were forgotten. Macroeconomic stabilization came only after the government discovered that there were no more savings left to steal by means of inflating the ruble. Shock therapy was stopped — or never really got started — as people objected to everything in their lives being changed at once.

At first glance, President Vladimir Putin's planned reforms have many similarities to shock therapy. The sheer number of proposed reforms suggests that Putin has not prioritized them and will not be able to implement them all. There is little talk of liberalization and economic freedom.

The main difference between this new round of reforms and shock therapy is that people have had time to learn about and adjust to a capitalist economy. After a complete absence of reforms during Boris Yeltsin's second term, almost everybody agrees that reforms are needed. Questions of fairness are being debated, both in the newspapers and in the State Duma. It would be better, of course, if these questions were actively debated in the most popular medium, television, which unfortunately is now a near monopoly of the state.

Reforms are also being considered in separate packages. It may be difficult to reform UES without at the same time reforming the system of communal services. Yet these plans are being made separately since it's even more difficult to reform everything at once.

Another important difference is that the plans are Russian-made, even if most of them delight Western economists. Shock therapy was viewed as being imposed by the West, by the International Monetary Fund or even by Harvard University. Though then-acting Prime Minister Yegor Gaidar advocated shock therapy, most people considered it a Western innovation or even a Western plot to weaken Russia. It's significant that the reformers are now being led by disciples of Gaidar — presidential economic adviser Andrei Illarionov and Economic Development and Trade Minister German Gref. It's more significant that a widely popular president is supporting them.

As these new economic reforms go through the planning process and start being implemented, it's important to remember the lessons that can be learned from shock therapy's failure. Planning is important, but prioritizing and implementing these plans are more important. Reforms must be taken in steps. Fairness and public discussion matter. Economic freedom and liberalization matter. And real reform takes time and popular support.

Peter Ekman is professor of finance at the American Institute of Business and Economics, a Moscow-based MBA program. He contributed this comment to The Moscow Times.