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. Last Updated: 07/27/2016

UN Think Tank Rips 'Naive' Reforms

Policies advocated by the IMF and World Bank in the 1990s and pursued by early reformers such as Anatoly Chubais were destructive and naive, a United Nations think tank said Wednesday.

Egged on by Western consultants, early reformers of Soviet bloc economies -- especially Russians like Chubais and Yegor Gaidar -- rushed too fast to dismantle the communist system, ignoring the long-term consequences of their actions and the more important issue of institution-building, the Helsinki-based World Institute for Development Economic Research said at a presentation of its new study on Russia's transition to capitalism.

"They did things that were stupid and destructive," Robert McIntyre, who directed the WIDER study, told reporters in Moscow.

McIntyre, a professor of economics at the Russian Academy of Sciences' Institute for International Economic and Political Studies, said the biggest mistake made by reformers was assuming that privatizing the largest companies first would lay the groundwork for a free market that would flourish on its own, driven by scores of vibrant small and medium-sized businesses.

"These expectations were based on either the pure theory of market economy or knowledge of the large role that small enterprises play in many advanced economies."

Once these ideas became generally accepted, debate was more or less suppressed, "and the West was explicitly pushing that simple idea." McIntyre said. "The World Bank reached an opinion and religiously imposed it on country after country."

The World Bank acknowledges that things could have been done differently, but it downplayed its role in the way events panned out.

"The transfer of existing assets over the creation of new ones was in theory the wrong priority. But the most decisive privatizers were Russians," said Christof Ruehl, the Washington-based institution's chief economist for Russia.

Ruehl said that because of the dramatic collapse of the planned economy, policymakers may not have had the option to do things any other way: "If you have the luxury to create a vibrant new private sector, do it, but there was very little alternative to privatizing old businesses at the time, and I think you'll find that those companies which were privatized are doing better than companies which continue to be state-owned."

Nonetheless, the WIDER study found that the views the World Bank helped to instill in "country after country" continue to be reinforced by misleading statistical data showing that the number of small businesses in Russia and other countries in Eastern Europe is booming. It says there is evidence that many small businesses that were registered but never actually operated continue to be included in official totals, as are real businesses that went bust.

"These statistics led people to believe the Gaidar and Chubais logic," said McIntyre, referring to the architects of the privatizations of the early 1990s. In addition, most of the small businesses that are actually in operation represent shuttle-trading activity that has little cumulative developmental effect and contributes little to the economy as a whole.

WIDER is urging Russia and other countries whose economies are in transition to stop relying on "automatic market processes" and focus instead on creating the "managed processes" needed to develop the engines of economic growth -- small businesses -- in a meaningful way.

This means creating an environment that exists in developed countries, where large enterprises act as customers and suppliers to small businesses and both national and local governments are deeply involved in the day-to-day activities of companies, supplying subsidies and funding research, McIntyre said.

The study's authors said the Moscow city government, for example, is moving in the right direction with plans to require its subcontractors to farm out 5 percent of their work to small businesses.

The government can promote the development of value-adding small businesses in other ways as well, they said, citing food-labeling as an example.

Small businesses often lose market share to conglomerates that sell lower-quality products but have superior distribution and marketing capabilities, McIntyre said. "Requiring proper and honest labeling can show consumers that one jug of milk is fresh and locally produced, while another was shipped in from afar," he said.

The government should play a more active role in the distribution of capital, too, according to WIDER.

One idea it is advocating is forcing state-owned banking giant Sberbank, which has a virtual retail monopoly, to increase its lending to small businesses.

Instead of requiring each branch in its vast national network to send deposits to Moscow, where it is used to buy government bonds and as long-term credits to large corporations, Sberbank should lend to local businesses through a system that would be controlled regionally, McIntyre said.

"Small businesses are dynamic in an environment of complex relationships between the national government, regional governments, big companies and credit institutions," he said. "People shouldn't expect too much of small businesses without these conditions."