Gloomy Prospects for the Russian Economy

University of Glasgow

Gloomy Prospects for the Russian EconomyAuthor(s): Igor BirmanSource: Europe-Asia Studies, Vol. 48, No. 5 (Jul., 1996), pp. 735-750Published by: Taylor & Francis, Ltd.Stable URL: http://www.jstor.org/stable/152995 .

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EUROPE-ASIA STUDIES, Vol. 48, No. 5, 1996, 735-750

Gloomy Prospects for the Russian Economy

IGOR BIRMAN

Hope is itself a species of happiness, and perhaps, the chief happiness which this world affords. (Samuel Johnson)

ONCE AGAIN I find myself against the (post)sovietological mainstream-at least in the USA-which habitually has believed in legends.' A recent American conference concluded that Russia was 'doomed to stability'. A remarkable assessment.2 In fairness though, there are dissidents nowadays, most notably Peter Reddaway.3

I also deviate from the mainstream of economics, largely because of my disagree- ment with the view that economic theories are universal and hence applicable to any (type of) economy. Looking back, I understand now that my disagreements with the sovietologists followed from (in addition to other reasons) my perception of the Soviet-type economy as an economy of a special kind, based on non-private property. In my immodest opinion, the attempt to formulate a 'scientifically correct' course for the economies in transition was doomed from the start precisely because the course prescribed certain 'universal recipes' for all of them. In my view the fundamental mistake was the notion that finance, money and market are more basic than property rights.

Many authors now prefer the term 'market' to 'capitalist' economy. This is not just semantics: there was a socialist market economy in Yugoslavia, and the main reason why Western economic theories are not quite applicable to Soviet-type economies is that the latter operated almost or entirely without private property.

The dismal state of Russian statistics also continues to be overlooked. The old saying that 'there are lies, damned lies, usual statistics, and Soviet statistics', was distinctly accurate; alas, Russian statistics have not improved.4 To cite only a few things:5

* Moscow statisticians have still not fully admitted the old lies about their economy's comparative size;

* they are not used to statistical sampling techniques; * they cannot force proper reporting from enterprises, and the economic activities of

non-government enterprises are distinctly underreported; * earlier the enterprises were interested in overreporting of activities; now they have

an even stronger incentive to underreport; * perhaps the worst figures were, and still are, the price indices. Nowhere are price

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IGOR BIRMAN

indices totally reliable, but in Russia they are hardly believable; yet they are especially crucial there because of rapid changes;

* calculations of the population's income ignore whether the payments are actually made. On the other hand, incomes from sources other than people's main job are severely underreported.

Aslund claimed that 'real incomes [of the Russians] increased by 10% in 1993 and even more in 1994'.7 The Moscow press claims the alleged improvement was caused by changes in the methods of calculation. A leading Russian economic observer, Otto Latsis, quoting the official report, showed that in the year to March 1995 nominal pay more than doubled, while the price index rose more than three times. Thus, concluded Latsis, real pay decreased over the year by 33%.8

When dealing with statistics, we (most of us) customarily check the numbers with common sense and personal observations. But in the Russian situation of today what looks sensible often turns out to be wrong! In regard to our personal observations ('anecdotal evidence'), we, the foreigners, and our Moscow interlocutors meet a narrow circle of people who have mostly benefited from reforms, but we know little about the situation of workers, especially in the provinces. Not having alternative statistics, we are forced to use the existing ones, but should do so extremely guardedly, checking and rechecking, applying common sense and uncommon logic. And even with reliable statistics we would probably honestly disagree in our deductions.

Criteria: the purposes (goals) of the reforms

To discuss the success or failure of the reforms without criteria is senseless. Arguably, Gorbachev was deposed mainly because of his unwillingness to reform the economic system fundamentally. The El'tsin regime correctly declared the inadequacy of the system and the necessity of cardinal reforms. The touchy issue of promises and their execution, even assuming that the new leaders meant what they said, is not relevant here.9

Those who started the reforms after August 1991 (Burbulis, Gaidar and El'tsin) had at best an unclear vision of the future; they thought in terms of political possibilities (as they seemed to them) rather than goals.10 Let us assume that they (their circle) wanted capitalism; however, even now they do not have a clear, agreed vision of the particular kind of capitalism.ll Seemingly, the prevailing view was that as soon as the state (the government) permitted certain 'freedoms', the capitalist economy would emerge 'naturally', by itself, as mushrooms grow in the wild.12

The core uncertainty we encounter is: what particular reforms are good? In other words, we should agree on what is good and what is bad, and how to measure the good and the bad. Gaidar and El'tsin promised liberalisation of prices and general liberalisation of the economy, including foreign trade. They did so, but is this enough to speak about the success of reforms? Reforms must be reviewed much more broadly: in my view only those which lead to a democratic society based on a capitalist economy are good.'3 Without discussing what is a truly democratic society, I would say that a real capitalist economy has (must have) the following features:

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GLOOMY PROSPECTS FOR THE RUSSIAN ECONOMY

* minimal intervention by government in business (some regulations, fiscal and monetary measures). It is best when the state owns no 'productive' property;

* strong and reinforced anti-monopoly regulations; * political rights of all, regardless of their wealth; * minimum care of the poor is maintained.

It appears to me that, under these conditions, the average living standard in a country rises and income inequality in the society is tolerable.

The reformers would hardly disagree in principle with this, but they never stated clearly these and other related points as their aim, and saw their prime role in financial stabilisation. To all appearances they hoped and still hope that financial stabilisation would do the trick.14 It did not.

So, if we agree on the content of the reforms, we nevertheless have to consider other points; in particular, time limits are important.'5 In other words, for the general net assessment we should deliberate as economists do: 'on the one hand ... on the other hand ...'. Most observers evaluate economic situations by the inflation rate (or financial stability); its importance is obvious, but it should not be the main, even less the only, indicator. More crucial is the level of privatisation; still, as I show below, it too is not unambiguous.16 In the opinion of Leszek Balcerowicz, the speed of the reforms is crucial; Janos Kornai agrees, but I ask what is the price of the quickness in terms of the living standard.

I regard the changes in the living standards of the bulk of the population as the most important criterion, but some additional criteria indicating trends in the economy are also needed, including the results of privatisation and especially the size of the middle class, the extent of monopolies, some indicators of domestic production, the rate of inflation, foreign debt and trade, and so on.

Monetary, financial and other matters

I limit myself to a few remarks on this topic. To clarify my position, certain monetary (and credit) measures do influence prices, but in an economy without real competition inflation cannot be explained (and controlled) merely by monetary factors.17 I want to make two interconnected points. First, serious monetary measures are senseless without regard to other economic (and political) occurrences. Second, they themselves do only a part of the job. By directing all the activities of his team toward money, prices and finance, Gaidar made the following dramatic mistakes:18

(a) reduction of the state budget expenditure was bungled, decreasing the amount of money in circulation. Certainly they are related, but one of the results was the infamous 'crisis of non-payments' and its grave consequences, including, among others, the hardships imposed on the population-which did not actually benefit the state;19 the profits were pocketed by thieves and the mafia.20 The benefits of allowing the dollar to become the second (if not the first) currency in the economy are not clear.21 By the end of May 1995 the ruble had started to rise against the dollar; however, it happened mainly for a simple reason-the central bank instituted a minimum reserve requirement for commercial banks; in order to meet the requirement they needed rubles and sold dollars, sometimes even those kept abroad. In other

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words, the ruble has not really become healthy and in a while, because of the continuing inflation, the ruble/dollar exchange rate will resume its decline. As an Izvestiya leading article put it: 'It was bad when the ruble was falling, it has not turned out better when the dollar started to fall'. The author explains that 'the dollar stopped rising, but consumer prices [in rubles] are growing'. He also mentions that in the new situation people cannot save. A year or two earlier they saved mainly in dollars because the banks' interest on ruble savings was lower than the inflation rate. Undoubtedly, the stopping of inflation would be quite beneficial, but first, I repeat, it cannot be done only by monetary measures, and second, even if done (for example with massive foreign credits) it will not by itself 'save' the economy;22

(b) a fateful mistake was termination of the state management of enterprises which still belonged to the state; we will discuss this below;

(c) a very unfortunate mistake was Gaidar's liquidation of the monetary over- hang-the population's money savings in Sberbank.23 It was done in accordance with the theory that otherwise the money would push up prices. In fact, that could have been avoided by temporary freezing of the savings and/or by directing them to privatisation. Prices jumped anyway, but literally tens of millions of people became justifiably angry, any trust in saving institutions was undermined, and now the government is looking for ways to compensate people.24

Russian leaders' promise to reduce the inflation rate to 1% by the end of 1995 was laughable.25 The deficit in the 1995 Russian budget approved by the Duma was 42% of the revenues.26 There is practically no hope of balancing the budget. On the one hand, the tax system is exceedingly weak; for example, during January-April 1995 the federal and local budgets failed to collect R 28.5 trillion, including 16.3 trillion for the federal budget alone.27 On the other hand, the needs for welfare and other requirements are enormous.28 Enterprises have to pay 62 taxes, and at present about 64% of the enterprise's entire income is paid in taxes.29

A few economic factors predetermining the continuation of inflation were described in the Russian press;30 I would add a political reason-the coming elections. However, on the other hand, the Government should receive a lot of revenue from the selling of enterprises. Yet the figures in Table 1 hardly need comment.

A few comments on foreign help to Russia. The subject was discussed intensively. First, Gram Allison, then Sacks and Aslund insisted on such help. Some authors maintained that it was better to spend a few, or even several, billion dollars for help than to allow Russia to become the evil empire again. In principle this was correct, but a lot depends on how the money is spent. In fact, several billion dollars were given by the IMF and the World Bank (basically as loans, but there is no hope of recovering the money). A huge sum has already been spent on the rescheduling of the recent debt of the USSR-Russia. It was never demonstrated that such money would do the trick. Sacks' arguments do not convince me.31 On the contrary, Boris Fedorov's point that such loans impose a heavy burden on the country is very valid.

The issue of IMF and World Bank activities in the FSU must be discussed seriously. It is unfortunate that these two organisations, not only preaching deep government intervention but making it a reality around the world at the expense of Western taxpayers, were directed by the leaders of the seven leading economic

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TABLE 1 DEFICIT OF THE RUSSIAN CONSOLIDATED BUDGET (TRILLION RUBLES)

as % of Revenue Expenditure Deficit revenue

1994 January 42 57 16 37 February 5 7 2 33 March 11 17 6 55 April 20 28 9 45 May 30 42 13 43 June 48 59 11 23 July 60 75 15 25 August 72 94 22 31 September 87 118 31 35 October 104 141 37 36 November 125 168 43 35 December 147 194 47 32

1995 January 177 235 57 32

Source: Statisticheskoe obozrenie, 1995, 2, p. 47.

powers to help the FSU in the transition to capitalism. Their administrators and experts basically supported the 'theorists', and wasted a lot of money on the support. The amount of foreign financial help, both suggested and actually given, pales in comparison with the amounts stolen and otherwise 'made' by the New Russians. There are various estimates, but most people would not object to the statement by Rybkin, Speaker of the Russian Parliament, that $100 billion is kept by the New Russians abroad.32

The state of economic affairs by the middle of 1995: the general picture

I do want to be an optimist, and would be much happier to confirm the 'Ruble Awakening' notion. Most outside and some domestic experts think that the worst with the Russian economy is over, and that with some international help, including apparently intellectual assistance, Russia will follow the road of Western democra- cies. Alas, with all due respect to the dreamers, truth is dearer to me, and I cannot agree.

Recently Sen has argued that one cannot determine how good (or bad) a country's economy is by the size of GNP (or GDP) alone; other factors, primarily demographic, are critical.33 This is true, but in my opinion economists should deal with economic indicators. There is no general or total indicator which characterises the picture; rather, we need a mosaic of indicators. This is unfortunate because experts under- standably cite the indicators which suit their argument best, which helps to make the net economic situation far from clear.

It is high time to say that something was done correctly by Gaidar; in some respects the situation has been improved compared with the end of 1991 and the overall economic picture of Russia does have a few slightly brighter spots. Full shops have replaced empty shelves, the economy indeed is closer to a market one, mass

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TABLE 2 RUSSIAN ECONOMIC INDICATORS (% CHANGE OVER PREVIOUS YEAR)

1992 1993 1994

GDP -19 -12 -15 Industrial production - 18 - 14 -21 Agricultural production - 9 -4 - 9 Consumer goods production - 15 -11 - 26 Investment -40 -12 -26 Housing construction - 16 1 - 8 Retail turnover - 3 2 3 Paid services - 18 - 30 - 36

Monthly money income per capita 850 1100 460 Monthly pay per capita 1100 980 370 Consumer price index (December to December) 26 100 940 300

Source: Voprosy ekonomiki, 1995, 3, p. 76.

unemployment was avoided, the provinces are much less dependent economically on Moscow. Furthermore, the ruble is indeed working better than in the recent and not quite recent past. However, on the whole, the state of Russian economic affairs is not good. Consider Table 2.

The bottom three lines appear to show that monthly money income and per capita pay were rising faster than inflation during 1993 and 1994, but the real standard of living depends on production of goods and services, plus imports. The upper part of the table shows that they were all going down, so what was the basis for pay increases? The domestic output of all the basic and non-basic goods, with the notable exception of potatoes, continues to fall; even on the most liberal assumptions, all the imports of consumer goods cannot be higher than $200 per capita a year. According to statistics, and this is to be believed, an average Russian was earning less than $100 a month in mid-1995, and prices are catching up with American levels.34 In other words, the living standard for the bulk of Russians is sadly low and worsening, not improving.

Below I refer to some figures from what one would hope are authoritative sources, but for now I pose a simple question. If on the average a Russian makes about $100 a month, if the consumer imports are no more than $200 a year, if the prices are close to American ones and if, as we see below, the income inequality is enormous, how do most of the Russians survive? Even with all the explanations given-

* prices are not so close to American levels, especially in the provinces;35 * the Russians spend much less on housing and transport (including private cars) than

their contemporaries in other civilised countries; * 60% of the Russians have to sweat on their private plots to put food on the table; * I myself claimed that the real Russian standard of living was much worse than the

experts had asserted, so what is surprising?-

I still keep asking the same question. Apparently, the explanation is the rapidly growing inequality of incomes, and we will discuss this below; for now I want to emphasise that it is perhaps the most important aspect of the Russian situation today.

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The top part of Table 2, showing that during 1992-94 all the important indicators were in steep decline (in 1995 the fall continued),36 helps to deal with another point. Aslund asserted in spring 1995 that the economy was bottoming out;37 this has been claimed more than once already, and I do not see any convincing evidence yet.

The fall in production has been explained away in many ways. One, that the Soviet economy used to produce a lot of what was not in fact needed, including first of all military goods, is very true. Another correct explanation is that a great deal of waste was eliminated. It is also true that the figures were influenced by the changes in the mode of statistical reporting. I certainly agree as well that inflation and especially the 'crisis of non-payments' did not help. Finally, no doubt the structure of the Soviet economy was obsolete, and in particular the trade share was dreadfully low.38 However, there must be natural limits to the structural changes; in particular, it would be absurd to think that in the foreseeable future the share of Russian agriculture in GDP will be 2% as in the US. No less absurd is to think that Russia can trade without domestic production (this is something like perpetuum mobile). It would also be difficult to explain why the production of consumer goods is falling.39 Aslund's only evidence of the coming recovery is the claim of inflation slowing down; but even if it were, it would not in itself be enough.

Stopping the decline and starting recovery of production is possible only with investment. The late Alec Nove and I, although good friends, disagreed sharply ideologically; but in fairness, he more than anybody else correctly emphasised the catastrophic decline of investment as the saddest result of the reforms; without investment there is no hope of economic recovery. So far net productive investment has been negative, that is, investment was smaller than the depreciation, and equipment is becoming even more obsolete than it used to be.

It might be argued that, indeed, the situation is not perfect, but it is much better than 4 years ago; so the direction of the reforms is correct and step by step things will be improved further. No, alas, no. While I criticise Gaidar and his supporters I do not question their integrity, and willingly acknowledge achievements. And I myself in that position (especially having El'tsin as a boss) would quite probably have performed even worse. However, I believe that the window of opportunity after August 1991 was not properly used; the country lost huge sums to thieves (mostly from the nomenklatura), and the general course of the privatisation is not creating a middle class of the appropriate size. All this was greatly exacerbated by another failure by El'tsin-there was no effort to remove the old party nomenklatura, KGB personnel and economic bosses, and they have regrouped, united with the mafia and kept the real power, and it will take decades, or civil war, or both to redistribute property properly.

Some very brief remarks on non-economic matters. Crime: in addition to everything else, racketeering is one of the main reasons why small business is developing so slowly. The chairman of a committee of the Federal Assembly says that earlier there were 160-170 murders a year. Now the number is 1800 and at the very best only a third if not a quarter are solved.40 Another source says that 'Today 1.5 million individuals are registered [!] as consuming narcotics. According to the official statistics of the Ministry of home affairs [police], about 1% of the population is narcotics-addicted ... According to the International anti-narcotics organisation, about

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6 million Russians depend on narcotics'.41 As for education, science, culture and health care, my English vocabulary is too poor to paint the tragic situation in these domains adequately.42 And in regard to ecology, the money needed not even to clean up (Cherobyl and Usinsk must be mentioned) but only to stop further destruction of the environment is so huge that there is not the slightest hope that it will be accomplished for decades.43

The Chubais privatisation

Although hardly mentioned in the initial announcement of the 'Gaidar reforms', step by step privatisation finally started. However, it has been destatisation rather than real privatisation. Senior Russian economic officials and most Western experts maintain that the Chubais privatisation has been an exemplary success, claiming that something like 62% of former state property has now been privatised. Both claims are incorrect in my view. In regard to the first, Chubais, after many discussions, consented to practically everything imposed by the then Russian Supreme Soviet, and on several occasions admitted that he did not like the privatisation laws approved. On the second point, I should say that in fact not more than 10-15% of state property has really been privatised.44

The state owns the land,45 and a great many enterprises,46 and in addition at least half of the shares in the nominally 'privatised' enterprises belong to the state.47 The majority of those considered to be privatised are formally the property of their workforces, which I call industrial kolkhozy. Very importantly, some critics, for example Piyasheva, correctly argue that, if there were real privatisation, why has virtually no enterprise become bankrupt.

What is wrong with the privatisation? First of all, the Russian people viewed it as extremely unfair. Regardless of what one considers to be fair, and what is fair 'objectively', the point is that Russian citizens (and voters) are convinced that they were cheated, which predetermines their attitude toward the reforms and the reformers. Secondly, and perhaps even more importantly, there are too few genuine owners who care about efficiency and profits; worst of all, the collective owners and managers do not care about the enterprises' future. Instead, the managers, understand- ing that the enterprises are not theirs, and subject to no control, try to steal for themselves as soon as possible (everything can happen in Russia!) and as much as possible.48 This partially explains the sharp decline in investment.

To repeat, privatisation should have established a numerous class of private owners; this has not occurred. Instead, a very small group became monstrously rich. They formed an alliance with the nomenklatura; in short, it was privatisation of the nomenklatura, by the nomenklatura, for the nomenklatura.49 This is probably the worst result of the Gaidar reforms: the impoverishment of the population and the establishment of a limited group of very rich. There are several dozen very rich people in Russia who became so wealthy either through state credits (Vneshtorgbank, Kredobank), or by acquiring huge portions of state property very cheaply (managers of enterprises), or by various machinations with government information or other means at which one can only guess.50 Whilst I would in fact argue that real capitalism

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is impossible without the rich, the Russian people will not forget that just when they thought they had won liberty, they were once again robbed.51

I also certainly regard privatisation as good; however it should not be a goal in itself, but rather a means. Aside from the great political significance of providing for the economic independence of citizens, privatisation must:

* minimise the economic role of the state; * create the strongest incentive for the producer-that of working for himself; * stimulate him through competition.

None of those was achieved: the economic role of the state is overwhelming, producers have more incentive to steal than to produce; production monopolies have not been eliminated, and there is no sign of appropriate action. The Chubais privatisation created too few small businesses, and the bulk of them are in trade and 'middle-man' services, but not in production.52 When I said this at a conference in Paris in 1994 a well known Moscow businessman, Kakha Bendukidze, agreed. There are also too few of the necessary institutions-in particular, there is no SEC and no independently monitored registration of share ownership.

The standard of living and income inequality

Having already stated my disbelief in Russian statistics, I limit myself here to a few points. On the one hand, we have no indications of hunger, which is exceptionally positive. Yet we must remember that no less than 60% of the population produce potatoes, vegetables and other foods for themselves on small plots of land. And of course a large number of Russians (figures in different sources vary, but in all cases it is not less than one-quarter) have incomes below the subsistence level, low as it is in Russia. The quantities cited in Table 3 are not those actually consumed, but the basis for the computation of the 'net index of consumer prices for goods and services at their average cost'. If the Russians themselves use these figures as a basis for calculations, the actual level of consumption must surely be modest to say the least.

According to a group of experts working for the Presidential Council on social policy, during 1994 'real incomes' ('real' should mean that inflation was taken into account) of the population 'increased by 18.9%'. However, this growth was provided exclusively (!) by the 'entrepreneurial incomes of 5-6% of the population'. The situation of those for whom wages (zarabotnaya plata) and social benefits are the prime source of income continues to worsen, even though they work conscientiously: '... average real wages in Russia ... in March this year [1995] were 71% of the

average pay in March 1994 ... while in December 1993 the earnings (zarabotki) of about half of those working were lower than the average, during 1994 the proportion reached 60%. Already, more than a quarter of those working receive wages which are lower than the subsistence minimum ... in April this year [1995] [the proportion was] 29%'53

Some analysts argue that Russian economic reforms were slowed down for political reasons. By itself this is correct; however, one must not forget that in turn politics to a large extent reflects economic realities-first of all, the standard of living of the masses and the widening gap between them and the New Russians. People who vote

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TABLE 3 ANNUAL FOOD BASKET FOR A MALE OF WORKING AGE

1. Rye bread 92 kg 2. White bread 86.7 kg 3. Millet 18.1 kg 4. Spaghetti (vermicelli) 7.7 kg 5. Sugar 24.8 kg 6. Vegetable oil 10 kg 7. Butter 3.6 kg 8. Beef 42 kg 9. Boiled sausagea 2.2 kg

10. Half-smoked sausageb 1.1 kg 11. Milk 184.3 kg 12. Sour cream 4.2 kg 13. Cheese 2 kg 14. Eggs 183 15. Potatoes 146 kg 16. Cabbage 29.8 kg 17. Onions 10.2 kg 18. Apples 11 kg 19. Cigarettes 96 packs

Notes: aVarenaya kolbasa; bPolukopchennaya kolbasa. Source: Statisticheskoe obozrenie, 1995, 2, p. 45.

for communists are only partially poisoned by ideology and by envy of the nouveaux riches; they are led by their stomachs.

Two decades ago I suggested the 'scissors model' as an instrument to help interpret the link between changes in the living standard and the political attitudes of the population. This does not mean that people's feelings, when different from 'realities', are subjective, psychological. For example, Latsis argued that the most difficult period was reached in spring 1995. In his words, in 1992 there were 'psychological-compensatory factors' at work: hopes (inspired by the irresponsible promises of El'tsin and Gaidar) that the 'temporary' economic sacrifice would be brief and then suddenly the shops would be full. Now those factors no longer work and ordinary people's feelings are determined by the realities. He cited the Roskomstat figures: per capita money income was 177% of the subsistence minimum, which was the lowest level for the previous two years. The proportion of the population receiving less than the minimum was 30.4% (45 million individuals) against 25.3% a year earlier. The poorest were those who worked in science and education, health care and culture.54 We do not have a gauge to measure the scissors gap, but the very fact of the unpopularity of El'tsin and the 'reformers' leaves no room for doubt-people do not like the present living conditions, which are much worse than their hopes and expectations.

We are asked by the Russian statistics to accept that since autumn 1994 'Russia is currently enjoying a very high saving rate-about one-quarter of household incomes are being put aside'. Aslund55 correctly calls the phenomenon 'surprising': this would be incredibly high for a country with such a standard of living and high inflation, without a stable system of saving institutions, etc. In reality though, the 'upper middle class', to use Aslund's phrase, put 'aside' the huge proceeds of various operations: I

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mentioned $100 billion taken abroad by the New Russians.5 Aslund understands that 'income differentials have risen sharply', and this is one of the most important results of the reforms-there is a small group of rich people, perhaps 10% of the people are doing not so badly, and a third of the population are living below the Russian (!) poverty line.

More specifically on income disparity, I note first that, according to Zaslavskaya, the 'business strata' of Russia (entrepreneurs and 'semi-entrepreneurs', self-employed professionals, and managers) number about 11% of the working population.57 Appar- ently this is also the figure for people who are now doing well in Russia.58 With these figures in mind, we note that during the first quarter of 1995, of all the money incomes of the population, 40.3% were wages, 16% social transfers, and 43.7% incomes from property and entrepreneurial activities.59

The Gini coefficient in Britain rose from 0.23 in 1977 to 0.34 in 1991 and in the USA from 0.35 in 1969 to 0.4 in 1992.60 The Economist does not give the figures for Russia, but says that 'by this measure, incomes are now less equally distributed in Russia than they are in America'. The figures for Russia are 0.398 for 1993, 0.409 for 1994, and 0.389 for the first quarter of 1995.61 I am a little sceptical about these figures, but that is not significant here. While the concept of the coefficient is very useful, first, the specific figures for the Western countries, especially in time-series, are not 100% reliable. Second, and more importantly, the coefficient disregards the absolute level of incomes; the same Gini numeral could describe very dissimilar situations in countries as different as the USA and Russia. Third, in the West with such inequality a predominant part of the high incomes is used for investment; in Russia it is not quite so. I am afraid that application of the Gini coefficient concept to Russia is one more example of (mis)use of Western economics tools as universal. To me, what is more significant than the Gini figures is that in 1991 the incomes of the wealthiest 10% of the population were 4.5 times higher than the incomes of the poorest 10%; by the middle of 1992 the figure was 6.5 times, but in 1994 it grew to 15 times.62

There are 1.9 million registered unemployed. However, if the methodology of the International Labor Office is applied (those who do not have a job but are actively looking), the number of those wholly unemployed was 5.3 million by the end of 1994 (7.1% of the economically active population). In addition 4.8 million are partially unemployed. Furthermore, according to the same source, in 1994 20-30% of those who had jobs were on forced leave for months.63

Some observers cite the relatively low unemployment in Russia as a good omen. In reality too many people are on a payroll and working with disastrously low productivity. If the economy were really privatised, private owners would dismiss the surplus labour. And of those whose employment was terminated, too few started their own businesses.

What to expect

Although I am so critical of others, I confess that if asked what to do I would be very hesitant. The situation is so dramatic that finding a way out is extremely difficult, perhaps impossible. First I shall summarise a few main points:

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* the (economic) goal of the reforms must be creation of a capitalist economy with some corporations and individual moguls, but mainly with many millions of 'average' and small owners competing with each other and basically independent from the state. This goal is far from being achieved; there are too few small businesses;

* financial stabilisation has not been achieved either and cannot be achieved before economic stabilisation. Although it is useful, financial stabilisation cannot be a goal in itself (for the economy in transition) or even a measure of success;

* if inflation still affects anything, it is investment, which is catastrophically low and smaller than depreciation;

* there is no sign of production bottoming out; the hopes for recovery are not based on anything convincing;

* the living standard on the whole has declined sharply, and although there does not appear to be actual hunger, for the vast majority the decline is continuing. Income inequality is very acute and also growing.

I have written much about the past, but to most people the past is of interest chiefly to the extent that it influences the future.64 First of all, Russia is not Singapore or Hong Kong; it cannot prosper or even survive on trade. And Russia is not Kuwait; it would not survive on oil and gas exports. In other words, like every large country Russia must produce: what are the possibilities?

The military industries are disorganised, but at the very best they could earn $2-3 billion for the country. Their conversion to civilian goods has not been successful, and the production figures are dismal. The so-called heavy industries on the whole can hardly accomplish more. Light industry (production of fabrics, cloth, shoes and the like) suffers severely from obsolete technology and the lack of raw materials: cotton is lost, flax-fibre is a thing of the past, wool and leather output are falling because farmers cannot yet replace kolkhozy. For these and other reasons, selling raw materials abroad is much more profitable than giving them to domestic enterprises which cannot pay the real price for them.

Expectations for agriculture are very bleak. In regard to livestock farming, further decline was expected in 1995; the rate of decline was predicted to be about the same as in 1994, 8-10%.65 A leading article in Izvestiya was titled: 'If Russia stops imports of food, large cities will be on hunger rations'.66

Whilst I do not consider the inflation rate to be the determining factor for the Russian economy, the prospects for halting inflation are not good. Until the rate of inflation is more or less tolerable there is no practical hope for investment, and yet it is not possible to stop inflation without investment. Even more, as we know from the Japanese and twice from German experience, there must be a time lag between the moment when inflation is stopped and investment started; such a pause takes at least a year. But in all three cases the task was much easier-there were institutions, there were personnel with experience, there was less corruption and crime. Another important factor is that the living conditions of Russians are such that the vast majority are not able to accumulate, and the enormous money of the crooks is at best an irritant to the mass of the people. The problems of funding science, education and

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health care are by no means easy. The Russian population is aging and the problem of pensions is extremely serious.

The foreign debt has reached $120 or even 130 billion; merely servicing it requires $20 billion annually. For Russia this is impossible: in 1994 total exports came to $67 billion. In 1994 the Paris Club agreed to 'restructure' the debt and Russia was to pay $7.7 billion; in fact only $0.9 billion was paid.67 Large foreign investment is not

likely. In 1994 foreign investment in Russia was $1.05 billion (and R89 billion), 54% of which went into five companies.6 The amount is negligible in relation to the Russian economy, and the high concentration means that too few are willing to take the great risks involved.

The political situation in Russia is no better. Corruption and other crime are

overwhelming.69 People are disillusioned with the democrats and reformers. Anti- American feelings are on the rise. Many New Russians, including the worst crooks, support the present government not because they are true democrats but because they do not want a new redistribution of property. Most of the people have more than

enough economic reasons for discontent, and I find it hard to see any reason for

optimism about the future of a country which remains dear to me.

Silver Spring, Maryland

This article was originally written for a conference in July 1995. I was greatly helped by intensive discussions with Jack Alterman, Vladimir Entov, Joseph Froomkin, Vladimir Nadein and Albina Tretyakova. Margy Pinsky and Toby Alterman helped me with English. The views expressed in this article are of course solely my responsibility.

1 And not only in the USA. The London Economist, 29 April 1995, wrote that 'The money supply [in Russia] grew by a mere 1% during the first quarter of this year. If the authorities continue this savage monetary squeeze, the official inflation target of 1-2% a month by the end of the year ... may be achievable'.

2 See Izvestiya, 1995, No. 62 (no mention of the conference in US media). El'tsin's assistant on national security, accompanied by an academic colleague, argues with the assessment in No. 79. At the Brown University dialogue in December 1994, on the eve of the Chechnya tragedy, the US Ambassador to Moscow, Pickering, was very upbeat about the Russian state of affairs, while the Russian Ambassador to Washington, Vorontsov, spoke quite convincingly about tremendous problems.

3 See in particular The Wall Street Journal (Europe), 9 March 1995. 4 In addition to everything else, the statisticians' salaries are so low that qualified people go to

work elsewhere. 5 The following deserves a note. According to the last statistical annual, Roskomstat-1994, p.

200, Russian per capita consumption of alcohol (5.6 litres) was lower in 1990 than in 15 countries; only in Bulgaria (!) and Norway did people drink less.

6 The recorded wage arrears amounted to R5.6 trillion ($1.2 billion) in February, The Economist, 29 April 1995.

7 The Washington Post, 23 April 1995. This was disputed by Dr Joseph Froomkin in The Washington Post, 24 May 1995.

8 Izvestiya, 1995, 70, p. 1. Anders Aslund, How Russia Became a Market Economy (Brookings, 1995), argues that 'the [Russian] statistics are of poor quality, but the nature of their biases is reasonably certain. Moreover, the scale of the change in Russia has been so great that no hesitation about overall developments is needed'. Indeed!

9 Including the El'tsin-Gaidar promise to improve living standards not later than by the end of 1992.

10 It is known that Burbulis made the choice of Gaidar, which El'tsin approved, but it is still not certain why Gaidar was chosen. One version is that he was against the Union more than others (Yavlinsky tried hard to preserve it). El'tsin (interview in Izvestiya, 10 June 1995) hints that the post was offered to Yavlinsky; but the latter said then that it was impossible to work with El'tsin.

II Around that time there was a lot of talk in Moscow about the Swedish model.

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12 I am not blaming them, not least because I myself thought more or less similarly. Only my old friend Jack Alterman, seeing from the very beginning how impossible the task was, was completely pessimistic.

13 In my, and not only my, opinion, the first is not possible without the second; the opinion dangerously widespread in Russia is that the second could be achieved without the first.

14 Quite recently Gaidar said he 'basically (v osnovom) supported the principles and provisions of the government stabilisation programme ... and was concerned merely about difficulties of forecasting [!] of the structural factors', Finansovye Izvestiya, 1995, 27, p. 11.

15 'Gaidar stated that the "capitalist revolution started in 1991 was completed with success", and that the formation of a capitalist economy in the country has occurred'. Nezavisimaya gazeta, 23, May 1995, p. 1.

16 Jumping ahead, if only a small group of tycoons own most of property in the country it is not, in my opinion, really meaningful privatisation.

17 A. Illarionov, Voprosy ekonomiki, 1995, is not too bad on this topic but still not very convincing.

18 A highly positive result of Gaidar's activities was the substantial reduction of military production, but the goal was to lighten the burden on the budget.

19 A Russian observer wrote that 'the occasional closing of the emission tap, which is done by postponing payments to those who work in the organisations funded by the state budget (in order to present the inflation indicators in a better way) is analogous to teaching a horse not to eat. To put it briefly, the "teacher" could be proud of the horse which is not eating, but soon it will rebel or die'. Finansovye Izvestiya, 1995, 24, p. IV.

20 The mafia flourished by extorting money from those who did not pay their clients on schedule.

21 While there are pros and contras, the latter seem to me more substantial. During 1994, individuals and organisations (mainly non-government banks) brought to Russia $21.7 billion in cash. In January 1995 the figure was 2.6 billion, and 860 million in February. Finansovye Izvestiya, 1995, 32, p. 1.

22 Izvestiya, 1995, 89. The following Moscow anecdote is untranslatable: Man', slysh', dollar to padaet. Luchshe by uzh u tebya tak stoyal, kak on padaet.

23 I am hardly unfamiliar with the problem, and note immodestly that the 'over-savings' of the Soviet population and their grave significance was my first issue with sovietologists, at the end of the 1970s.

24 In May 1993 I had a chance to explain this to the Constitutional Court of Russia. The Government was represented by Sergei Dubinin, whose only argument was the lack of money. The Court decided to compensate for the loss of savings; in 1995 the Duma adopted such a law.

25 In a speech to the government in June 1995 El'tsin spoke about 2%. 26 Finansovye Izvestiya, 1995, 24, p. IV. The headline was 'Budget-95 promises crash of hopes

for financial stabilisation'. 27 Finansovye Izvestiya, 1995, 36, p. 1. During the first quarter of 1995, 18% of all taxes

collected in the country were gathered in Moscow, where less than 6% of the total population reside. Finansovye Izvestiya, 1995, 32, p. 1.

28 Interestingly, in Roskomstat, Sotsial'no-ekonomicheskoe polozhenie Rossii (January 1995) nothing is said about the budget, and the January-February issue gives some data about revenue but nothing about expenditure.

29 The list is published in Izvestiya, 1995, 108, p. 4. The largest taxes are on profit-12.4%; VAT-5.2%; on pensions-13.2%; for roads-2.9%, on excess wages-3.9%.

30 For example, Evgenii Vasilchuk, Finansovye Izvestiya, 1995, 37, p. 11, writes: 'Practically, the central bank no longer has real, except maybe only emergency, measures to struggle with inflation. But victory over inflation has still not been accomplished'. (However, the article on the opposite page of the paper argued that some hidden reserves would allow the budget deficit to be eliminated).

31 According to his logic, the money would help with the financial stabilisation, but I have already said that I do not believe in its magic. The Sacks approach was disputed convincingly by Maxim Boyko, Proceedings of the World Bank Annual Conference on Development Economics (1994).

32 Ekonomika i zhizn', 1995, 14. I wonder who, how and why, in view of at least these circumstances, advised the IMF to give another $6 billion or more to El'tsin and his government. This is also the position of the Wall Street Journal editorial writers. See, for example, the editorial 'Getting Russia Wrong' in the European issue on 9 March 1995. Characteristically, immediately after

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Camdessus personally flew to Moscow to give the money, Moscow TV, 12 April, showed the First Vice-Premier Oleg Soskovets making a government pledge to give $1.5 billion to the military industry.

33 The worsening of Russia's demographic situation comprises various (including economic) facets and factors. Besides, the criteria are arguable: I for one do not think that population growth is nowadays beneficial.

34 In The Economist, 15 April 1995, p.74, Big Mac index, Russia was cheaper by 30%. 35 For example, prices for housing in the centre of Moscow are in the same league with West

European capitals. However, in Elektrostal' (20 miles from Moscow) the cost of housing is a third of that, and in Omsk (Siberia) it is even lower (anecdotal evidence).

36 A significant exception is retail turnover during 1993-94. By itself it is excellent; however, I am not sure that the figures are correct. We should take into account, at least, the following points:

* we do not know exactly how the figures were calculated, how the dramatic changes in the commodity structure were dealt with, but we do know that Russian price indices are awful;

* we do not know how full the data are, in particular about bazaar and kiosk trade and the so-called chelnoki;

* we know about the plunge of production including, as the same table shows, agricultural production and output of consumer goods; on the other hand, the amount of stocks in trade fell dramatically. 37

Washington Post, 23 April 1995. 38 I was the first to criticise sovietologists for not taking this into account in comparisons of the

USA and the USSR. 39 In January-April 1995 the production of the following goods, compared with January-April

1994, was, in %:

radio receivers 92 sewing machines 20 tape-recorders 50 TV sets 44 including colour TV sets 29 refrigerators 64

Roskomstat, Sotsial'no-ekonomicheskoe polozhenie Rossii, 1995, 4, p. 21. 40 Literaturnaya gazeta, 17 May 1995, p. 10. 41 Nezavisimaya gazeta, 23 May 1995, p. 1. 42 See 'Health Care, Medical Practice, and Medical Ethics in Russia Today', JAMA, 273, 20,

24/31 May 1995. 43 The chairman of the Russian State Committee on water resources said that '70% of cities and

other localities use water which does not meet Russian standards, to say nothing about international standards'. Izvestiya, 1995, 75, p. 2.

44 I note, especially in relation to the freedom of the Russian media, that all the printing-works still belong to the state.

45 Although small individual garden plots are in practice in the hands of the people who work them.

46 By the end of 1995 the state shares in 7186 enterprises were to be sold. In addition, a great many enterprises, privatisation of which had been postponed until 1995, were to be sold as well. Izvestia, 1995, 70, p. 1.

4Senior government officials are on the boards of many new large companies-for example, the First Deputy Minister of Finance, Vavilov, and Deputy Chairman of Goskomimushchestvo, Kokh, are on the board of Noril'sk Nickel (apparently they are directly paid for this).

48 A characteristic example. A new and extremely profitable industry has been created in the USA: managers of FSU enterprises are brought there for a couple of weeks to look around, to listen to a few lectures on loosely related subjects, and basically to have a good time. I have talked to the participants, and none said that he would do it even for half the price it actually cost their enterprises.

49 The number of bureaucrats has increased very significantly in comparison with the times of bureaueconomics. The nomenklatura won. The Kremlin, the Moscow White House and local authorities spend (waste) colossal sums for their indecently lavish offices (and projects like the Moscow-Petersburg high-speed railway).

50 I do not want to put myself in the same position as The Wall Street Journal which had to publish an apology to Gusinsky in April 1995. Still, I cannot blame the ordinary Russians for not liking him and his kind.

A particularly striking example is the privatisation of Gazprom. See, for example, Boris

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Fedorov, Izvestiya, 21 March 1995, p. 2: 'The impression is that we have witnessed the largest robbery of the century, or even in history'.

52 In Moscow there are 360 000 private small businesses (including the self-employed); 65% of them are in trade and 'middle-men' services, only 25% are in production. However, the volume of everyday services is sharply declining, Izvestiya, 1995, 86, p. 2.

53 Izvestiya, 31 May 1995, p. 9. 54 Izvestiya, 1995, 84, p. 2. The figures apparently are from Roskomstat, Informatsionnyi

statisticheskii byulleten', 1995, 6, pp. 19 and 35. However, Statisticheskoe obozrenie, 1995, 2, p. 60 gives 33.5% for 1992, 31.5% for 1993, and 24.4% for 1994.

55 The Washington Post, 23 April 1995. 56 'Newly-rich Russian tourists spent $6.8 billion abroad in 1994', Economist, 29 April 1995. 57 Tat'yana Zaslavskaya, Sotsis, 1995, 3, p. 6. 58 There are supporting figures in the same article, but they must be taken with caution. 59 Roskomstat, Informatsionnyi statisticheskii byulleten', 1995, 6, p. 22. 60 The Economist, 29 April 1995. 61 Roskomstat, Informatsionnyi statisticheskii byulleten', 1995, 6, p. 21. The figures for the last

group are: 1990-12.9, 1991-24.8, 1992-16.1, 1993-24.4, 1994-38.0. 2 Roskomstat, Informatsionnyi statisticheskii byulleten', 1995, 4, p. 27.

63 Finansovye Izvestiya, 1995, 31, p. VIII. According to Statisticheskoe obozrenie, 1995, 2, p.

61, during the fourth quarter of 1994, 5.3 million were unemployed, including 1.6 million registered, and 4.8 million worked part-time. See also 0. Latsis, Izvestiya, 1995, 70, p. 1. In the first quarter of 1995 there were 5.6 million unemployed (according to the definition of the ILO). Roskomstat, Informatsionnyi statisticheskii byulleten', 1995, 6, p. 19.

64 An excellent analysis of the situation and prospects may be found in Ekonomicheskii Monotoring Rossii: Global'nye tendentsii i konyunktura v otraslyakh promyshlennosti, 1995, 4-5. The same authors published an article in Finansovye Izvestiya, 1995, 36, p. V,. with the title 'Russia is coming to the frontiers of uncontrolled devastation of the economy'.

65 Finansovye Izvestiya, 1995, 30, p. 11.

66 Izvestiya, 2 June 1995, Two days earlier another leading article was titled: 'Attack of the

Russian Government on the import of food-stuffs can make shops in Moscow and other cities empty'. 67 Roskomstat, Informatsionnyi statisticheskii byulleten', 1995, 6, pp. 3 and 7. 68 Finansovye Izvestiya, 1995, 26, p. 11. 69 Even if not entirely accurate, the words of Oleg Bogomolov, Nezavisimaya gazeta, 'according

to some estimates the total number of bodyguards in the country is about 800 000', are nonetheless significant.

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