Text 2. The Russian transition from socialism to capitalism

1. Discuss the following questions with a partner.

a) How would you describe the current state of the Russian economy?

b) Will Russian people be richer or poorer in the future? Why do you think so?

2. Read the text below, define its main idea.

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On 21 December 1991, a meeting of representatives of the eleven republics of the Soviet Union took the decision to dissolve the union at the end of the year, replacing it with the much looser Commonwealth of Independent States (CIS). By far, the largest republic was the Russian Federation. Its government, led by Boris Yeltsin, inherited a rapidly deteriorating economic situation. Unemployment was rising, and output falling rapidly. Prices (though still largely controlled by the state) were rising rapidly, and the ruble was clearly overvalued. Economic reform was essential, for the Soviet system was collapsing. The question facing the government was not whether or not to reform but how to do so.

There was a clear consensus that a transition towards a capitalist economy was needed. The Soviet model, even if not completely collapsed, was widely perceived as having failed. Nevertheless, it was hard to see how a centrally planned economy could operate in a more open society.

There were questions, therefore, about the type of capitalism that should be adopted and the means by which the transition should be achieved. Was it to be the ‘shock therapy’ of a quick transition or something more gradual?

There were also technical questions. If state industries were to be privatized, how should this be accomplished? How could the government set up a system of taxation? What role should the state have in this new capitalist economy? How should monetary policy operate, especially when the state was running a large deficit, financed by increasing the money supply and causing inflation? How should foreign trade be liberalized and what should the role of foreign investment be? Once these and other questions were answered, there was the question of sequencing – in what order should the government implement these reforms, and how should they be linked to other changes, such as reforms of the legal system.

Faced with a choice of at least five teams offering different economic programmes, Yeltsin opted for one led by Yegor Gaidar. The Gaidar-Chubais team advocated shock therapy – a rapid transition to capitalism. The team shared the view that Russia had to become a market economy as soon as possible. Price regulation needed to be abandoned because to retain it would be to keep inflationary expectations alive. To ensure competition, the liberalization of foreign trade and of monopolies should occur at the same time. Because high inflation made it difficult to raise revenues, and the tax system was in disarray, the government budget had to be balanced by cutting spending and abolishing subsidies. This would entail much suffering, but less than would a policy of gradual change.

Macroeconomic stabilization and the establishment of market prices were to be followed by fast and massive privatization, as rapidly as the necessary legislation could be passed. The main argument for such rapid privatization was that the command economy had failed: the state was incapable of managing enterprises, especially in a time of economic crisis. Private ownership would ensure financial discipline: it would introduce competition, and the existence of prices would lead to rational investment decisions. The restructuring of the economy therefore had to be based on market prices and private property.

There was a widespread feeling that if assets were not privatized, they would be taken, legally or illegally, by the old elite (the concept of prikhvatizatsiya, which means simply ‘grabbing’ or making state property one’s own, sounding very much like ‘privatization’, already had wide currency).