Capitalism in Russia: Too much shock and not enough therapy


STROBE Talbott, U.S. ambassador at large to the former Soviet Union, faults the International Monetary Fund for inflicting too much shock and not enough therapy. The criticism is accurate, but rings hollow. The IMF is merely carrying out the policy of its most influential patron, the United States of America.

That policy holds that recovery of the Russian economy requires rapid dismantling or sale of state-owned industry and budget and currency reform -- all intended to apply the necessarily harsh discipline of the marketplace. In exchange, the IMF and the industrial democracies are offering pathetically inadequate loans, and a seal of approval to attract private Western capital.

This recipe, in lock step with Western textbook economics, ignores that real people live in these fledgling capitalist democracies. It ignores the fact that when low living standards decline further under a cold-bath cure, newly enfranchised voters look desperately for alternatives.

In Poland, whose government followed the shock-therapy formula, voters responded by ousting the incumbents and installing a new government heavily dependent on former communists. In former East Germany, leftist parties have been making significant gains at the expense of Chancellor Helmut Kohl's Christian Democrats. And in the recent Russian elections, both the far left and the far right gained. It is this political fallout that finally grabbed our government's attention.

Unfortunately, pressing the IMF to release a little more money a little sooner, as Ambassador Talbott wants, is not enough. Something is seriously wrong with the entire approach.

The statist economies of the Soviet Union and Eastern Europe were absurdly inefficient. But they did produce goods, albeit inferior and insufficient ones. Nobody went without a job and nobody starved.

The shift to a market economy, which will eventually be far more efficient, necessarily entails a long period of transition. Nudging factories, railroads, banks, hospitals, warehouses into the marketplace takes time. The shift from controlled prices to a market pricing system also takes time.

For now, tens of millions of Russians are employed by state-owned firms that are not competitive by world standards but that do produce goods and paychecks. To put all of them on the auction block, when there is no "market" for most of them, would send the already weak Russian economy into collapse.

Indeed, the unacknowledged secret of Eastern Europe's relatively successful economic reform is that privatization there has been slower than many Western advisers wanted.

Many Western experts insist a state-owned economy cannot coexist with a market economy, even for a transitional period. They should take a good look at China. In China, there is no cold-bath cure. Rather, a still-authoritarian communist government has gradually allowed parallel capitalism, in agriculture, small business, factory production for export -- but without dismantling the huge state sector of the economy.

The state still dominates banking. Capital allocation, as well as exports, imports and exchange rates, are still strictly controlled.

Yet China's economy is gradually becoming far more market-oriented and efficient. The result is a very high growth rate and a socially tolerable transition to capitalism.

In a recent article titled "Big Bang's Bust" in the journal International Economy, two senior economists with the Asian Development Bank contrast the cold-bath approach with the more gradual Asian way.

According to economists Pradumna B. Rana and J. Malcolm Dowling Jr., under the Asian approach private enterprises have been encouraged, but price controls have been retained and state firms not closed down.

Ambassador Talbott, happily, is not an economist but a historian. He is surely dismayed by the contrast between U.S. leadership in the postwar reconstruction of Western Europe and our current policy vacuum vis-a-vis the former USSR.

In the 1940s, the Marshall Plan contributed $13 billion to Western European recovery. The United States tolerated more than a decade of economic planning, currency controls, limitation on imports and substantial public ownership, as Europe's market economies gradually revived.

As the cure worked and growth resumed, American taxpayers more than recouped their investment.

Having spent more than $10 trillion to destroy the Soviet communist empire, it is scandalous that we cannot muster a few tens of billions to ease the transition to Russian capitalism. It is equally appalling that we do not approach this task with patience and flexibility rather than with a dogma in its own way as brutal and arbitrary as Lenin's.

If the Russian economy continues to sink, we will soon spend far more money rearming ourselves against a new Russian menace that is fascist rather than communist.

The IMF is nothing but a creature of the great powers. If Ambassador Talbott is serious about averting this risk, he should stop scapegoating the IMF and start changing the policy of his own government.


Robert Kuttner writes a column on economic matters.

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