Transcript The Design of Post-Communist Reforms

Capitalism with a
Russian Face


“Death of a Nation”
http://www.youtube.com/watch?v=J1OyI
Jtjdpo
The Design of Post-Communist Reforms




“The Washington Consensus”, also known as
the Neoliberal Orthodoxy, also known as
“Shock Therapy”
Simultaneous economic and political transformation under
Western guidance
Proclaimed goal: to create capitalist economies and liberal
democratic states integrated with the West
The destruction of the old system has to be as rapid as
possible


Yeltsin with Clinton at Camp David:
http://www.youtube.com/watch?v=vHfbp
L0NDmw

The economic blueprint:
LIBERALIZATION
 STABILIZATION
 PRIVATIZATION
 (added later: INSTITUTIONALIZATION)

Liberalization





Replace command with self-interest as the economy’s
driving force
The government stops setting prices, let them be
determined by supply and demand (easy to do)
Trade should be as free as possible, both internally and
externally
Expected result: replacement of the hierarchy of state
control with a network of free economic agents
THE STATE RETREATS
Stabilization






Liberalization leads to hyperinflation, which may destroy the
economy
Need for tight monetary policy: the government limits the
amount of money it prints
Sharp reduction of government spending
Raising taxes
Expected result: the new market economy gets its most vital
component: a solid monetary base which can service all
those myriads of free market interactions stimulated by
liberalization
THE STATE COMES BACK WITH A TIGHT FIST
Privatization
 Restoration of private ownership of the means of production
 Transfer of state property into private hands
 Creation of a bourgeoisie – a capitalist class capable to act
as the main agent of transformation (no capitalism without
capitalists)
 Methods:
Sell state companies to local buyers
Sell to foreigners
Allow managers of state companies to become owners
Mass privatization through vouchers
Allow employees to become owners
Effects of “shock therapy”





Production falls while trade flourishes
Living conditions worsen
Rapid concentration of wealth in the hands of a small
minority
Expansion of “underground economy”
The state loses most of its economic sovereignty
TEMPORARY DIFFICULTIES, ACCEPTABLE SIDE
EFFECTS –
OR FAILURE OF THE DESIGN?
IS NEW CAPITALISM SUSTAINABLE ?
The Missing Link: Institutionalization



You can’t build any system without a
well-functioning state
The state is badly needed to make a
market economy work. Since mid-1990s,
“institutionalization” has been listed as
the fourth key component of the
neoliberal transition orthodoxy
What kind of a state is needed to
accomplish the transformation?
The question of democracy




During the fall of communism, democracy was viewed as
an essential value in itself
It was also associated with prosperity
If the main issue is the dominance of the communist
bureaucracy over society, democracy is a natural remedy:
the people should have the power to determine how their
society is to be organized and governed
Did the people get that power under the neoliberal
orthodoxy?
“Shock therapy” vs. democracy

PROBLEM 1: “Shock therapy” does not depend on
popular participation. Its main agents are the state, the
West, and the New Rich in the East. Citizens’ main role is
to adapt as best they can.

PROBLEM 2: “Shock therapy” inflicts tremendous costs on
the society. How will citizens react?
 They may keep patience, if they are convinced that the
transition moves in the right direction, but requires
temporary sacrifices. This allows the reforms to go
through
 They may protest, using democratic institutions, and
force their governments to change reform policies. This
slows down and distorts the reform process
 If one is committed to the reform blueprint, one has to
try and minimize public impact on policy-making

PROBLEM 3: “Shock therapy” creates new forms of
power and control for the elites through concentration of
wealth

PROBLEM 4: Ethnic nationalism rises as a channel of
popular protest and mobilization, resulting in tensions,
wars, persecution of minorities, rise of fascist-type
movements
Possible solutions:
1.
--Liberal democracy (elections, rule of law, accountable
government)
--Reform authoritarianism
--Reliance on external forces (joining NATO, EU)
--Alternative reform strategies based on democratic
principles
Challenges to society:
Accumulation of capital
Unemployment and poverty
Dismantling of the welfare state
Zero-sum struggles for survival
If society accepts capitalism as something normal, it is better
prepared to cope with these challenges
If society is not familiar with capitalism, it tends to reject the
changes
In the first case, democracy aids in the transition
In the second case, it may prevent it






Which factors account for success in transition from state
socialism to capitalism?
1. ACCEPTANCE OF CAPITALISM AS NORMAL
The degree of development of market economy
Poland, Czech Republic, Hungary, Slovenia – elements of
capitalism in the economy were present to a higher degree
Russia, Ukraine, Belarus, Romania, Bulgaria, Central Asian
countries –
market institutions were
almost non-existent
So, it was a case of reversal, rather than a re-invention





2. SOCIETY’S POTENTIAL TO INFLUENCE THE
COURSE OF TRANSITION.
The strength of civil society
The stronger the civil society, the more the reform
strategies have to take into account citizen reactions to the
transition
As a result, the transition process is relatively less costly
Since the transition costs fall most heavily on the majority of
society, the ability of citizens to defend their interests
presents challenges to the transition



3. ETHNOPOLITICS
Multiethnic societies
 Patterns of and results of transition vary between
different ethnic groups
 Competition easily acquires ethnic connotations
 Ethnopolitical mobilization leads to conflict
Monoethnic societies
 Similarity of patterns
 Competition not ethnically coloured
 Ethnopolitical mobilization may shore up stability


Success is most likely:
 In a country with embedded market institutions, a strong
civil society, not significantly divided along cultural-ethnic
lines
Failure is most likely:
 In a country with embryonic market institutions, weak civil
society, ethnically divided
Most countries are somewhere between these two extremes

The transition shock
 Russia’s Great Depression
 Contraction or collapse of the welfare state
 Unemployment and poverty
 Rapid rise of social inequality
 Crisis of the value system
4/6/2016
23


‘‘What emerged after the defeat of communism was the
ethos of competition, the ethos of getting wealthy…
Economic evolution pushed our
countries toward… heartless market economy… a rat
race, and money became the only measure of the value…
of life’s success’’ (Adam Michnik, leader of Poland’s
Solidarity movement, 1999)
4/6/2016
24






The world’s billionaires, 2009 (Forbes Magazine, March
11, 2009)
Total – 793 (down from 1,125 in 2008)
Russia – 55 (down from 87 in 2008)
The 55 Russian billionaires own assets estimated at half
of Russia’s total
Most of them live in Moscow
http://www.forbes.com/2009/03/11/worlds-richest-peoplebillionaires-2009-billionaires_land.html


The Rise of Russia’s Oligarchs:
http://www.youtube.com/watch?v=QUspDd2Ecuo&feature
=related
Former Russian billionaire No.1 – Mikhail Khodorkovsky



Khodorkovsky’ letter from jail, 2004:
“Russian liberalism has suffered a defeat because it
ignored two things: first, some key elements of Russia’s
historical experience, second, vital interests of the
overwhelming majority of the Russian people. And it was
mortally afraid of telling the truth.
I do not want to say that Russia’s liberal leaders set it as
their goal to deceive the people. Many of the liberals who
came to power with Yeltsin were convinced that liberalism
offered the only right solution for Russia, and that a “liberal
revolution” was needed in this exhausted country which had
historically tasted so little freedom. But they understood this
revolution in a very peculiar, elitist way. They cared about
the conditions of life and work of those 10% of Russians
who were ready to embrace decisive social change and to
abandon government paternalism. But they forgot about the
90%. And they covered up their failures with lies.



…They deceived most Russians about privatization. They
gave everyone a privatization voucher, promising that at
some point, one would be able to buy two cars with it. Well,
if you were an enterprising financial dealer with access to
insider information and the brains to analyze it, you would
probably be able to buy ten cars with your voucher. But the
promise was given to everyone. They closed their eyes to
the social realities of Russia, as they carried out
privatization. Ignoring the social costs of it, they called it
painless, honest and fair. But we do know what the people
think of this privatization.
…No fundamental reformation of society is possible without
social stability and social peace. But the Russian liberals
chose to disregard it and created a chasm between
themselves and the people. And they used the informationbureaucratic pump of PR technologies to fill the chasm with
liberal myths…”
“Vedomosti”, March 29, 2004
Russia’s Great Depression

1991-96:
 GDP - fell by 45%
 Industrial output – fell by 49%
 Agricultural output – fell by 32%
1991-1999:
Textile, leather and fur, and footwear industries:
 Output fell by nearly 10 times,
Garment industry - by 5 times,
Meat and dairy industries - by 3 times.
The share of high-tech products in GDP fell
 from 45.3 to 25 percent of the GDP.
In 2000, labour productivity in Russia was 5 times lower than in the
United States
---------------------------------------

Dying for Growth: Global Inequality and the Health of the Poor: Jim Yong Kim,
Joyce V. Millen, Alec Irwin and John Gershman (Eds.), Common Courage
Press, Monroe, 2000
Facts and Figures: Raw Materials Exporter. - Ekonomika i zhizn, No. 43, 2000







The social impact:
 A double blow to the livelihoods of most Russians:


a decline in their incomes and savings
a drastic reduction of social services for which they depended
on the state.








In 1999, the incomes of over 40% of the population (60
million people) were below the official subsistence level of
1,138 roubles a month, which was the equivalent of about
US$40.[i]
The official (government-determined) minimum wage in
2000 was 132 roubles (US$ 4,74) a month.[ii]
The average monthly salary was 2,403 roubles (US$86).[iii]
About half of all families with one child lived below the
subsistence level.
In 75% of families with three children, each family member
had less than a dollar a day to live on.[iv]
[i] Izvestia, 4.07.2000.
[ii] Moscow Times, 18.10.2000
[iii] AFP, 31.10.2000
[iv] Moscow Times, 18.10.2000
[v] VCIOM, Press-vypusk 3.03. 2000
Social inequality





In the last years of the Soviet Union, the gap between the
rich and poor was estimated to be 4:1.
It is usually assumed that if the gap grows beyond 10:1,
society becomes unstable.
In 1999, the gap in Russia was 15:1, according to official
statistics.
According to the estimates of the Institute of Socioeconomic
Problems of the Population of the Russian Academy of
Sciences, the actual gap was much wider:
Total income of the 10% richest households was 44 times
higher than that of the poorest 10%.[ii]


[i] Izvestia, 4.07.2000
[ii] Moscow Times, 18.10.2000.
Implications for democratic development…







Who needs democracy – and for what ends?
The Russian experiment with democracy, started in 1985,
was driven by elite perceptions of the efficiency of
democratic political systems compared to authoritarian
systems
It was expected to save and revive the Soviet system
When democratic practices began to threaten the Soviet
system, there was an attempt to suspend it – The August
1991 coup
After the attempt failed, democracy was used as the most
effective way of destroying that system
Democracy was a potent weapon against communist rule
and the Soviet state
Democracy did help accomplish the demolition mission




What about the mission of construction?
How useful has democracy been as a tool to build a
capitalist political economy?
It did help accomplish:
 The shift to market economy and private ownership
 Partial legitimization of capitalism
 Partial integration with the West
Accomplishing even those tasks did considerable damage
to democratic governance

Consolidation of capitalism?
 A capitalist political economy capable of reproducing
and sustaining itself in the context of globalization
 Productivity and competitiveness
 A functional state
 Improvement of socioeconomic conditions
 Social and political stability





How does political democracy relate to these tasks?
In general, we can say: democratic capitalism works better
than authoritarian capitalism
In the long run, a virtual circle
A normative liberal democracy would best suit Russia
But what about the short run?



There is a deep and acute conflict between the
requirements of democratic development and the tasks of
capitalist consolidation
Democracy became an obstacle to consolidation of
capitalism, a mortal threat to the preservation of Russia’s
post-communist regime
The only way that regime could survive the social upheaval
of the 1990s was through subverting and limiting
democratic practices in Russia
Yeltsin’s record as a great democrat
 1992: Shock therapy
 1993: suspends the Constitution, suppresses the
Parliament by armed force
 1994: Launches a war on separatist Chechnya
 1996: Rigs the presidential election to keep himself in
power, empowers the oligarchs
 1999: Launches a second war on Chechnya
 1999-2000: appoints Vladimir Putin as his successor
President
Putinism
 Focus on national security
 Restoration of the power of the state
 Re-centralization of political authority
 Fall back on command methods
 Expansion of the power of security services
 Increased control of media – both direct and indirect
 Increasing resort to Russian nationalist ideas

At the core of Putinism, is the restoration of a Russian state
– not a Western-type liberal-democratic state, but a state
shaped by Russian traditions




A corporate-bureaucratic regime fuelled by energy exports
Coexists with society which tolerates it for now – because it
does not see viable alternatives
“I want a guy like Putin…”
http://www.youtube.com/watch?v=Z9gqQnAvYn4








They support Putin
And don’t see Putinism as a threat to freedom
BUT:
They desperately want socioeconomic change which would
reverse the trends of the 1990s
They assert the values of justice and equality
They are sceptical about capitalism
Agitation for democracy continues
Threats to regime are suppressed