Message-ID: <199904241815.OAA18794@hil-img-ims-1.compuserve.com> Date: Sat, 24 Apr 1999 20:14:56 +0100 From: Eric Fenster <mailto:efenster@IGC.ORG> Subject: UN mea culpa on West's advice to Russia To: mailto:INTDEV-L@pete.uri.edu
The excerpt here is from the 9 December 1998 press release that summarized the United Nations Economic Commission for Europe's publication of its "1998 Economic Survey of Europe."The text is a striking acknowledgment that the advice given to Russia by Western "experts" was flawed from the outset, took no account of the Russian reality and was doomed to failure.
Eric === .... Lessons of the Russian crisis
This issue of the Economic Survey of Europe devotes particular attention to the Russian crisis .... It concludes that the policy course that has been followed so far has led precisely to the present unpromising situation, and thus a fundamental reappraisal is necessary. The standard policy prescriptions which were followed in Russia turned out, given the institutional setting and the difficult initial conditions prevailing in the country, not simply to be ineffective, but to give increasingly perverse results which moved the country further and further away from establishing effectual free markets and stable government.
There is wide agreement that a major fiscal imbalance was the proximate cause of the present Russian financial crisis. But the persistent fiscal problem is itself the consequence of the grave, and the more fundamental problems of the process of economic and political change in Russia. Essentially, the crisis reflects major failures in the actual Russian transformation model. The Russian fiscal dilemma was made progressively more, not less, acute by the policy mix adopted in 1995, and the actual dynamics of the particular stabilization recipe in fact led to an increase in the budget deficit rather than its reduction. The perverse incentives generated by macroeconomic policy, moreover, were magnified by the deeply flawed privatization process which produced a private ownership structure which neither encouraged effective corporate governance nor the efficient allocation of resources.
Given the profoundly inappropriate character of so much of the Russian institutional infrastructure for the new market environment, disinflation turned out to be a more easily achievable goal, given the operational policy levers actually available to policy makers. The increasingly excessive emphasis on price stabilization necessitated increasing monetary austerity as the commitment to what became, in effect, an exchange rate anchor, involved a further policy commitment to high interest rates. To help complete this particular vicious circle, the higher interest rates raised the cost of debt service, and thus increased the fiscal burden. This process ruled out a return to growth, and fixed investment has continued to fall throughout the entire period.
Whilst there is little doubt that there has been some concealment of corporate profits, particularly in light of the continued complex and arbitrary tax structures, aggregate corporate profits have actually fallen. Enterprises and regions increasingly resort to monetary surrogates and barter, further extending the demonetization of the economy. All this has continued to shrink the tax base. The issue of non-payment of taxes by the important energy sector further reveals the unusual character of the Russian fiscal dilemma. The popular perception that arrogant oil and gas barons were simply unwilling to pay the taxes they owed needs some correction. In the complex Russian tangle of non-payment, the government also came to demand effectively that energy be provided free of charge (that is, with no disconnection for non- payment) to a substantial proportion of users.
In sum, the path taken In an attempt to restore fiscal balance in Russia since 1995 has proved to be counterproductive and, in the end, has resulted in a disastrous financial and political crisis. In this unpromising atmosphere, it is easy to be paralysed by the sheer scale of the problems, yet positive first steps can load to others, provided that there is an overall sense of direction. The greatest source of disorientation, however, has come from the belief that economic policies can be advocated in an institutional vacuum. A critical lesson which emerges yet again from consideration of the Russian crisis is that active assistance in the creation of appropriate institutions should never have been relegated to the rank of "second-generation" transition issues.
The implementation of any set of economic policies must perforce be done through institutions, the state and its public administration. Arguably the most serious consequence of the "policy overshooting" on transformation issues was the widespread and deliberate downgrading of the role of the state. Even for the establishment of an effective fiscal administration, there will be little progress without the creation of a professional civil service, a functioning public administration, and the development of broader societal attitudes regarding the legitimacy of the state and of its right to levy taxes. It is evident that the gap which must be bridged in this respect is substantially greater for Russia and other countries of the CIS than for most of the states of central and eastern Europe.
The Survey argues that the policy impasse, however desperate it may appear at present, can be broken by articulating a coherent and long-term strategy to tackle these myriad problems. A carefully sequenced programme is needed in which high priority must be given to creating the key institutional foundations of the market economy and for changing the structure of incentives so as to encourage entrepreneurship and fixed investment. The precise content should be decided by the Russians themselves, but it must be designed to convince the G-7 and the Russian public of the credibility of the strategy and therefore attract the necessary financial and popular support for the programme. This will be costly - but there are no quick solutions, and further delay will be even more costly. +*+*+*+*+*+*+*+*+*+*+*+*+*+*+*+*+*+*+*+*+*+*+*+* Eric Fenster mailto:efenster@igc.org http://ourworld.compuserve.com/homepages/efenster 1999 Moscow Study Trip: June 19-July 19 closed (3/4 week options in Sep-Oct upon expressed interest) Web site has FAQs, anecdotal accounts from 1992-1996, sample daily schedule, photos, more ...