The New Russia : Transition Gone Awry

by Marshall Pomer, Lawrence R. Klein

Release Date: January, 2001

Edition: Paperback

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Engrossing

Provides a comprehensive picture of the course of economic transition in Russia under Yeltsin. Explains how the West's push for shock therapy had brutal consequences. Important contributions from a number of prominent Russian and American economists.

a useful collection of essays

The book The New Russia: Transition Gone Awry is a collection of twenty-seven essays by noted Russian and American economists and analysts, including Oleg Bogomolov, Leonid Abalkin, Georgi Arbatov, Marshall Pomer, and Lawrence Klein (winner of the 1980 Nobel Prize in economics). The book is divided into three main parts ("Economic Role of Government," "Economic Crisis," and "Policy Agenda") and contains a foreword by Mikhail Gorbachev. This volume resulted from the activities of the Economic Transition Group (ETG), an international network of economists set up in 1994 on the initiative of Marshall Pomer (Macroeconomic Policy Institute, Santa Cruz, California) and Alexander Nekipelov (Institute of International Economic and Political Studies, Russian Academy of Sciences). The purpose of the ETG was to bring together prominent economists, many of them Nobel Prize winners, to reexamine the early Yeltsin years and develop an alternative economic strategy that would strengthen democratic government but also "minimize harm in human terms." The contributors advocate a balanced approach to reform that avoids both unrealistic free-market ideals and excessive government control. The chapters are clearly written and cover a wide range of topics, including the shortcomings of the competitive-equilibrium model, origins and consequences of "shock therapy," privatization, corrupt banking and "pyramid schemes," poverty and social assistance, real estate markets, agriculture, coal industry, energy efficiency, human capital, government leadership, and trade within the Commonwealth of Independent States.
In the first essay, Pomer warns against attributing the failures of Russian economic reform to "bad implementation of good policy." He believes that Russian reformers paid too little attention to government's role and placed too much faith in the free market (p. 21). The Western-oriented competitive-equilibrium model (the "neoclassical paradigm") was unsuitable for the Russian economy. "The proposition that the market would adjust on its own without an activist government proved fallacious in Russia," Pomer writes (p. 23). Russian citizens were not ready for "shock therapy." The foreign competition and radical price liberalization (beginning in January 1992) stunned industry. This led to a sharp drop in living standards.
In their essay on crime and corruption, Svetlana Glinkina, Andrei Grigoriev, and Vakhtang Yakobidze point out that perestroika actually fueled corruption (p. 234). Privatization merely transferred the assets of an inherently wealthy country to a powerful elite ("oligarchs"), a politically connected business elite largely oriented toward plunder. Although individual Russian citizens during the first phase of privatization could purchase "vouchers" that were supposedly redeemable for cash or a share of industry, they soon discovered that the vouchers were useless because dividends were rarely paid and investors had no power in the decision-making process.
Banks run by the "oligarchs" sprang up that promised citizens rates of return over 1,000 percent. Desperate to preserve their savings in the inflationary period of the early 1990s, more than 20 million citizens lost everything in what turned out to be "pyramid" schemes. These banks---for which there were no reporting requirements regarding sources of large deposits---were heavily involved in money laundering and embezzlement on the part of insiders (p. 236). According to the authors, "by delaying payments on government obligations and giving short-term interbank credits at outrageous interest rates, the bankers were able to amass substantial fortunes. At the same time, federal and local governments routinely reneged on paying salaries (p. 237). Five of the largest private banks and their leaders---Inkombank (Vinogradov), SBS-Agro (Smolensky and Berezovsky), Most Bank (Gusinsky), Menatep (Khodorkovsky), and Rossiiskii Kredit (Malkin)---routinely granted loans to their affiliated companies for amounts greater than those of their debts to private depositors (p. 242).
The New Russia contains many more insights than can be covered here. Because the book covers many aspects of the Russian economic system, it would be suitable to assign in courses on comparative economics or Russian politics. The detailed, cogent essays written mostly by Russian economists make this book preferable to more generalized books on Russian economic transition written by Western scholars, such as Stephen Cohen's Failed Crusade: America and the Tragedy of Post-Communist Russia (2001) and Steven Solnick's Stealing the State: Control and Collapse in Soviet Institutions (1998), or those that focus almost exclusively on crime and corruption, such as Paul Khlebnikov's Godfather of the Kremlin: Boris Berezovsky and the Looting of Russia (2000).--Johanna Granville, Ph.D. (Stanford University)