Studies Eastern European Markets
Eastern European Markets
Pekka Sutela:
Kikimora, Helsinki 2003. ISBN 952-10-1467-9. ISSN 1455-4828.
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Doctor Pekka Sutela is the Head of Bofit, The Bank of Finland Institute for Economics in Transition. A freguent commentator on Russian affairs, he has published several books on the Soviet and Russian economies.

    It is more than three decades since I wrote my first scholarly paper, an MA thesis, on the Soviet economy. It is two decades since I defended my PhD dissertation on the development of Soviet economic thought. In my recent book I try to pull together much that I have learned about Russia. That is not all that I have learned, but hopefully it is a central part of it.

    The book is actually, though not formally, divided into three parts with separate but interconnected underlying messages.

    From Soviet economy to modern Russia

    The first part is about the Soviet economy. I am even more convinced than before that one simply cannot begin to understand what happened in the 1990s – and to comprehend, what might be ahead – without knowing the burdens of the past. The Soviet system was a paradoxical attempt to make reality follow a dogma. The system was presumably based on planning, but was never planned itself. It underlined the centrality of scientific knowledge, but prevented the study of social reality. And the system praised the primacy of the common good, but was in many respects captive to specific interests.

    Modern Russia is in many respects a normal lower middle-income country. Its alleged uniqueness disappears in a comparison with the resource-based economies of in particular Latin America and Asia. When I hear claims of the uniqueness of Russia, I release the safety-catch of my computer keyboard. In some sense, naturally, all countries are unique, and Russia may be more unique than most. One determinant is geography. Russia' s position both in Europe, Central Asia and Far East is exceptional. Therefore, Russia will always remain a country larger than its economic size.

    Russia also differs from other countries with similar income levels by having inherited a wide base of industry, research and education. Even if much of that has disappeared, much also remains. Some of that, like the educational standards of the population, remains a resource. A part, like the location of production, is rather a curse.

    The heaviest of all of Russia's specifics is its past as a great power. That has an impact on thinking and on the drive to reconstitute part of the past glory and prestige, now so prominent in Russian policy. But more than anything else, great power past left Russia with much that is now aimless and vain. That particularly holds for much of the industrial base.

    Seen afterwards, the Soviet system is a strange aberration in the great flow of history. That does not make understanding it any less imperative. The system was feasible during its early decades, because the Soviet peculiarities facilitated it. The USSR invented the goal of economic growth, and submitted enormous natural resources, plentiful labour and a centralism pasted with tyranny for that purpose. After these resources had been mobilised, development was dependent on the ability of the system to adapt itself. That ability did not exist. Deterioration and final collapse were inevitable.

    But how the end came depended on two auxiliary factors. The first one are Gorbachev's policies, so incomprehensible in retrospect. The other was the way in which Yeltsin fought his struggles for power.

    The danger of a return to the old system

    The whats and hows of Russia in the 1990s are partly due to such historical factors. But policy choices made also a difference. The second part of the book concerns the 1990s.

    The crucial basis for policy choices was the belief that there was real danger of a return to the old system. Therefore, it was concluded, one had to act fast and with determination, change as much as possible, and thus ensure that both the electorate and central elites supported the new system. This is why it was deemed necessary to liberalise and privatise, the sooner the better. Stabilisation and the development of supporting institutions were of less primacy.

    This surely does not exhaust the factors moulding the 1990s. The lack of an external policy anchor was crucial as well. In contrast, the Central European countries wanted "to return to Europe". In practice that meant joining the Alphabet Soup of Euro-Atlantic organisations as soon as possible: EU, NATO, OECD, WTO and so on. The membership requirements of these organisations actually amounted to a straight jacket, to which policy, legislation and institutional development had to be adapted. As social consensus on the grand goal of policy kept, this resulted in a more or less consistent, transparent and widely shared long-term policy line. Citizens as well as economic agents like predictability, and this is rewarded by positive economic developments. One intermediary goal will be reached 1 May, this year. What remains to be seen is the extent to which the internalisation of the external policy anchor has succeeded. Will the return to Europe, now that it has taken place, serve the new EU member countries as well as aiming at that has done?

    For Russia, the situation was a different one. The country was not about to return to Europe. Too many Russians thought that their country had never been a European one, and neither could nor should turn into one. What one wanted was to turn into a normal country, perhaps with some specific Russian spice thrown in. That was an appropriate goal, keeping in mind the Soviet background, but it always remained too general, diffuse and badly defined. It never amounted to an external policy anchor. Policy and societal development all too easily became short-term, inconsistent and captive to special interests. The consequences were visible in economic and social development – or lack of it.

    A defence of the Washington Consensus

    Towards the end, the book asks whether Russia's WTO-membership or the arrangements of relations with the EU might act as the external policy anchor that has so far been so conspicuous by its absence.

    The central tool with which the international community tried in the 1990s influence Russia's economic development were the economic policy programmes agreed with the International Monetary Fund and the conditionality they contained. These programmes never became an effective policy anchor. This was primarily because the USA regarded Russia as being too large and too nuclear to be given a treatment similar to that given to others. Conditionality remained too weak.

    In recent years it has become frequent to accuse the IMF policy programmes of many faults. The thinking underlying them, the so-called Washington Consensus, has been dubbed ultraliberal. It is supposed to have concentrated overly much on liberalisation, balanced budgets, tight monetary policy and privatisation. Washington Consensus has been blamed for the collapse of Russia's aggregate production, impoverishment, increasing inequality and the 1998 economic crisis.

    It is not yet possible to write the economic history of the 1990s. Some things are however already clear. Looking at original sources, it becomes clear that the Washington Consensus, as applied to transition economies, did not in fact have many of the faults it has been accused of. It never believed that a market economy could be established overnight. Neither did it neglect the need for institutional development. The IMF also never dictated the economic policies of Russia. The thinking that policies were in a hurry was that of Russian decision makers, not the Washington Consensus. This book can also be read as a defence of the Washington Consensus.

    Russia's recent growth performance is a fruit of the 1990s

    Towards the end, the book naturally looks at the future. The Russian economy has grown fast for five years. This growth has been based on high export prices and the price competitiveness created by the 1998 devaluation, but also on the fact that Russian privatised enterprises have reacted to market signals in correct ways. Also essential has been that the consensus in favour of price stability, stable exchange rates and in general predictable macroeconomic environment has been widely shared. In spite of all that has happened, Russia's recent growth performance is a fruit of the 1990s. Russia is a market economy, most production is in private hands and economic policies are rational. The dependence on oil prices still exists, but growth is also based on increased consumption and private investment.

    Economic reform legislation of the past few years also has an impact. The best piece of economic news from Russia recently is that small enterprises think that their business environment has improved. Such news is too recent to allow for final conclusions, but still they are evidence of reform legislation also having been implemented.

    Economies do not grow because they function well. They grow, if they this year function better than last year. This is the simple reason why China, India and Russia are among the fastest growing economies of the world. Can Russia's growth continue?

    Simple economic calculations explain and forecast economic growth using a few variables. Among them are education level – a measure of human capital – investment and relative backwardness, indicating the possibilities of catching up. Typically, such calculations forecast that Russia's growth potential is some 5-6 per cent annually. At some point of time in the future the greying and decline of Russia's population will start depressing growth rates. There are also other worrisome trends, for instance concerning popular health.

    If Russia's growth were to remain modest, a number of ticking time bombs will await in the future. Where will Russia find the resources that are needed to turn back long-term trends of economic and social deterioration: aging capital stock, insufficient infrastructure, education and research, popular health and so on? Many of the potential risks have cross-border consequences.

    Russia is a European country, but the relations between it and the European Union are marred by a number of asymmetries. These concern economic size, production structures, trade dependence and other economic dimensions, but also security interests and social values. These have tended to make the building of Russian – EU relations a highly frustrating exercise – for both sides.

    Russia's growth will continue, though it may prove insufficient in the end. The current trend towards a soft authoritarian state is worrisome, also for economic reasons. Declining political freedom tends to imply diminishing economic freedom, and both depress growth potential and limit the improvement of welfare. But Russia does not want isolation, it does not want to be seen as a pariah state. Therefore, there is also room for measured optimism.


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