The Russian Crisis: Perils and Prospects for Post-Soviet Transition

American Journal of Economics and Sociology, The,  July, 1999  by Peter J. Boettke

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The enigma wrapped in a contradiction which represents current Russia unravels once we separate rhetoric from reality. The logic of the situation actually requires only a rudimentary knowledge of economics to both understand and propose viable solutions. When walking through Washington square Park in New York's Greenwich Village, as I did daily through most of the 1990s, it was a common occurrence for me to be propositioned to purchase some illicit substance or another. If tonight it was announced that the 'War on Drugs' was over and all substances previously illegal could now be traded above ground, then my Washington square Park "entrepreneur" would disappear. If I walked through the park in six months and he was still there, then it would seem obvious that something wasn't so clear in that earlier legal announcement. That is Russia. Liberalization has been announced for close to a decade, yet underground markets dominate economic life. The enforcement of contracts in this underground market creates opportunities for extralegal mechanisms, what we term "Mafia."(7)

In addition to the broad topic of economic liberalization, there are also very specific reform measures where the rhetoric and the reality diverge so significantly that it is worth pointing out. One of the major problems with the Soviet system of economic management was that firm-level inefficiencies were converted into macroeconomic imbalances through the mechanism of "soft-budget" constraints. Subsidies to firms were paid for by budgetary imbalances, which in turn were financed through money creation. Since prices were administered during the Soviet era, this led to what was then referred to as the "rouble overhang" problem. Since the liberalization of many prices, the continuation of inflation finance has led to rising prices and a move out of the rouble and into harder currency (such as the US$). The point to stress, however, is that inflation finance has continued throughout the Yeltsin years.(8) Despite claims to monetary and fiscal restraint, the reality of policy has been one of continued subsidies to inefficient state and quasi-state firms.(9)

To this monetary and fiscal policy environment, add the regulation and tax policies which have been adopted, and the sorry state of post-Soviet affairs is not surprising. Registration, regulation and tax policies have become major impediments to the development of new enterprises in an above ground market economy. The ambiguity and poor enforcement of property and contract by the official government has led to the rise of alternative enforcement mechanisms - some desirable, some not.(10) Compare the situation in Moscow and Warsaw for setting up a private shop. In a study reported in Russian Economics Trends (April 1997), it is reported that the average time for registration (in months) is 2.7 in Moscow, but only .7 in Warsaw. The average number of inspections in 1996 per private shop was 19 in Moscow and nine in Warsaw. In Moscow, 83% of those inspections resulted in fines, whereas the corresponding number in Warsaw was 46%. Finally, 39% of private shops in Moscow reported being contacted by the "mafia" within the last six months, while only 8% report similar contacts in Warsaw.