Lost Opportunity: Why Economic Reforms in Russia Have Not Worked. - book reviews

National Review, Oct 24, 1994 by Radek Sikorski

At a time when billions of dollars in Western taxpayers' money are pouring into Moscow to support Russian economic reforms, the very title of Marshall Goldman's latest book is something of a cold shower. After all, the reforms, following painful fits and starts, seem finally to be making some headway: Russian interest rates reflect the cost of capital, the ruble is convertible, a privatization of sorts is in full swing, the majority of Russians are now said to be working in the private sector. Surely, Marshall Goldman must be exaggerating. But he predicted that perestroika could not succeed, so we should consider what he says when he goes against the grain of current wisdom yet again. Lost Opportunity is an overview of the successes and failures of efforts to reform Communist economies from China to Poland, and if its conclusions about Russia are unpalatable, we should not therefore shoot the messenger.

At bottom, Mr. Goldman says, reforms in Russia will be much slower and more erratic than elsewhere in the former Communist world, because Russian culture is deeply anti-capitalist. Nor was Russia served well by Mikhail Gorbachev's tinkering with the command economy or Boris Yeltsin's indecisiveness in the wake of the August 1991 coup. Russia's entry into the modern world has also been delayed by successive legislatures' failures to allow private ownership of land, by the public's visceral hostility to foreign investment, and by a bureaucratic ethos which thinks nothing of breaking contracts or wiping out savings. In fact, half-hearted reform has been tried for so long - next March will mark the tenth anniversary of Mr. Gorbachev's rise to power - that opportunities for a relatively smooth transition to the market have now evaporated.

There is no contradiction between saying that elements of macroeconomic stability have been put in place in Russia, and accepting Mr. Goldman's gloomy predictions about the country's future. The macroeconomic disciplines mean that Russia is approaching a great crunch - the long-delayed meeting with reality. Only now that credits are beginning to have to be paid in real terms and goods really sold to customers will we see the outcome of seventy years of economic madness and ten years of dabbling with reform. Thousands of factories will go bust; whole towns and industries will shut down; millions of workers will lose their jobs and become easy prey for demagogues. The alternative is to prop Russia up with funny money and see an even bigger disaster at the next turn of the cycle. Either way, the social and political dislocation is going to be Biblical in proportions. Russia has already missed its chance to become a capitalist country in the normal, Western mold, or even in the Italian one, which most of Eastern Europe seems to be embracing. It is going down the road of anarcho-capitalism in the manner of Nigeria, or Latin America in the worst days. Such a system is unlikely to rest on the secure foundation of broad social support.

One might object that "shock therapy" has succeeded before, most notably in Poland, which now enjoys macroeconomic stability and buoyant growth. Within five years, a command economy that used to do most of its trade with its Comecon partners has metamorphosed into a free-market economy which trades mostly with the West. Why can't Russia follow where Poland has led? But there are several differences, some quantifiable, others less so. First, the Soviet economy was dominated by state-owned monopolies to a much greater degree than the Polish economy. Unlike in Poland, agriculture and even the smallest service outlets were nationalized. Secondly, the disruption in Poland's trade from the breakup of Comecon does not even compare with what Russia has suffered from the collapse of the Soviet Union. Third, Poland started developing its trading class in the 1970s and 1980s, when millions of Poles traded in the markets of Vienna, Berlin, and Istanbul, and worked on London building sites. In only forty years of socialism Poles never entirely forgot the capitalist work ethic or the principles of commerce, and they have been relearning them for twenty years now. Above all, it is easier to reform a homogeneous country of 40 million than a multinational empire (which the Russian Federation in some senses remains) stretching from Europe to Asia. As the Russians themselves say, Russia is like a big oil tanker and Poland is like a speedboat. It takes much longer to turn around a tanker than it does a speedboat.

Unlike many academic economists, Mr. Goldman is not shy about bringing into the debate such crucial intangibles as national mentality, historical experience, and human error, factors that are impossible to capture in statistics yet are often decisive. His case studies of successes and failures of foreign investments and local reform efforts are also strikingly illuminating.

I would particularly recommend this book to Strobe Talbott, President Clinton's gaffe-prone Russia supremo. Only in the light of the facts laid out in this book can we fully appreciate how much damage he inflicted when he advised the Russian government to pursue "less shock and more therapy" - this at a time when the Russian Central Bank was under the control of an anti-reform legislature and printed worthless money with abandon. Before he puts his foot in it again, Mr. Talbott should immerse himself in this superb volume. Beside getting it right, Lost Opportunity is accessibly written, and bloody well timed, too.