Russia's Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed.

Russia's Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed

Anders Aslund

Peterson Institute for International Economics: Washington, DC, 2007, xxiii + 356 pp., $26.95, ISBN: 978-0-88132-409-9.

Since it is not controversial to say that politics and economics of major reforms are intertwined, it is somewhat surprising that until Anders Aslund's new book there has been no comprehensive English-language study addressing both the politics and economics of Russia's transition covering the period from Gorbachev through Putin. The main question that Aslund attempts to answer is why did market reform succeed in Russia while democracy has so far failed? Aslund's short answer is that critical market reforms benefited from their being implemented during a brief 'window of opportunity' in the winter of 1991-1992 while the same opportunity was not exploited for the purpose of democratic reforms. This difference occurred because Russian reformers and even their Western advisors had relatively good knowledge about how to build a market economy but had little idea about how to build a democracy. This answer is developed throughout this book, much of which is based on Aslund's earlier work.

Aslund's main thesis is that revolutionary reforms work best when they are done quickly and early in the process lest counterrevolutionary forces manage to consolidate and thwart reform progress. These forces prefer partial reforms with their vast opportunities for rent seeking. Moderation at this time will prove counterproductive. Given limited administrative capacity of the state and the brief window of opportunity, radical reforms need to be simple. Aslund, who served as a foreign advisor to the Russian government in the early 1990s, argues this view consistently by comparing the success of early price deregulation, import liberalisation, and small-scale privatisation to the failures of perestroika and slow process of democratisation. Although early economic reforms were insufficient to stop economic decline, their radical nature made them irreversible, providing the foundation for economic growth that started several years later. In politics, however, Boris Yeltsin missed the opportunity for an early election to replace the Soviet-era parliament and for disbanding the KGB. As a result, the conflict between the president and the parliament was eventually resolved through violence, staining the idea of democracy. That outcome and the virtually intact KGB structure, combined with excessive presidential powers in the 1993 Constitution and other mistakes, provided the foundation for the rise of Putin's authoritarianism during post-revolutionary stabilisation.

Aslund's view of Russia's transition as a capitalist revolution allows him to apply insights of the vast literature on revolutions in his analysis. He suggests that '[a] schematic revolutionary paradigm frames the Russian development from 1995 to 2007 perfectly well'. A pre-revolutionary 'great awakening' of the perestroika was initiated by the 'moderate revolutionary' Gorbachev and the collapse of the existing system. The revolutionary dissolution of the USSR was accompanied by radical economic reforms undertaken by the 'revolutionary hero' Yeltsin who also presided over the time of greatest influence of state enterprise managers in 1994-1995, followed by a period dominated by the oligarchs. The years of the 'great revolutionary drama' ended in the financial crisis of 1998 and 'post-revolutionary stabilisation' that began in 1999 and led to the transition to authoritarian rule under Putin. In a conclusion Aslund continues the revolutionary theme and offers predictions for Russia's future.

Throughout the book Aslund contends with the proponents of gradualism and those who suggest that Russia should have adopted a Chinese approach to reforms. His position is generally defensible, but sometimes his statements overreach and his evidence is incomplete. Aslund is correct, of course, that the economic and political conditions in China and the USSR on the eve of reforms were vastly different. But his claim that '[t]he problem was not that Gorbachev did not follow the Chinese lead but rather that he followed it too closely' is questionable. It is certainly incorrect with respect to major specific policies. For example, China's reforms started in agriculture while Russia's began in industry; there was no policy of glasnost in China; and so on. This claim is particularly puzzling given Aslund's description of how Gorbachev 'wisely abandoned all attempts to reform agriculture' after realising that he could not overcome bureaucratic resistance. Soviet macroeconomic policy also differed from China's. Another instance of insufficiently nuanced analysis is Aslund's reference to loose monetary policy in 1992 as an example of gradual reform that resulted in 'miserable failure'. In fact, monetary policy was loosened only after several months of significant tightening. One might argue that the initial overly tight policy was a failure, because it generated a backlash strong enough to force the government to abandon it, simultaneously undermining the credibility of future monetary policy.

In terms of evidence, such a broad study cannot be expected to provide the level of precision of a more focused journal article. Occasionally, however, even this lower standard is not upheld. For example, to demonstrate the success of deregulation efforts in stimulating the development of small enterprises since the year 2000, Aslund cites the 7% per year growth rate of the number of enterprises that reached 5 million by 2006 and even presents a graph reflecting this trend since 1994. These data are misleading, because in 2005 only about 980,000 enterprises or seven per 1,000 people were classified as small by Goskomstat (2006). This is only a fraction of the rate observed in developed countries and compares to almost 880,000 small enterprises in 2000. It represents growth of just over 2% per year. Moreover, much of small business activity is performed by individual entrepreneurs who are not registered as 'enterprises'. Conversely, enterprises are sometimes registered simply to conduct fraudulent transactions and disappear. Perhaps a better indicator of small business sector development would be employment in the sector, including individual entrepreneurs; this indicator actually declined slightly as a percentage of total employment between 1999 and 2002, according to the OECD.

The problems pointed out above are minor, however. Overall, Aslund presents strong arguments for his views. His defense of Russia's privatisation programme is particularly important, given its uneven reputation among experts and laymen alike. Aslund justifies even the loans-for-shares privatisation, arguing that all three controversial companies in this episode (Yukos, Norilsk Nickel, and Sibneft) within 5 years became 'stunning successes of industrial restructuring' with production and tax revenue growth, management improvements, and sharply increased real asset values. Aslund attributes the controversy around this event and also with respect to the Svyazinvest privatisation to their relative transparency compared to the highly opaque nature of insider privatisations of Lukoil and part of Gazprom. Also, prices paid in the loans-for-shares scheme may appear low ex post, but not necessarily ex ante, as prior to privatisation these companies were poorly run by corrupt managers.

Rapid privatisation and other radical reforms have underpinned the success of market economy but this success is endangered by the authoritarian political system. Aslund sees this contradiction as the main force that will shape Russia's future. Despite recent renationalisations and growth of corruption, he is optimistic that the contradiction will be resolved by Russia 'throw[ing] off its authoritarian yoke and matur[ing] as a democracy' because it is 'simply too rich, too economically pluralist, too educated, and too open to be authoritarian'. Let us hope that Aslund's optimism is warranted.

doi:10.1057/ces.2008.15

Michael Alexeev

Department of Economics, Indiana University, Bloomington, Indiana, USA

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