I recently had the pleasure to revisit Warsaw, Poland, and St. Petersburg, Russia, two decades after the start of market reforms in which I had participated as an economic adviser. Both cities, proud and venerable capitals, had surmounted the tumultuous collapse of the Soviet era. Shops were full; architectural treasures glistened; local and international tourists abounded.
Yet the differences were also apparent. Warsaw has enjoyed a building boom, with impressive new business towers going up despite the economic slowdown in western Europe. St. Petersburg glories in the architectural treasures of the past but with much less evidence of current dynamism.
Because I worked in the late 1980s and early 1990s throughout eastern Europe and the former Soviet Union, I have often been asked since then why market reforms took stronger hold in some places than others. The answers, rooted in the complex interplay of geography, politics, history and culture, are well worth understanding.
The greatest dividing line in outcomes has been the Soviet border. Countries such as Poland, Hungary, the Czech Republic and Slovakia—which had been outside of the Soviet Union but under Soviet domination—were eager to dash toward membership in the European Union. That membership process usefully steered their internal politics and legal reforms and prompted incoming foreign investments from Germany, Italy, Austria and Scandinavia.
Conversely, Russia was not dashing to Europe but was instead grappling with its own past and future. The collapse of the Soviet system was not followed by a consensus on a new economic and political model within Russia to replace it. Russian statecraft continued to be guided by the centuries-old practice of bureaucratic rule that cast a wary eye on market forces.
Culture has also shaped the dynamics of reform. Because Poles maintained a healthy skepticism toward state power, Poland developed a vigorous and competitive democracy after 1989. Civil society energetically criticized state corruption and helped to keep it in check. Out of 180 countries evaluated by the organization Transparency International for its latest index of perceived public-sector corruption, Poland stands as the 49th least corrupt. This ranking is not as high as it should be but is still rather good for a middle-income, young democracy that has so recently emerged from decades of Communist rule.
In Russia, on the other hand, corruption has run rampant during the past 20 years, and the public shows little capacity to rein it in. The institutions of civil society, suppressed by centuries of tsarism and obliterated by Soviet-era state brutality, remain weak. Because the constraints on corruption were so toothless, vast state wealth—especially oil, gas and mineral wealth—was transferred in the mid-1990s into private hands, creating the so-called oligarchs of the new Russia. A few years later powerful bureaucrats wrested back control of many of these assets. The rise and fall of the oligarchs was murky, without the transparency needed for a healthy market economy. Russia, not surprisingly, lands at a dismal 146th on the Transparency International corruption list.
One of the sad parts of the story was the failure of U.S. presidents George H. W. Bush and Bill Clinton to support Russia’s embattled reformers at crucial moments. I have come to believe that senior American officials were insensitive to the growing Russian corruption and remained passive when they could have helped reformers to keep it in check. After all, the U.S. has its own corruption problems, ranking a rather dreary 19th on the Transparency International list, below most other high-income countries.
I left St. Petersburg feeling that so much more economic reform was still possible in that glorious city and throughout Russia. The people’s high education and technical expertise do not adequately translate into new businesses and higher incomes. The bureaucracy keeps its traditional grip, even maintaining the internal registration system from the time of the tsars that constrains Russians from moving from city to city. Small businesses are similarly encumbered with arbitrary regulations. Russia’s gains in political and economic liberalization are undoubted, but this country with so much talent has yet to combine the best of its cultural heritage, its technical skills and the advantages of greater economic freedom.
This article was originally published with the title Market Reforms, 20 Years Later.
Already a Digital subscriber? Sign-in Now
If your institution has site license access, enter here.
See what we're tweeting about
6 Comments
Add CommentThe libertarian essayist P.J. O'Rourke visited Russia about 10 (?) years ago. He wrote that when he went he was firmly convinced that what was needed to grow economies was a free market. When he left, he was still sure of the same thing but now realized that a necessary precursor was the rule of law without which everything, markets included, became corrupt. Sadly, Russia has never really had any rule of law.
Reply | Report Abuse | Link to thisMr. Sach's disingenuous remark in the article ascribing the failure to recognize the rise of corruption in Russia to U.S. government is appalling. Perhaps that is true, but just so because the U.S. supported his economic and political strategies. Has he forgotten that he was an ardent supporter of the so-called "big bang" economic theory that pushed the former Soviets into a rush to privatise? This in turn served to create the oligarchs who now control all the wealth there, except when it can be wrested back from them by the corrupt state. What a hypocrite.
Reply | Report Abuse | Link to thisSach’s past record, and his unwillingness to talk about what his ‘shock therapy’ and other voodoo economics have done, are appalling, as RF1 rightly says. When pressed about these matters in a BBC Hard Talk interview in January 2003, Sachs squirmed and said that the American approach in Russia hadn’t really been about economic reform but about finishing off the Cold War. Now, in this article, Sachs suggests that American officials, embarrassed by corruption at home, looked the other way when it cropped up in Russia. That’s plausible, but there were stronger incentives at work. For apart from the Russian oligarchs, big winners of Russia’s reform include American financial interests. The UN’s World Economic Situation and Prospects (an annual publication) shows that =net= financial flows out of countries of the former Soviet Union to richer places have been running in the many tens of billions of dollars a year, and since 2005 at over 100 billion a year. In other words the American approach, spearheaded by Sachs, is a nice little earner for Wall Street.
Reply | Report Abuse | Link to thisAdise may be wellcomed, but guidance is not so. As an equivalent of the Monroe doctrine "Nothing coming from outside will be allowed to rule the USA"?, an european joke reflects some people's thoughts on this: "America for the americans. - and Europe? - for the americans too". Anyway, the situation is better than the one depicted in a Russian tale. "What is capitalism? -the abuse of men by men. And socialism?- the reverse". Salut +
Reply | Report Abuse | Link to thisSorry, I meant advise
Reply | Report Abuse | Link to thisRegarding Sach's article, re-posted on the blog "Economist's View" a reader ("Goldilocksisableachblonde") made the following trenchant remarks:
Reply | Report Abuse | Link to thisIn a 2009 Pew poll , residents in Russia and in the former Soviet states of Eastern Europe were asked if they thought the economic situation for most people was better , the same , or worse than under Communism. Out of the eight countries surveyed , Poland scored highest with 47% saying things were better , but an equivalent percentage there said things were the same or worse. The people of Hungary registered the most dissatisfaction , with only 8% saying things were better than under Communism.
http://pewresearch.org/assets/publications/1554-2.gif
Not exactly a ringing endorsement of Sachs and his neoliberal reforms , and you'd have to think the poll numbers would be getting even worse with the ongoing economic decline since last year.
If you're in the room when Sachs starts spinning , hold your hat.
Saturday, August 14, 2010