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See Inside August 2010

Market Reforms, 20 Years Later

Economic, political and cultural forces have boosted Poland but fallen short in Russia

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.

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