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The external causes of economic transformations, in turn, can be divided into two large groups.
In the first group, we include those drivers of change that are determined by a country’s competitive position relative to the economies of other countries in the world. The comparison of trends in the external (seemingly prosperous) world with stagnant trends within the country was a significant source of motivation for changes in the economic system. Such aspirations in Soviet society became especially strong after the removal of political barriers to various contacts with the outside world, including mass tourism and official trips of our citizens to capitalist countries. In the practice of subsequent reforms, however, these motivations were reduced to imitations of the outside world and meant mainly the desire to adapt to it, and to a lesser extent the desire to compete with dynamic countries.
The second group of external driving forces of institutional transformations consists of the special economic and political interests of other (primarily highly developed) countries and transnational economic entities in relation to Russia and entities on its territory. In our society, they did not timely assess the existence of such external interests that oppose national interests and failed to neutralize their negative impact on their development, at least by clear statements about their strategic intentions, not to mention clearer actions in practical policy in accordance with the strategy put forward.
Setting Criteria for Economic Reform
The internal need to ensure a more efficient management and transfer the economy to a comprehensively intensive, innovative type of development has in fact been and remains the main impetus for the transformation of the economic and socio-political system of Russia. Therefore, it is quite justified to continue to focus on domestic problems during reforms, on overcoming the negative legacy of the stagnant past, and on the formation of a new level of institutional base. The fundamental question on which the attitude of society to the ongoing reforms depends in this approach is the question of the compliance of the reform actions with the basic criterion that would meet the long-term interests of the country as an integral community of people.
This basic criterion is extremely difficult to quantify unambiguously in one or more indicators. In addition, in dynamic terms, it changes from period to period, is supplemented with new parameters or, on the contrary, is characterized by a decrease in the weight of some controllable quantities. But that doesn’t mean it’s elusive or completely subjective. The criterion of socio-economic progress is inevitably felt and controlled by society. as well as its individual individuals, regardless of what analytical summaries the official authorities prefer to publish and control. In the final analysis, this criterion is always based on society’s assessment of the dynamics of the country’s productive forces as a factor and condition for a stable positive change in the level of the nation’s well-being.
If this conclusion is recognized as valid and fundamental for the formation of the country’s strategic policy, then a sufficiently stable, clear, and consistent methodological basis for analysis in unity of goals, factors and conditions for effective socio-economic development, for a correct understanding of the driving forces and tasks of economic transformations appears.
With the passage of time since the start of reforms in Russia, it has become more obvious that when choosing the ways of transformation, the elite of our society has not been able to show independence and has succumbed to assessments that do not quite correspond to an objective approach.
First, the state of the economy and society was overly dramatized. In fact, at the time of the start of the reforms, Russia was far from being in the last echelon of the world economy, although it lagged the United States, Germany, and similar countries in most of the parameters accepted in the traditional analysis. As of 1987, Russia’s GDP per capita (in purchasing power parity prices) was 30.9% relative to that of the United States, while similar figures were in South Africa (22.4%), Brazil (24.2%), Turkey (20.4%), South Korea (27.3%), Malaysia (22.9%), and Egypt (14.3%). And in the lowest echelon – the low-income countries, in the terminology of the World Bank (for example, in Ethiopia, Mozambique, Tanzania, Chad) – per capita GDP relative to the United States was only about 3%. In other words, Russia did not need to be tempted to start from scratch.
Secondly, the emphasis was not placed on the most important problems that determined the unsatisfactory trends in the USSR (Russia) in the pre-reform period. The focus was on the problems of the economy in the narrow sense of the word and on the transformation of the institutional framework, while the fundamental contradictions rested on the shortcomings of human resources, the educational system, and the anti-innovation nature of management. As of 1980, the share of education expenditure in GDP in Russia was only 3.5%, while the world average was 3.9%, in the United States 6.7%, in Sweden 9%, in Japan 5.8%, and in the United Kingdom 5.6%.
Third, the chosen external “models” based on which the national reform program was formed turned out to be unjustifiably one-sided. The experience of the “non-Western” countries, such as China, India, Malaysia, etc., was ignored. Meanwhile, in terms of objective parameters, there have already been many “neutral” countries that have developed more dynamically (Table 2.1) and are more balanced in the structural sense than, say, the leading countries of the G7.
Many of these countries have not become passive actors in globalization processes. They did not allow themselves to be strayed into the style of complaining about the behavior of the “sharks of globalization”, and by all their routine steps in economic policy they tried to join the slightest progressive consequences of this for themselves. For example, China, according to some experts, is undoubtedly implementing the outcomes of globalization with undoubted benefits for itself (despite some costs)[12 - Silvestrov S. On the Global Modernization of the World Order (Theses) // Society and Economy. 2004. No. 3. P. 8.]. As a matter of fact, Japan also made its famous breakthroughs during the post-war modernization of the economy due to the rapid absorption of the achievements of external global development, especially in the field of scientific and technological development, management technologies, and so on.
A Romance with External Aid
Today, it is clear to an increasing number of observers that over the past period of market transformations, Russia has not so much gained as lost its economic potential (we will dwell on these pros and cons in more detail below). The losses incurred were largely due to the inability of analysts and political leaders of those times to understand the correlation between internal and external incentives for the process of transformation of the economic system and the lack of will on the part of society to demand an account from the elected leadership for the actual, corresponding to the above criterion (and not imaginary) effectiveness of the transformations carried out.
In some cases, the external factors of transformation in Russia have played a rather insidious role. This is especially true of the group of factors that was conditioned by the special economic and political interests of highly developed countries and their large economic entities, which were laid down (sometimes explicitly, but more often covertly) in various kinds of recommendations regarding reforms to Russia, in the loans granted, in foreign economic transactions, and so on.
At the same time, I would like to unequivocally note that the negativity resulting from this circumstance in the form of losses and ineffective outcomes for Russia cannot be presented as an accusation against our foreign partners. These partners deserve respect as truly sensible economic and political actors who pursue their policies and persistently build them in accordance with their own economic interests. It would be strange for a country (or a firm) that has long lived under capitalist competition if it cared more about Russia’s interests or its own “universal values” than about its own interests in the course of its behavior.
Accusations should be brought against us, for all citizens of the country for the frivolity inherent in the advanced elite, for the lack of qualifications and experience of our leaders and businessmen, for tolerance in society towards those who managed to take advantage of the confusion to organize “trade” in the interests of the nation for their own selfish purposes. If society was to accept the realities of market relations, it should have demanded that the elite and the government develop immunity from the behavior of Russia and its representatives in external relations as a weak, dependent partner. The market has never nurtured the weak, it must, by definition, subordinate them to the strong or destroy them altogether.
The long period of peaceful coexistence of countries with different political systems and levels of development and the absence of major conflicts have led to illusions about the harmony of their relations. Therefore, at the start of market reforms in Russia, many people had the idea that, for example, the West was asleep and saw the longed-for future, when Russia, after the completion of the transformation of socialism into capitalism, would join a friendly alliance of highly developed countries as a more powerful force than before. For some reason, it did not occur to the relevant conceptualists that this idea was, to put it mildly, illogical, inconsistent with the normal psychology of capitalist competition.
Over the years of peaceful coexistence and subsequent globalization, the competitive principles of economic and political relations in the world have not weakened but have become more strategic. The intensity of competition has increased due to the sharp increase in per capita consumption of energy resources in highly developed and medium-sized countries and the perception that these resources are finite. In addition, there are significant technological opportunities for those with financial and intellectual advantages to influence the positions of competitors by initiating deliberate crises. Such attempts have become almost the norm of behavior of the powerful of this world.
The Western countries had powerful motivations to weaken and liquidate the socialist camp led by the USSR and its economic system. After all, it was the main economic and political competitor at that time. The ideological component helped the West to accomplish this task, since the communist (socialist) system was already presented in the eyes of the mass philistine as the main concentration of “uncivilizedness,” as an “evil empire,” and so on. Subsequently, it became clear to many that the goal of suppressing communism as such was secondary, not the most important. Communism as an ideology was no longer dangerous for the developed West. In fact, the task of suppressing our country, as the main center of economic competition and military rivalry at that time, was of fundamental importance. Another aspect of this orientation of the West’s policy was the prospect of advantageous access to the rich resource base of the USSR.
The fact that one country has benefited the most from this – the United States, which has turned from just the leader of the West into the only superpower in the world – did not immediately become obvious. But with the passage of time, it has become apparent that the world is entering a new era of fierce competition. This was especially evident after several global and local financial crises initiated by transnational corporations, and as the formation of serious centers of opposition to American financial and economic hegemony in Europe and then in Asia. The euro has become an obvious competitor to the U.S. dollar as a world currency. From time to time, the Japanese yen and even a hypothetical Asian currency based on the Chinese yuan indicated themselves in the same capacity.
Thus, today there are enough grounds to isolate the real meaning of the interests of those circles that were the most active conductors of the ideas underlying the Western options for the transformation of the economy in Russia and in other post-socialist countries. The conceptual limitations of these options will be discussed in later sections of the book. At this point, it is necessary to emphasize the conclusion that these external impulses for the transformation of the economic and political system carried a significant share of deliberately destructive components in terms of their impact on Russia’s productive forces and competitiveness.
Shifting Internal Forces Driving Change
The noted impact of the external contour has had a significant impact on the structure of the internal driving forces of the transformation of the economic system in Russia. In the structure of the interests of our society, the interests of small but powerful groups of people have taken an undue place due to economic support from the outside. The real interests of the entire Russian society were largely crushed by the force of special economic interests emanating from the milieu of pseudo-entrepreneurs. which arose on a special soil, which was a mixture of the “Komsomol” and semi-criminal mentality. Moreover, such a specific entrepreneurship began to gain ground in business at a time when effective institutions of normal market relations simply could not yet appear within our country.
The initially formed structure of economic interests strongly influenced the further change of institutions in the country. The vector of these interests was determined by two major components: first, the emergence of the interests of the shadow economy with a criminal orientation of the owners of this capital, and second, the emergence of a layer of enterprising people who quickly got their bearings in the new situation and managed to find themselves on the crest of privatization of the most lucrative parts of the national wealth in the context of the “denationalization” of the economy. Among this last group, there were unions of nomenclature figures of the former system with initiative people from the scientific and creative environment. Some representatives of the former Komsomol apparatus turned out to be especially active in the field of not quite pure privatization.
These structural groups, merged in their mercenary motivations with the interests of external forces to weaken the economic potential of the former Soviet bloc, set the tone for major changes in state and public institutions in Russia and many other countries. Under their decisive influence, the political and economic system of the country was formed, and the new state machine, in turn, began to serve its creators to an increasing extent.
Many researchers who have observed the processes of institutional transformations in Russia have believed that the initial distribution of ownership of capital in the implementation of reforms is important only in the sense that it must correspond to the private capitalist principle and be based on individualistic motivation. The expectation was that, in accordance with Coase’s theorem, after a while all possible injustices of the primitive accumulation of capital would be eliminated by themselves.
Indeed, Coase’s theorem in its original version states the following: “The redistribution of property rights takes place on the basis of a market mechanism and leads to an increase in the value of the products produced,” hence “the final result of the redistribution of property rights does not depend on a legal decision [regarding the original specification of property rights]”[13 - Coase R. The Firm, the Market, and the Law. Chicago: The University of Chicago Press, 1988. Р. 115, 158.]. However, it should be borne in mind that both Ronald Coase himself and his followers and interpreters later made important clarifications about the boundaries of this theorem. It was pointed out that the initial distribution of title deeds was irrelevant from the point of view of efficiency only “under conditions of perfect competition” and “if transaction costs are negligible”.[14 - Economic Issues. 2002. No. 3. Pp. 138—141.]
That these latter conditions are far removed from reality in the real modern economy probably does not require extensive proof. It should be asserted even more confidently that the assumptions about “zero transaction costs” or the existence of “free competition” did not correspond to the realities of the period of the reversal of market transformations in Russia. The asymmetry of information used in economic decision-making by different agents of the entrepreneurial class was glaring in Russia. Involvement in this information radically depended on the proximity of economic agents to the power structures and on “investments in corruption”. Under these conditions, transaction costs were by no means zero, but commensurate with the volume of the final economic product.
It would also be necessary to assess in a transactional manner the cost components that arise from external efforts to transform institutions in countries with economies in transition. The level of external investment in different countries of this group was different at the initial stages of transformation. The volume of foreign aid was especially large in such countries as Hungary, Poland, the Czech Republic, the Baltic states, which were formerly part of the USSR, – Estonia, Lithuania, Latvia. The selective nature of financial assistance to transforming countries speaks for itself in many ways. For example, net official assistance to Poland from international organizations amounted to $876 million in 1998, $1,186 million in 1999, and $1,396 million in 2000. These are the largest amounts of aid compared to what has been received by other countries in Central Europe and the Baltics. For example, the three Baltic states together received $323 million, $318 million, and $254 million in the corresponding years.[15 - Statistical data of the Committee for Assistance to the Development of the ECOS. Public Administration in Transition Economies. Open Society Institute. Spring 2002. P. 3.] In this regard, if we talk about the level of official assistance to Russia and such countries that were formerly part of the USSR as Belarus or Moldova, then it is absolutely symbolic against the background of even the volume of assistance provided to the above-mentioned Baltic countries.
In addition to the channels of “official aid,” “foreign investment,” “forgiven” foreign loans, and so on exert a significant and varied external influence on the transformation processes in the post-socialist countries. In Russia, so-called foreign investment had almost no positive impact on the real economy. A significant part of them were various kinds of “systemic” loans, which either patched up the needs of the country’s current budgets, or flowed through complex channels, settling in private funds of incomprehensible social purpose. Many commercial loans were “tied.” In addition, the volume of foreign investment in Russia was not commensurate with the scale of the country, and it was an order of magnitude (or more) lower than, for example, foreign investment in the economy of China or even Poland. Between 1994 and 1998, Russia received $13.6 billion in foreign direct investment, while China received $198 billion. According to some reports, Poland has received about $450 billion from the West in various kinds of investments and assistance during the entire period of market reforms.[16 - Currency Rain Dried Up the Polish Economy // Rossiyskaya Biznes-Gazeta. 2001. 20 March.] It should be noted that the foreign investments that came to these and many other reforming countries were implemented by their governments (unlike Russia) for the benefit of macroeconomic development.
China has experienced and is experiencing a real boom in foreign investment, which actively contributes to maintaining consistently high rates of socio-economic development of the country. For example, in 2003 (despite the destructive impact of the SARS factor) foreign direct investment in this country amounted to $53.5 billion, in 2004 – about $60 billion, and in 2010 it is expected to reach $100 billion. per year. And in total, over the years of moving towards a market economy, China has received (including from the Chinese from abroad) probably at least $0.5 trillion in foreign investment.
Thus, the external factors of economic transformations have a multifaceted potential that contains not only negative, but also positive aspects. Therefore, it is unreasonable (because of the dangers of negative external influences or for other reasons) to refuse to take an active part in world economic relations. The advantages objectively present in the international division of labor can and should be used as much as possible during transformations. A country that excluded itself from the global world economy would find itself outside the modern flow of innovation and managerial experience. But in everything, as has long been established, a measure is needed. Reducing the impact of the negative external factors of transformation and strengthening the manifestations of their positive aspects is an objectively necessary and quite feasible task for the governments of countries with economies in transition, even in the increasingly rigid grip of unipolar globalization. The realization of such opportunities depends on the specific policy in the country and the social and moral health of society.
Chapter 3. The Economic Structure of the Soviet Union: From Growth to Collapse
The complex problems faced by the former Soviet Union and Russia and other countries that emerged after its collapse, as well as the difficult course of reforms in them, have formed in a significant part of society a purely negative attitude towards the entire period of Soviet history, including the economic results associated with the 70-year period of socialism. Meanwhile, the USSR, even as of 1985—1986, when the Gorbachev perestroika began, the harbinger of market reforms, it had an economic potential that could not be ignored in the world. This was ensured by the high growth rates of production in the main sectors of the national economy over the previous years. The economy on the territory of the USSR functioned as a single (without exaggeration) national economic complex, all parts of which were located in the space of cooperation branched to detail and were subject to a common plan. For all its serious drawbacks, this cooperation has been quite powerful in binding the country’s economic structures together in a focus on sustainable economic growth. In the external dimension, the country’s economy was presented both objectively and subjectively as a significant factor.
The Nature of Soviet Economic Growth
In 1985, the national income in the USSR reached 66% (according to official Soviet statistics) of the level of the United States. Industrial output accounted for more than 80% and agriculture for 85% of the U.S. figures. The volume of annual capital investments was characterized as 90% of the level of the United States. The comparison in terms of the parameters of economic efficiency looked somewhat worse. For several years, according to the USSR Central Statistical Office, labor productivity in industry was at the level of 55% and in agriculture, about 20% of the U.S.[17 - The National Economy of the USSR for 70 Years. Moscow, Finance and Statistics Publ., 1987. P. 13.]
Consistently high rates of economic growth distinguished the Soviet economy from the economies of many other countries both in the pre-war (before 1941) and post-war periods. The national income produced in 1940 was 5.1 times higher than in 1928, and between 1950 and 1985 it increased 10.2 times.
As can be seen from Table 3.1, the USSR was basically ahead of the United States in terms of the average annual growth rates of national income, industrial and agricultural production, capital investment, and some other indicators. At the same time, in the context of the five-year periods presented in the table for the USSR, there is a noticeable tendency to reduce the growth rates of almost all economic indicators.
It can be stated that up to the Ninth (1971—1975) Five-Year Plan in the USSR, the average rate of economic growth was quite high, at the level of not less than 6—8% per year (Table 3.2).
This was facilitated by the high scale and rate of capital investment in the national economy and a significant and stable increase in the production apparatus over a long period of time. The growth rate of production in industry was higher than the average in the national economy. Although the productivity of social labor increased continuously, economic growth was extensive rather than intensive. The growth of the well-being of the country’s population clearly lagged behind the rate of economic growth.
Symptoms and Causes of Economic Stagnation
Since the 1970s, there has been a clear downward trend in the growth rate of such indicators as real per capita incomes and retail turnover of state and cooperative trade. During the Twelfth Five-Year Plan (1986—1990), for the first time in many years, the country faced a decline not only in the rate but also in the level of well-being of the people. This was so shocking that in 1986—1990 the government, glossing over this fact, removed the indicator of “real incomes of the population” from official statistics. It was replaced by the indicator of “cash incomes of the population”, which looked more decent due to the invisible presence of incipient inflation in it.
The deterioration of the overall economic dynamics affected the weakening of the country’s position in foreign trade. The average annual growth rate of foreign trade turnover fell from 8.3% in 1966—1970 to 0.7% in 1986—1990.
The dynamics of economic parameters in the USSR in 1985—1990 is indicative (Table 3.3).
From a comparison of the data for 1985, it is not difficult to conclude that it was a clear reflection of economic stagnation. This underscored the urgent need for major changes in the economy and society. The figures for 1986 and partly for 1987 testify to attempts to implement these changes proclaimed by perestroika and Gorbachev’s policy of “accelerating” socio-economic development. The growth rate of capital investment sharply increased (to 8.4% in 1986).
The growth rate of industry increased slightly, mainly due to investments in mechanical engineering. But then these intentions to accelerate economic development fizzled out. The year 1990 ended with an absolute decline in GNP, industrial and agricultural production, social labor productivity, and foreign trade turnover. In 1988—1990, as if in opposition to this, retail trade turnover and cash incomes of the population began to grow rapidly, which embodied the growing inflationary trends and, at the same time, the exhaustion of the ideas of “perestroika” and “acceleration”, which were replaced by new slogans of the “social orientation” of the economy.
Fundamental Flaws in the Soviet Economic System
It can be argued that the fundamental flaw of the economic system that existed for a long time in the country was its inability to overcome the extensive framework of economic development and to include the factors of economic intensification caused by the radical shifts in world science, technology, and management after the 1950s.
The sphere of science and engineering in the country, especially after the end of the Second World War, was among the most privileged areas of activity. As can be seen from Table 3.4, the growth rates of investments in science were quite high.
In terms of the level of knowledge intensity of the economy, the USSR quickly reached indicators commensurate with the most developed countries of the world. Even on the eve of the collapse of the USSR in 1990, expenditures on science from the state budget and other sources amounted to 5% of the country’s national income.
The total expenditures on science from the state budget and other sources for the period 1986—1990 in the USSR amounted to 153.3 billion rubles, i.e., their growth compared to the previous five-year period (1981—1985) amounted to 116.9%.
It is impossible not to admit that the initial period of the reversal in the world of the scientific and technological revolution was also full of events in our country that inspired great faith in its capabilities. In the USSR, there was a rapid increase in investment in the field of science. If in 1950 expenditures on science in our country amounted to 1 billion rubles, or less than 1.4% of the national income, then in 1960 it was 3.9 billion rubles (2.7%), in 1970 it was 11.7 billion rubles (4.0%). In the 1970s, the USSR was on par with the United States in terms of the relative value of spending on science to national income. Over the past 20 years (from 1950 to 1970), the number of scientific workers in the Soviet Union has increased by 5.7 times, and their share in the total number of workers and employees in the national economy has increased from 0.4% to more than 1%.
The significant absolute and relative increase in resource investment in science, especially in the 1960s, did not, however, lead to an adequate increase in its contribution to the national economy. The transformation of the productive forces based on scientific discoveries and inventions and the proclaimed task of “combining the achievements of scientific and technological development with the advantages of the socialist economic system” proved to be a much more complicated matter in practice than it was seen in theoretical reflections on the future of scientific and technological revolution. There was a lack of perseverance and dedication to ensure the effective materialization of R&D achievements at the level of state programs, and due attention was not paid to the reorientation of investment policy to the process of accelerating scientific and technological progress. Although during each five-year plan the fixed assets in the national economy were on average renewed by about half (see Table 3.4), the involvement of means of labor of a fundamentally new scientific and technical level in the economy did not occur on the required scale. As a result, from one five-year plan to another (except for the Eighth Five-Year Plan, 1966—1970), there was a decrease in the efficiency of capital investments in the national economy. The increase in the national income produced per ruble of capital investment in the Eleventh Five-Year Plan (1981—1985) amounted to 11 kopecks, which is 2.1 times lower than in the Eighth Five-Year Plan, and 2.5 times lower than in the Sixth Five-Year Plan (1956—1960). Was it possible to reverse this trend at that time? In principle, yes, if it were possible to organically combine the investment process with scientific and technological progress, to turn capital investments into a reliable guide to the national economy of the most effective achievements of science and technology[18 - Kushlin V. I. Scientific and Technical Revolution in the USSR: History and Modernity / History of the USSR. 1988. No. 5. Pp. 11—12.].
These assessments were made in the political conditions of the pre-reform period. They are rather harsh in their criticality, but inevitably still bear the imprint of faith in the country’s ability to correct the flaws of the system within the framework of evolutionary targeted reforms.
Missed Opportunities and Unrealized Approaches
Comprehending today, considering the time that has passed, what I, as a researcher, wrote in the pre-transformational period, I must be more critical of myself. Yes, at that time, many of my ideas about our economy and society, as well as those of a few other scientists, were formed under the influence of a priori belief in certain ideals. In addition, many of the deep-seated flaws of the socio-economic system were not fully revealed to researchers at that time due to insufficient access to information. It seemed that most of the shortcomings of economic management in the country depended on subjective causes and could be eliminated with proper adjustment of the policy of the authorities. There was a hope for the existence and operation of national (nationwide) economic interests as the main factor in motivating people’s behavior.
In many of my developments, I and some other economists proceeded from the possibility, through rational transformations of economic structures and forms of economic management, of building such a system of economic interests of enterprises and associations that would correspond to the structure of the long-term needs of society. In our opinion, this should ensure a stable interest of economic entities in the best (most effective) satisfaction of the needs of society and, accordingly, generate and reproduce the economic responsibility of these subjects for the degree of satisfaction of the needs of society.
All this presupposed a high degree of democracy in society, transparency of entrepreneurial aspirations and actions of the authorities, and broad opportunities for public control. At the same time, the mechanism of market competition (competitiveness) in the behavior of economic entities oriented towards satisfying the needs of society was thought to be organically immanent in the entire system of economic relations.
From these prerequisites, the proposed solutions to ensure socially promising (strategic) approaches to the reproduction of the technological base of the economy, the creation of conditions for achieving the greatest growth in the final efficiency of the economy in the process of renewal of the production apparatus followed[19 - Kushlin V. I. The Production Apparatus of the Future: (Problems of Efficiency). Moscow, Mysl Publ., 1981.]. The implementation of such approaches was focused on the mechanisms of optimal economic distribution of resources according to aggregate development goals within the framework of economic units specializing in meeting the basic needs of society. For this purpose, it was proposed to use detailed new methods of block-modular renewal of the production apparatus, which assumed an organic connection between investments in the economy and the implementation of the most effective scientific and technological innovations[20 - Kushlin V. I. Intensification of the Renewal of the Production Apparatus. Moscow, Mysl Publ., 1986. Pp. 72—107, 156—182.].
All these, as well as many other tempting offers, were not realized, for which there are many reasons. First, it is necessary to admit that in the development of the proposals, hopes were unjustifiably high for the possibility of understanding at the level of the central economic management bodies the key interrelations of the optimal development of the country’s economy, which is tuned to meet the needs of society. Here we must admit the truth of Friedrich von Hayek’s accusation against economists who believed (as we did then) in the possibility of a planned socialist economy, when he observed that “socialists, victims of arrogance, want to know more than is possible.”
Secondly, the policy of our state at that time was fundamentally lacking purpose and energy. Collectivist-socialist driving forces were no longer brought into action by this state policy, as had been the case at certain stages earlier. And competitive entrepreneurial driving forces were not given the opportunity to emerge and express themselves. Ideological frameworks and regulatory frameworks severely limited and suppressed entrepreneurial initiatives.
There was a great inertia of the approaches that assumed the eternal priority of the development of the “first subdivision” of social production (the branches producing the means of production) over the “second subdivision” (the production of consumer goods and services). Ideas about the expediency of building chains of expanded reproduction based on the structure and dynamics of people’s ultimate needs were rejected from the outset. Consequently, the technical level and the scientific equipment of the industries directly working to improve the well-being of the people fundamentally lagged behind the branches serving the production of means of production. For example, in 1987, the ratio of R&D expenditures to manufactured marketable products in the USSR Ministry of Light Industry was less than 0.09% compared to 2.9% on average in the country’s machine-building complex.
In general, as of the end of the 1980s, the level of knowledge intensity in the main branches of material production in our country was noticeably lower than in the most developed countries of the world. According to available estimates, the average ratio of science intensity in the USSR and the USA was about 1 to 2 in civil engineering, 1 to 3 in chemical and metallurgical industries, and 1 to 5 in electric power industry. Although expenditures on science in the USSR and the United States were considered close as a share of national income (in 1987 they were 5.2 and 5.8 percent, respectively), the absolute amount of spending on science in the USSR was much less than in the United States. In 1987 they amounted to 32.8 billion rubles against $123.6 billion (1986) in the United States.
The Soviet Union of the 1980s and 1990s was exhausted by competition (complex competition) with a much more powerful rival in the face of the United States (plus the countries of Western Europe, Japan, etc.). Maintaining military parity with the West required concentrating most intellectual and economic resources on the development of the defense complex. The volume of defense R&D in the USSR was estimated to be 3:2[21 - The Path to the 21st Century: Strategic Problems and Prospects of the Russian Economy. Moscow, Ekonomika Publ., 1999. P. 348.] on average. Moreover, the defense research sector was characterized by large overhead costs, which absorbed a considerable part of the appropriations for science and innovation. It turned out that the scientific support of that sphere of the country’s economy, which, under the normal structure of the economy, in fact, should be the main space of the economic process of expanded reproduction, was prohibitively low.
Perestroika: Ideas vs. Realities
The period of 1985—1990 was a very difficult and contradictory time for the country’s economy. In a political sense, it set the pace for the turbulent changes that were overdue. The beginning of perestroika was tinged with the euphoria of the emancipation of society, and therefore the strategy of “accelerating the socio-economic development of the country” looked like a completely natural direction for that time. The course taken for the rise of machine-building, the acceleration of scientific and technological development and structural shifts aimed at intensifying production was logical in concept and, moreover, relied on the historical confidence of the ruling party, which was accustomed to achieving its goals. But, faced with the very first difficulties and contradictions of the turn from an extensive to an intensive type of management, which presupposes a qualitatively different level of economic mechanism and management, the country’s leadership began to glide on the path of improvised gliding on the surface, moving away from solving real problems towards populist tasks that are in full view of the media.
Inconsistency and superficiality in the formulation of the main goals of state policy had a particularly destructive effect. As early as 1986, almost immediately after the announced decisions to “accelerate scientific and technological progress” and the short-lived propaganda of this direction, another slogan appeared, focusing on “overcoming technocratic approaches” in socio-economic policy. Moreover, it was presented in such a way that it disavowed the value of the task of deploying technological progress and the transition to qualitatively new technologies. At the same time, the idea of a “social reorientation of the economy” and its subordination to the “human factor” began to be intensively promoted. This formulation, which was justified in principle and even belated in many respects, was then taken to a primitive extreme, which blurred the previously initiated actions to reorient investment policy in the direction of technological progress.
An insidious role was played by the idea of regional self-financing, which gained special favor in the Soviet Baltic republics. It was used to show the supposedly significant driving forces of economic development that are revealed in the event of the separation of regions (republics) from the center that binds them into an independent circuit. To this end, the launched information about “injustices” in the macroeconomic exchange between the Russian Federation and the Baltic republics was actively circulated. The problem of “exploitation by the Russian Federation” was especially persistently raised in some circles in Estonia. None of the official statistics based on input-output balances, which testify to other (contrary to the emotional conclusions of local politicians) ratios of imports and exports between Russia and Estonia (other republics) were considered. Such sentiments have spread in a few other Union and autonomous republics. They contributed in no small measure to the collapse of the USSR as an integral state and as an economic complex.
Significant and far-reaching damage was caused by the ill-conceived advancement of the tasks of a universal turn in politics to “universal values.” This turn, seemingly logical in its essence, was again brought to the point of absurdity and eventually turned our own fundamental goals into tasks secondary to certain global values inherent in an abstract “civilized” community.
Many researchers, including the author of these lines, wrote about the mistakes and dangers of such a course at the time, but this was not perceived by the political elite. As an example, let us cite our statements on the situation and economic policy in the country, published in June 1991.
Based on the analysis of the dynamics of the main socio-economic indicators, we then tried to identify the “stage” causes that led to the escalation of the crisis in the economy. One of these reasons is related to the structurally unadjusted investment boom of 1986, when there was a sharp increase in capital investment in the national economy as a whole and in industrial facilities, especially in mechanical engineering. This boom turned out to be purely extensive, even though a policy was proclaimed for the use of qualitative factors of growth and for the effective acceleration of scientific and technological progress. Such a significant drawback of investment policy was later supplemented by the disproportion caused by an ill-conceived anti-alcohol campaign, as well as populist interpretations of the policy of social reorientation of the national economy and “overcoming technocratic approaches” in the economy. This, on the one hand, served to further deaden production investments in the unfinished construction of facilities of the technological level the day before yesterday, and on the other hand, prepared the conditions for a serious imbalance of supply and demand in the consumer market due to a sharp decline in the receipt of consumer goods (-10 billion rubles), accompanied by an increase (uncovered by resources) of cash income in the investment sector.
Another concentration of imbalances was 1988, when the growth of monetary incomes of the population increased by 2.5 times, and the output of consumer goods by 6.4%, but if we do not consider alcoholic beverages, then only by 5%. The state budget deficit reached a record level (81 billion rubles), having increased by 5.8 times compared to 1985. In 1988, there were high absolute increases in GNP (50 billion rubles against 26 billion rubles in 1987) and produced national income (31 against 12 billion). But there were no adequate increases in the physical quantities of the product behind this.
The dynamics of production in physical terms for the most important items of the nomenclature of industrial products considered in monthly reporting (158 items) is characteristic. If in 1986 there was a steady growth, and in 1987 a decrease in output affected a part of the products, mainly mechanical engineering, then in 1988 there was a decline in the production of every fifth type of product, and in 1989 – almost half of its most important types. The year 1988 was a springboard of inflation and economic anarchism, which was caused by unsuccessful laws on enterprise and cooperation, and the ill-considered breakdown of the old state structures. A huge destructive impact was exerted by the rapid removal of the previously existing distinction between cash and non-cash money turnover. All this has created space for the egoistic aspirations of the leaders of enterprises and cooperatives, the speculative elements, who are the most dexterous in redistributive actions.
In 1990—1991, the logic of events, prompted by the pressure of the concepts of economic romanticism and populism, led to a state of the national economy that can be characterized as close to collapse. In 1990, there was an abrupt shift from a positive to a negative trajectory in the production of GNP and national income. The imbalance of economic relations of almost all enterprises has exceeded the critically permissible level. The economic efficiency of the development of the material and technical base of the national economy has become not just declining, but negative.
One of the serious reasons for all this is the tendency towards the destruction of statehood. The economic reality that took shape in 1989—1991 became a synthesis of the worst features inherent in both the centralized model of management (its cumbersomeness, multiplied by the elimination of almost all incentives for power coercion) and the market mode of interaction (atomism, which develops into anarchy, the barter-speculative nature of relations, and the monopoly of the seller in relation to the buyer).[22 - Kushlin V. The State in the Economy: Yesterday, Today, Tomorrow // Planned Economy. 1991. No. 6. Pp. 5—6.]
The author of the article mentioned in the footnote noted that the contradictions that became the subject of the analysis stemmed from the fact that “the main landmarks of reforms were the forms, not the content, of economic development. The objective criterion of progress, which is limited to the dynamics of the productive forces of society and the satisfaction of the material and spiritual needs of the population, has been lost.”
Exploring Alternative Paths of Transformation
The Soviet Union and its national economic complex collapsed (if we single out purely economic reasons for this) precisely because of the loss of sources for the sustainable implementation of the process of expanded reproduction of its economy. Extensive sources of reproduction were exhausted, and intensive factors could not be used because they were concentrated in the “non-economic” defense sector of the economy.
There is no doubt that the economies of Russia and other countries of the former USSR were to undergo radical transformations. What kind of transformations would be optimal?
At that time, the most active part of the initiators of the transformations had no doubts that it was necessary to quickly form a market-type economy, the prototype of which was the economic models of the most developed Western countries. At the same time, theoretical positions that were based on the belief in the possibility of socialist principles of economic management, if they could be implemented in some form “cleansed” of the negativity of Soviet practice, also remained widespread. They, however, were “on the defensive” and increasingly retreated under the pressure of the radical market direction of reforms. It must be admitted that the direction of reforms towards the development of market relations was absolutely justified in principle. But this does not mean that there was no alternative to the specific paths of reform chosen.
Today, from the standpoint of the experience gained on the path of contradictory market transformations, it is becoming more and more obvious that ideological approaches are an extremely unreliable background for the choice of state decisions. The old communist ideology was a brake on effective entrepreneurial behavior in the economy, and, therefore, a brake on ensuring the country’s highly competitive position. But then a new ideology rose to the Olympus – the primacy of market individualism, and it proved to be intolerant of other approaches and aggressive. With unusual peremptoriness, decisions and proposals that did not correspond to the new ideology were labeled as “non-progressive”, “non-market”, and “conservative”, which was enough to remove them from consideration without delving into the content from the point of view of economic performance.
Was it then possible to carry out effective transformations without completely rejecting the signs of socialism, but, on the contrary, deriving certain advantages from them? It is hardly possible to answer this question today. Reasoning in the style of the subjunctive mood is always insidious. But it would also be a mistake to abandon any analysis of possible variants of socio-economic systems with components of relations of the socialist type.
Socialist and communist principles, which have been greatly discredited by the practice of the USSR, cannot simply be destroyed by some other ideology as fundamental values that attract many people. There is no reason to believe that they will not be in demand again and again by humanity in some respects in the future. Nikolai Berdyaev, one of the first and most profound critics of the model of socialism that developed in Russia after the October Revolution, remarked that “the movement towards socialism, understood in a broad, non-doctrinaire sense, is a world phenomenon” and that “it is not for the defenders of capitalism to denounce the falsehood of communism.”[23 - Berdyaev N. A. The Origins and Meaning of Russian Communism. Moscow, Nauka Publ., 1990. Pp. 126, 150.] It is no coincidence that many ideas and principles of communism coincide with the universally recognized principles of decent human behavior, which are enshrined in the dogmas of the world’s major religions.
The recent deterioration of relations between the countries of the world in claims to limited natural resources and the inevitable disillusionment with the models of absolute individualism on which Western prosperity was nurtured, has brought many thinkers back to the values of collectivism. An additional argument is the steady dynamism of economic development in China, a country where socialist principles continue to color the entire system of social relations while at the same time actively spreading creative market mechanisms.
Unambiguous answers to the question of which model of economic and political system will be acceptable to the entire world community can hardly be found now. But the fact that this model will not be purely capitalist in the Western version in the foreseeable future is already recognized as true by objectively thinking researchers. The search for answers in terms of combining the motivations of market individualism and socialist collectivism will inevitably continue.
Chapter 4. Radical Reforms: Concepts, Consequences, Challenges
The idea of radical reforms, which set the tone for the transformation of the economic system in Russia, was the result of a collective awareness of the need to give our economy and society a new dynamism. It seemed that these transformations would create a scope for economic progress that would provide benefits for all. It is this national economic interest that became the driving force and justification for the initiation of radical economic and political reforms. And it was in anticipation of improvements for all that society embraced the ideas of transforming the country.
The reforms were aimed at rapid systemic transformations that were supposed to change the entire structure of motivations, increasing the interest of enterprises, savers, banks, and managers in entrepreneurial strategies leading to high efficiency and income growth for all. But, if we recognize this as the starting point of the public choice made, then the assessment of the results of the reform plans should be carried out with the expectation of adequate socio-economic criteria.
A Bold Start: The Early Phases of Reform
It is believed that market economic reforms in Russia began to unfold at the end of 1991, when a team of young, educated, and radically transformative ministers was assembled in the government under the patronage of President Boris Yeltsin. As early as January 1992, bold measures were taken on the so-called shock therapy method. Control over prices was lifted, channels for the implementation of foreign economic relations on an entrepreneurial basis were wide open, a policy of all-round denationalization of the economy and privatization of state-owned objects was announced, etc. Almost at the same time, the existing money overhang in the retail market was removed, shortages of goods and queues in stores were eliminated, and the shelves were filled with imported goods that were previously unavailable for free sale.
At the same time, it was found that the prices of goods and services rose abruptly, at a rate that was many times higher than the rate of increase in production. Wholesale prices for cement, for example, in January 1992 increased by 6 times compared to December 1991, and by 8.4 times by January. Daily output was 99% by December and only 89% by January 1991. The shortage of goods was eliminated by a sharp decrease in the effective demand of the general population and enterprises.
The reversal of the events of the reforms of 1992 and subsequent years has been sufficiently described in the literature. The courage of the young reformers at that time was based on the desire to get rid of the shackles of the stagnant past as soon as possible and was fueled by the conviction that it was the radical version of economic liberalization that would lead to the rapid emergence of a workable market economy with automatic advantages over the Soviet economy. The realities, as we know, turned out to be much more complex than desires and hopes.
Measuring Success: Two Dimensions of Reform
The results of the reform efforts can be assessed in two main ways. The first is the final economic and social results recorded by statistics and felt by the population. These results are determined by the scale and rate of growth of the social product and shifts in the standard of living of the people. The second section is the institutional changes that mark the formation of a new economic system.
It is the second aspect that has been brought to the forefront of public attention during the first very long stage of reforms. The denationalization of the economy, privatization, and the expansion of all kinds of entrepreneurial principles were conceived as the most important directions for the formation of a new structure of institutions and a new economic climate. And quite soon in this respect it was possible to note many remarkable processes in the economy that strongly influenced the structure of economic interests:
1. Shifts in the structure of ownership, the multiplicity of interacting economic structures.
The multi-structuring of the economy has become a reality. It is known that the economic structure is a certain type of production relations that encompass a significant part of the economy and is capable of relatively independent reproduction. At the heart of every economic structure is first a certain type of property. After 1995, more than 70% of Russia’s GDP began to be created in the non-state sector. In 1994 this share was 62% and in 1993 – 52%. Especially characteristic were the changes in the structure of retail trade turnover by form of ownership. In 1991, 33% of Russia’s total retail trade turnover was sold through non-state forms, while in 1992 it was 59%, in 1993 it was 77%, in 1994 it was 85%, in 1995 it was 87% and in 1996 it was 91%.
2. A new influence of demand on the economy, turning it into a real structure-forming factor.
3. Openness to the outside world of the Russian economy as a whole and all its economic entities, ensuring integration into globalization trends.
