Industrial Policy of Russia and the Problems of Industrialism - Serguei Kara-Murza.
Serguei Kara-Murza.
From book: Industrial Policy of Russia and the Problems of Industrialism. Moscow: "AO ICC RIA", 1994. 250 p. / Composed by S.G.Kara-Murza; Editors I.O.Shurchkov, D.I.Piskunov.
INTRODUCTION
Industrial policy aims, within the scope of restrictions existing in a given society, to optimize the interaction of the technosphere both with the social sector and the environment. This serves as the basis for specific tasks: how industry should be organized, where it should be located, the technological renewal period and changes in the production structure, etc. These are standard system tasks. As always, the quality of their solution is determined by the right choice of criteria, an understanding of actual restrictions and a creative approach to the formation of alternatives. This methodology seems to lie on the surface - however, why are we now witnessing grave mistakes and crises, why is there a foreboding of an impending wave of technological catastrophes and a philosopher-predicted onset of a century of technological terrorism?
Basic errors in the understanding of existing restrictions and formulation of the criteria for optimization can be attributed to the fact that industry is a most complicated system, where the natural, social and technological intertwine. Each has its own genesis and development logic, each is seen through the prism of a specific culture. Contradictory ideals and interests, masked by an ideology and some prejudices lie behind each concept of industrial policy. It is only at the critical, turning-points of history, when successive "failures" occur in the entire system of concepts and the entire system of coordinates breaks down, that whole social groups try to get to the root of the problems and ask themselves fundamental questions. The course of reasoning is sometimes quite unusual, but can trigger a process leading us to a new level of understanding and opening the corridor for a way out of the crisis.
The profound crisis in Russia is a part of the general crisis of industrialism. Industrialism can be regarded as the meta-ideology of the West in the New Times, that is, modern western civilization, which rose from the ruins of the traditional medieval society as a result of a chain reaction of varying revolutions (the scientific revolution and Reformation, the industrial revolution and a series of political revolutions) that swept Europe and its cultural areas. Industrialism is based on fundamental philosophical ideas and may incorporate conflicting ideas and ideologies of the lowest order
The present crisis of industrialism is linked, first and foremost, with a sensation (and in some cases an understanding) of the limited character of some key and seemingly absolute ideas at the origin of industrial civilization. These reflect the identity crisis, the insoluble clash of man's perceptions about himself and his picture of the world with the new empirical reality. Man has become aware of a whole series of such contradictions, which cannot in principle be resolved in the foreseeable future within the framework of the structures of industrial civilization. The whole of the civilization project has found itself at a crossroads, and consequently politics in all its aspects. And industrial policy in the first place.
Basic errors in the understanding of existing restrictions and formulation of the criteria for optimization can be attributed to the fact that industry is a most complicated system, where the natural, social and technological intertwine. Each has its own genesis and development logic, each is seen through the prism of a specific culture. Contradictory ideals and interests, masked by an ideology and some prejudices lie behind each concept of industrial policy. It is only at the critical, turning-points of history, when successive "failures" occur in the entire system of concepts and the entire system of coordinates breaks down, that whole social groups try to get to the root of the problems and ask themselves fundamental questions. The course of reasoning is sometimes quite unusual, but can trigger a process leading us to a new level of understanding and opening the corridor for a way out of the crisis.
The profound crisis in Russia is a part of the general crisis of industrialism. Industrialism can be regarded as the meta-ideology of the West in the New Times, that is, modern western civilization, which rose from the ruins of the traditional medieval society as a result of a chain reaction of varying revolutions (the scientific revolution and Reformation, the industrial revolution and a series of political revolutions) that swept Europe and its cultural areas. Industrialism is based on fundamental philosophical ideas and may incorporate conflicting ideas and ideologies of the lowest order
The present crisis of industrialism is linked, first and foremost, with a sensation (and in some cases an understanding) of the limited character of some key and seemingly absolute ideas at the origin of industrial civilization. These reflect the identity crisis, the insoluble clash of man's perceptions about himself and his picture of the world with the new empirical reality. Man has become aware of a whole series of such contradictions, which cannot in principle be resolved in the foreseeable future within the framework of the structures of industrial civilization. The whole of the civilization project has found itself at a crossroads, and consequently politics in all its aspects. And industrial policy in the first place.
What is behind the anthropological pessimism caused by the increased threat of the "greenhouse effect", for example? Behind is the fact that, despite the idea of the infiniteness of the universe embedded in culture, a natural barrier has suddenly emerged before man depriving him of the freedom of expansion - and consequently, calling into doubt the idea of unlimited progress and constant expansion of reproduction. Any revisionism of the category of freedom and idea of progress implies a radical restructuring of the very foundations of industrialism. This is a hard decision to take, and political leaders prefer to take palliative measures
However, this path only complicates matters, as these measures are bound to explode the ethical structures of industrialism. The most simple solution (and technologically quite accessible choice for the First World) is to prevent any increase in atmospheric discharges of CO2* by Third World countries. In other words, to freeze development of industry and transport, and in general the growth of energy consumption - prevent their development. However, this would mean abandoning the ideas of humanism and democracy, inscribed on the banner of industrialism.
The crisis of industrialism has manifested itself with particularly destructive force in Russia because of its cultural specifics. For in cultural terms Russia was always a chimera - part of the West, but not the West; a Christian world, yet not modern, but a traditional society; a traditional society, but not the East. As a result the key ideas of Western civilization were grafted onto a different world outlook and bore at times exquisite, but anomalous, hypertrophied fruits. If the idea of progress was accepted, it tended to assume a religious, rather than quasi-religious meaning.
This became particularly manifest during the Soviet period, in the modernization project accomplished under the ideological cover of Marxism. Nikolai Berdyayev wrote in Paris: "The originality of Soviet communist Russia is provided by the spiritual phenomenon inherent in technical buildings. Here we see something truly unprecedented: a new spiritual phenomenon. And an eerie impression is produced by its eschatology, the reverse eschatology of the Christian... Christian eschatology links the transformation of the universe and Earth with the actions of the Divine Spirit. The eschatology of technology waits for the attainment of a definitive mastery over the universe and the Earth, definitive rule over them via technical instruments."
Russia's experience today is also exceptionally eloquent, because the support structures of society are being destroyed in the social and cultural spheres. During the brief moment of the rupture, the fracture reveals what has been concealed in a calm period. We are witnessing today in the industry of Russia and other countries of the former USSR an experiment of colossal dimensions. Study and systematization of the observations of Russian engineers, industrialists, administrators and workers, provides invaluable knowledge about today's technosphere, ailments, death and rebirth, new dangers lurking within, its links with politics, culture, social psychology and even ethnogenesis - the dynamics of the formation, change, decline and disappearance of peoples. This knowledge may become the possession of mankind or may be lost without attracting the attention of the ideologically blinkered Western intellectual. Whereas in collecting this material, we are doing our duty as engineers.
Of course, industrial policy in Russia today has its own special interest, as social consciousness is transfixed by the absolutely idealized picture of "world civilization", which we supposedly need to "return" to in order to extricate ourselves from the crisis. When society is at a cross-roads and is trying to determine its development model, politicians inspired by Eurocentrism assert that the answer has been discovered by industrial Europe. Their slogan: "Follow the West - this is the best of all worlds." This was the case in Peter the Great's program of civilization and during the period of Stalinist industrialization. This approach is also being used today during modernization under the banner of liberalism. Here is the credo expressed by one of the ideologues of perestroika, L. Batkin: "The West at the end of the 20th century is not a geographical notion or even a notion of capitalism (although genetically, of course, it is associated precisely with this idea). It is a universal definition of the economic, scientific, technological, structural and democratic level, without which the existence of any genuinely modern, cleansed-of-things-archaic society is unthinkable."
However, past experience suggests that we should pay attention to the warning of the outstanding anthropologist Levi-Strauss: "...It is hard to imagine that one civilization could adopt that of another without sacrificing its very self. In practice attempts to engineer such a transformation can only have two results: either the disorganization and collapse of one system - or an original synthesis leading to the emergence of a third system, not reducible to the two others" [51, p. 335].
However, this path only complicates matters, as these measures are bound to explode the ethical structures of industrialism. The most simple solution (and technologically quite accessible choice for the First World) is to prevent any increase in atmospheric discharges of CO2* by Third World countries. In other words, to freeze development of industry and transport, and in general the growth of energy consumption - prevent their development. However, this would mean abandoning the ideas of humanism and democracy, inscribed on the banner of industrialism.
The crisis of industrialism has manifested itself with particularly destructive force in Russia because of its cultural specifics. For in cultural terms Russia was always a chimera - part of the West, but not the West; a Christian world, yet not modern, but a traditional society; a traditional society, but not the East. As a result the key ideas of Western civilization were grafted onto a different world outlook and bore at times exquisite, but anomalous, hypertrophied fruits. If the idea of progress was accepted, it tended to assume a religious, rather than quasi-religious meaning.
This became particularly manifest during the Soviet period, in the modernization project accomplished under the ideological cover of Marxism. Nikolai Berdyayev wrote in Paris: "The originality of Soviet communist Russia is provided by the spiritual phenomenon inherent in technical buildings. Here we see something truly unprecedented: a new spiritual phenomenon. And an eerie impression is produced by its eschatology, the reverse eschatology of the Christian... Christian eschatology links the transformation of the universe and Earth with the actions of the Divine Spirit. The eschatology of technology waits for the attainment of a definitive mastery over the universe and the Earth, definitive rule over them via technical instruments."
Russia's experience today is also exceptionally eloquent, because the support structures of society are being destroyed in the social and cultural spheres. During the brief moment of the rupture, the fracture reveals what has been concealed in a calm period. We are witnessing today in the industry of Russia and other countries of the former USSR an experiment of colossal dimensions. Study and systematization of the observations of Russian engineers, industrialists, administrators and workers, provides invaluable knowledge about today's technosphere, ailments, death and rebirth, new dangers lurking within, its links with politics, culture, social psychology and even ethnogenesis - the dynamics of the formation, change, decline and disappearance of peoples. This knowledge may become the possession of mankind or may be lost without attracting the attention of the ideologically blinkered Western intellectual. Whereas in collecting this material, we are doing our duty as engineers.
Of course, industrial policy in Russia today has its own special interest, as social consciousness is transfixed by the absolutely idealized picture of "world civilization", which we supposedly need to "return" to in order to extricate ourselves from the crisis. When society is at a cross-roads and is trying to determine its development model, politicians inspired by Eurocentrism assert that the answer has been discovered by industrial Europe. Their slogan: "Follow the West - this is the best of all worlds." This was the case in Peter the Great's program of civilization and during the period of Stalinist industrialization. This approach is also being used today during modernization under the banner of liberalism. Here is the credo expressed by one of the ideologues of perestroika, L. Batkin: "The West at the end of the 20th century is not a geographical notion or even a notion of capitalism (although genetically, of course, it is associated precisely with this idea). It is a universal definition of the economic, scientific, technological, structural and democratic level, without which the existence of any genuinely modern, cleansed-of-things-archaic society is unthinkable."
However, past experience suggests that we should pay attention to the warning of the outstanding anthropologist Levi-Strauss: "...It is hard to imagine that one civilization could adopt that of another without sacrificing its very self. In practice attempts to engineer such a transformation can only have two results: either the disorganization and collapse of one system - or an original synthesis leading to the emergence of a third system, not reducible to the two others" [51, p. 335].
We have witnessed such a synthesis in Japan. We were also moving to this end in Russia (USSR), but the sharp radicalization of the project engendered the disorganization and collapse Levi-Strauss wrote about.
This book systematizes for the first time data on the evolution of the technosphere in Russia (and the concomitant sphere of scientific and technological activities) during perestroika and liberal political and economic reform. However, this empirical evidence will assume elements of scientific knowledge, if we at least schematically delineate the invisible part of the iceberg of industrial policy - recall initial postulates, the roots of industrial civilization and the "sharp corners", which any traditional society feels as it assimilates these postulates during accelerated modernization.
CONCLUSION
Six years of perestroika and two years of radical economic reform have passed, enough time to allow our analysis of the economic situation to be based on statistics gathered over a fairly long period. The main tendencies have become quite clear and the decisions taken in industrial policy can be evaluated pragmatically, that is without the ideological arguments that used to stand in the way of rational discussion of the reform options. The state of Russia's life-support systems has deteriorated to such an extent that it is criminal to try to gain political advantage from it.
What are the causes and dynamics of the acute crisis in industry? We must return to those because any stabilization or even any measures to halt the landslide decline in industrial output are impossible if we fail to understand its real causes. We should recall the conditions under which reform was launched in industry and some of the objective features of Russian industry, which predetermined its "response" to reform.
It should be recalled that the entire Soviet industry was a giant enterprise that was managed by non-market or quasi market methods and that the domestic prices of industrial goods differed greatly from the world prices, sometimes by as much as 1,000 times.
One should bear in mind the specific location of industrial enterprises within the territory of the USSR and the high level of their specialization which meant one or two major plants were often unchallenged monopolies in their sectors.
The economy was overburdened with enterprises whose functioning was not regulated by any economic laws (the defense sector), but which were closely intertwined with the rest of the economy.
The Soviet Union was a multi-ethnic country and its industrial development differed greatly from region to region.
Soviet industry was at the final stage of the "second phase" of industrialization and was in need of a restructuring and large-scale modernization of its basic assets. The Soviet economy entered that phase - one similar to the industrialization in the West in the thirties - not in a crisis but certainly in a state of stagnation and that enabled the Soviet leaders to choose mild restructuring models.
All these conditions placed obvious and harsh restrictions on the reform effort:
1. Soviet reformers could not allow for a moment's pause in the information and control system until an effective alternative market-based information system could be created.
2. Investments had to be routed to the defense sector for its restructuring and conversion, a conversion which became possible after the Soviet Union achieved and effectively demonstrated its military parity with the West.
3. It was necessary to decide which system-forming enterprises, especially monopolies, could not be allowed to switch to free market principles until after the creation of a stand-by market-based system
4. Political, economic and cultural resources had to be mobilized to hold the state and its economy together. 5. A "social peace" agreement was to be concluded for the most critical period of the reform, pledging its signatories to refrain from any action that might destabilize society and provoke conflict.
As we all remember, by all their actions taken in 1985-1991 the political leadership demonstrated their disregard for those restrictions and that inevitably led to a system crisis. The main goal of the entire ideological program of perestroika was to break down the "administrative-command system" and eventually the information and control system of the economy was destroyed under various political pretexts. The end of planned control over the price and income dynamics immediately destabilized the financial system and provoked inflation, and the elimination of the state monopoly on foreign trade before the domestic prices had leveled out with world prices encouraged the rapacious export of natural resources and other products and the creation of an influential compradore lobby in the political power structures.
At the same time, all sorts of antagonisms and conflicts, especially ethnic ones, were excited with the aim of undermining the "Soviet empire". It was a historical paradox that the central government encouraged separatism and nationalist and extremist movements in the regions and regularly strengthened their positions by ideological campaigns: witness the ballyhoo about the "Ribbentrop-Molotov Pact" and its "awkward" actions in Tbilisi, Baku and Vilnius. Whatever we may think about the intentions of the authors of this program, there is no doubt that it planted a powerful mine under the economy.
To strengthen their positions against the background of growing instability the ideologists of perestroika in 1989 resorted to a populist ploy: they declared that they intended to build "an economy with a human face" and permitted an unjustified increase in people's incomes by taking money out of the basic industries. The period of 1988-1991 saw a major let-up in the modernization of the basic assets in the power engineering, metallurgical, machine-building and chemical sectors (see Figure 1). Not backed up with even a minimum of the required funds, the conversion of the defense sector became an ideological action, designed to conceal the break-down of the most technologically developed sector of the economy.
Figure 1. Putting into operation of basic funds of industry in the Russian Federation (in % of the existing).
What are the causes and dynamics of the acute crisis in industry? We must return to those because any stabilization or even any measures to halt the landslide decline in industrial output are impossible if we fail to understand its real causes. We should recall the conditions under which reform was launched in industry and some of the objective features of Russian industry, which predetermined its "response" to reform.
It should be recalled that the entire Soviet industry was a giant enterprise that was managed by non-market or quasi market methods and that the domestic prices of industrial goods differed greatly from the world prices, sometimes by as much as 1,000 times.
One should bear in mind the specific location of industrial enterprises within the territory of the USSR and the high level of their specialization which meant one or two major plants were often unchallenged monopolies in their sectors.
The economy was overburdened with enterprises whose functioning was not regulated by any economic laws (the defense sector), but which were closely intertwined with the rest of the economy.
The Soviet Union was a multi-ethnic country and its industrial development differed greatly from region to region.
Soviet industry was at the final stage of the "second phase" of industrialization and was in need of a restructuring and large-scale modernization of its basic assets. The Soviet economy entered that phase - one similar to the industrialization in the West in the thirties - not in a crisis but certainly in a state of stagnation and that enabled the Soviet leaders to choose mild restructuring models.
All these conditions placed obvious and harsh restrictions on the reform effort:
1. Soviet reformers could not allow for a moment's pause in the information and control system until an effective alternative market-based information system could be created.
2. Investments had to be routed to the defense sector for its restructuring and conversion, a conversion which became possible after the Soviet Union achieved and effectively demonstrated its military parity with the West.
3. It was necessary to decide which system-forming enterprises, especially monopolies, could not be allowed to switch to free market principles until after the creation of a stand-by market-based system
4. Political, economic and cultural resources had to be mobilized to hold the state and its economy together. 5. A "social peace" agreement was to be concluded for the most critical period of the reform, pledging its signatories to refrain from any action that might destabilize society and provoke conflict.
As we all remember, by all their actions taken in 1985-1991 the political leadership demonstrated their disregard for those restrictions and that inevitably led to a system crisis. The main goal of the entire ideological program of perestroika was to break down the "administrative-command system" and eventually the information and control system of the economy was destroyed under various political pretexts. The end of planned control over the price and income dynamics immediately destabilized the financial system and provoked inflation, and the elimination of the state monopoly on foreign trade before the domestic prices had leveled out with world prices encouraged the rapacious export of natural resources and other products and the creation of an influential compradore lobby in the political power structures.
At the same time, all sorts of antagonisms and conflicts, especially ethnic ones, were excited with the aim of undermining the "Soviet empire". It was a historical paradox that the central government encouraged separatism and nationalist and extremist movements in the regions and regularly strengthened their positions by ideological campaigns: witness the ballyhoo about the "Ribbentrop-Molotov Pact" and its "awkward" actions in Tbilisi, Baku and Vilnius. Whatever we may think about the intentions of the authors of this program, there is no doubt that it planted a powerful mine under the economy.
To strengthen their positions against the background of growing instability the ideologists of perestroika in 1989 resorted to a populist ploy: they declared that they intended to build "an economy with a human face" and permitted an unjustified increase in people's incomes by taking money out of the basic industries. The period of 1988-1991 saw a major let-up in the modernization of the basic assets in the power engineering, metallurgical, machine-building and chemical sectors (see Figure 1). Not backed up with even a minimum of the required funds, the conversion of the defense sector became an ideological action, designed to conceal the break-down of the most technologically developed sector of the economy.
Figure 1. Putting into operation of basic funds of industry in the Russian Federation (in % of the existing).
In the meantime, the press and television conducted a campaign encouraging a further split of Soviet society.
The aim of the perestroika plan was achieved: the "evil empire" with all its flaws collapsed. However, the structures that supported the economy collapsed too. All that was left to Russia was a crippled economy deprived of many vital components and marked by severely weakened internal ties. It no longer had its traditional foreign partners like COMECON, and tensions were growing in an already split society.
Russia had to continue the reform, but the situation in the country at that time was far worse than it had been in 1985. The crisis of the system had already begun and in late 1991 Russia was confronted with the choice of a reform model. What influenced that choice?
1. Academic circles and intellectuals in general, along with the party and government apparatchiks who assumed key positions of power during the years of perestroika, advocated liberalism and wanted Russia to switch to Western-style capitalism ("return to world civilization"). It was a period of neo-liberal Western-oriented utopism, which caught the imagination of many intellectuals and bureaucrats in major Russian cities. The advocates of alternative reform models had no opportunity to air their views in public. Thus, the choice of the reform model in Russia was virtually made by the small group of intellectuals who initiated perestroika.
2. It was believed that the major geopolitical and military concessions made to the West under Gorbachev would be rewarded by financial assistance, which the West promised to give Russia if she adopted a certain reform plan (the so-called "stabilization program" of the IMF). The leadership of the Foreign Ministry did everything to bolster these hopes and the governments of the former socialist countries had already adopted that program and were sending encouraging signals to the Russian leaders.
As a result, Russia received a government made up of specialists who shared the principles of Western neo-liberalism and advocated the theories of the Chicago School of Economics. Jeffrey Sachs, one of the more radical representatives of that school, was invited to Russia as an advisor.
The IMF program provides for a series of restrictive monetarist measures:
- reducing state interference in the economy and even the complete privatization of the public sector, ending or sharply reducing government subsidies and budget expenditures on education, health care and social programs and a deficit-free budget;
- encouraging in every possible way private enterprise and foreign investment and granting all sorts of benefits to foreign investors;
- implementing the policy of "real exchange rates", which requires a constant reduction of the exchange rate of the national currency against the major Western currencies "in order to encourage exports".
The adoption of that program was a decision of paramount importance. However, it was taken in a great hurry, without even any debate among the specialists. It was taken despite the fact that it was known that a CIA report (1991) warned about the grave consequences of such a decision and that similar warnings had been made by a group of prominent Western figures (Action Committee for International Co-operation): Pierre Trudeau, Valery Giscard d'Estaing, Miguel de la Madrid and Helmut Schmidt. They warned that the implementation of the IMF shock-therapy policy would have disastrous consequences. A number of major studies by American and European specialists about the negative results of the use of the IMF methods in a great number of African and Latin American countries were also well known. By that time the "White Paper" had been published in Britain about the long-term negative consequences of the monetarist reform implemented by Margaret Thatcher and the results of the implementation of this program in Poland and Yugoslavia during two years had been summed up and analyzed.
Despite vast financial aid from the West, Poland had barely survived the shock-therapy: it lost a considerable part of its industrial potential and its agriculture was seriously undermined.
Yugoslavia was experiencing a grave crisis and the escalation of its civil war. That country was a shining example of the application of the IMF scheme to the entire economy of a multi-ethnic country with a considerable defense sector. It illustrated the uneven distribution of the crisis in different ethnic regions and, as an inevitable result, the rise in separatism. Czechoslovakia adopted a more sparing model and it resulted in a peaceful break-up of the country.
In Hungary, the privatization of the more advanced enterprises by Western investors led, even despite contracts with effective guarantees, to the closure of many competitive production facilities rather than an inflow of new technology.
The potential risks involved in the adoption of the IMF scheme were well known: when efforts to quickly stabilize the situation fail, credits become an additional burden on the sinking economy and the conditions set by the IMF turn the economy of the donor country into an economic space filled with enterprises dependent on creditors
At the present time foreign debt payments account for 30-40 per cent of the budget expenditures of Third World countries. Whenever their debts are re-drafted, the governments of the debtor countries assume the obligation to repay the foreign debts of private enterprises. The debtor countries are also required to capitalize their foreign debt, that is convert their debt obligations into shares or exchange them for shares
It is clear that Russia took a big risk, but the choice was made. The West did not take long to make Russia realize that it would not receive any financial aid to cushion the economic shock and the Russian leaders had no time to create any mechanisms to prevent the flowing off of capital from the country.
How did the Russian social and economic system respond to shock therapy? Its reaction to the IMF scheme was "not right", as the IMF experts soon had to acknowledge. The shock therapy and market competition it created failed to bring about economic recovery, solve the problem of surplus labor, cause the loss-making enterprises to wither away or bring about structural changes. It increased economic degradation and this process was especially rapid in the more "market-oriented" sectors, such as the food and light industries.
To prevent economic and social catastrophe the Russian government had to continue to subsidize enterprises and preserve a deficit budget. Curtailment of social programs reached a critical point; people lost practically all their savings and the rise in prices and taxes reduced the consumption level of the vast majority of the population to a subsistence minimum. No other country ever had to make such sacrifices; sacrifices which failed to produce the desired result. The money expropriated from the population did not turn into investment and never reached the state vaults. A lot of it was taken out of the country and deposited in foreign banks. The sacrifice made by society was useless. However, no major changes were made in the reform model. On the contrary, the radical political circles forced the government to accelerate the monetarist reforms.
In what state are the Russian economy and society today? Judging by the major economic indicators, the decline of production in many basic industries has assumed disastrous proportions and there is no evidence of general economic stabilization (see Figure 2). True, production has stabilized in a number of sectors, but this stabilization remains at a very low level and may soon be followed by a new decline.
The aim of the perestroika plan was achieved: the "evil empire" with all its flaws collapsed. However, the structures that supported the economy collapsed too. All that was left to Russia was a crippled economy deprived of many vital components and marked by severely weakened internal ties. It no longer had its traditional foreign partners like COMECON, and tensions were growing in an already split society.
Russia had to continue the reform, but the situation in the country at that time was far worse than it had been in 1985. The crisis of the system had already begun and in late 1991 Russia was confronted with the choice of a reform model. What influenced that choice?
1. Academic circles and intellectuals in general, along with the party and government apparatchiks who assumed key positions of power during the years of perestroika, advocated liberalism and wanted Russia to switch to Western-style capitalism ("return to world civilization"). It was a period of neo-liberal Western-oriented utopism, which caught the imagination of many intellectuals and bureaucrats in major Russian cities. The advocates of alternative reform models had no opportunity to air their views in public. Thus, the choice of the reform model in Russia was virtually made by the small group of intellectuals who initiated perestroika.
2. It was believed that the major geopolitical and military concessions made to the West under Gorbachev would be rewarded by financial assistance, which the West promised to give Russia if she adopted a certain reform plan (the so-called "stabilization program" of the IMF). The leadership of the Foreign Ministry did everything to bolster these hopes and the governments of the former socialist countries had already adopted that program and were sending encouraging signals to the Russian leaders.
As a result, Russia received a government made up of specialists who shared the principles of Western neo-liberalism and advocated the theories of the Chicago School of Economics. Jeffrey Sachs, one of the more radical representatives of that school, was invited to Russia as an advisor.
The IMF program provides for a series of restrictive monetarist measures:
- reducing state interference in the economy and even the complete privatization of the public sector, ending or sharply reducing government subsidies and budget expenditures on education, health care and social programs and a deficit-free budget;
- encouraging in every possible way private enterprise and foreign investment and granting all sorts of benefits to foreign investors;
- implementing the policy of "real exchange rates", which requires a constant reduction of the exchange rate of the national currency against the major Western currencies "in order to encourage exports".
The adoption of that program was a decision of paramount importance. However, it was taken in a great hurry, without even any debate among the specialists. It was taken despite the fact that it was known that a CIA report (1991) warned about the grave consequences of such a decision and that similar warnings had been made by a group of prominent Western figures (Action Committee for International Co-operation): Pierre Trudeau, Valery Giscard d'Estaing, Miguel de la Madrid and Helmut Schmidt. They warned that the implementation of the IMF shock-therapy policy would have disastrous consequences. A number of major studies by American and European specialists about the negative results of the use of the IMF methods in a great number of African and Latin American countries were also well known. By that time the "White Paper" had been published in Britain about the long-term negative consequences of the monetarist reform implemented by Margaret Thatcher and the results of the implementation of this program in Poland and Yugoslavia during two years had been summed up and analyzed.
Despite vast financial aid from the West, Poland had barely survived the shock-therapy: it lost a considerable part of its industrial potential and its agriculture was seriously undermined.
Yugoslavia was experiencing a grave crisis and the escalation of its civil war. That country was a shining example of the application of the IMF scheme to the entire economy of a multi-ethnic country with a considerable defense sector. It illustrated the uneven distribution of the crisis in different ethnic regions and, as an inevitable result, the rise in separatism. Czechoslovakia adopted a more sparing model and it resulted in a peaceful break-up of the country.
In Hungary, the privatization of the more advanced enterprises by Western investors led, even despite contracts with effective guarantees, to the closure of many competitive production facilities rather than an inflow of new technology.
The potential risks involved in the adoption of the IMF scheme were well known: when efforts to quickly stabilize the situation fail, credits become an additional burden on the sinking economy and the conditions set by the IMF turn the economy of the donor country into an economic space filled with enterprises dependent on creditors
At the present time foreign debt payments account for 30-40 per cent of the budget expenditures of Third World countries. Whenever their debts are re-drafted, the governments of the debtor countries assume the obligation to repay the foreign debts of private enterprises. The debtor countries are also required to capitalize their foreign debt, that is convert their debt obligations into shares or exchange them for shares
It is clear that Russia took a big risk, but the choice was made. The West did not take long to make Russia realize that it would not receive any financial aid to cushion the economic shock and the Russian leaders had no time to create any mechanisms to prevent the flowing off of capital from the country.
How did the Russian social and economic system respond to shock therapy? Its reaction to the IMF scheme was "not right", as the IMF experts soon had to acknowledge. The shock therapy and market competition it created failed to bring about economic recovery, solve the problem of surplus labor, cause the loss-making enterprises to wither away or bring about structural changes. It increased economic degradation and this process was especially rapid in the more "market-oriented" sectors, such as the food and light industries.
To prevent economic and social catastrophe the Russian government had to continue to subsidize enterprises and preserve a deficit budget. Curtailment of social programs reached a critical point; people lost practically all their savings and the rise in prices and taxes reduced the consumption level of the vast majority of the population to a subsistence minimum. No other country ever had to make such sacrifices; sacrifices which failed to produce the desired result. The money expropriated from the population did not turn into investment and never reached the state vaults. A lot of it was taken out of the country and deposited in foreign banks. The sacrifice made by society was useless. However, no major changes were made in the reform model. On the contrary, the radical political circles forced the government to accelerate the monetarist reforms.
In what state are the Russian economy and society today? Judging by the major economic indicators, the decline of production in many basic industries has assumed disastrous proportions and there is no evidence of general economic stabilization (see Figure 2). True, production has stabilized in a number of sectors, but this stabilization remains at a very low level and may soon be followed by a new decline.
Figure 2. Worsening situation in agriculture.
a) manufacture of tractors (1) and combine harvesters (2);
b) mineral fertilizers (1) and fodder additives (2) supplies to agriculture in th. tons (2).
Hopes for spontaneous stabilization and growth have faded, owing to the involvement of a new crisis factor: the delayed result of a sharp fall in investment. The rate of the depletion or degradation of the basic assets exceeds by far the rate of the introduction of new ones and the gap is widening all the time
The ideologically-motivated campaigns in the economy begin increasingly to look like adventures, a factor which escalates tension in society. The so-called "voucher privatization" in industry and the efforts to encourage private farming in agriculture are the most shining examples.
The voucher privatization program failed to create a middle-class of "owners". As a result of this campaign black-market dealers bought up a vast amount of shares, creating even more fertile soil for social conflict. The idea of privatization was discredited, while the price of the privatization voucher (officially, "a share of national wealth") fell to the price of a kilo of sausage.
Russia's vast scientific and technological potential, a major development factor created by the efforts of the entire nation over a 300-year period, has been undermined and may be lost for good in the course of 1994.
The income-gap between different regions of the country has widened dramatically. The focus of the crisis has shifted to the agricultural regions and regions with a high concentration of defense plants, while Moscow has become a kind of enclave with part of its population earning unreasonably high incomes. (See Figure 3).
Figure 3. Retail trade turnover (Moscow trade turnover = 100%) in Tatarstan (1), Kalmykia (2) and Daghestan (3).
The ideologically-motivated campaigns in the economy begin increasingly to look like adventures, a factor which escalates tension in society. The so-called "voucher privatization" in industry and the efforts to encourage private farming in agriculture are the most shining examples.
The voucher privatization program failed to create a middle-class of "owners". As a result of this campaign black-market dealers bought up a vast amount of shares, creating even more fertile soil for social conflict. The idea of privatization was discredited, while the price of the privatization voucher (officially, "a share of national wealth") fell to the price of a kilo of sausage.
Russia's vast scientific and technological potential, a major development factor created by the efforts of the entire nation over a 300-year period, has been undermined and may be lost for good in the course of 1994.
The income-gap between different regions of the country has widened dramatically. The focus of the crisis has shifted to the agricultural regions and regions with a high concentration of defense plants, while Moscow has become a kind of enclave with part of its population earning unreasonably high incomes. (See Figure 3).
Figure 3. Retail trade turnover (Moscow trade turnover = 100%) in Tatarstan (1), Kalmykia (2) and Daghestan (3).
- Russia's vast scientific and technological potential, a major development factor created by the efforts of the entire nation over a 300-year period, has been undermined and may be lost for good in the course of 1994.
- The income-gap between different regions of the country has widened dramatically. The focus of the crisis has shifted to the agricultural regions and regions with a high concentration of defense plants, while Moscow has become a kind of enclave with part of its population earning unreasonably high incomes (See Figure 3)
- The wide income-gap and the impoverishment of a large part of the population have become a major cause of health problems and a key stress factor. There has been a sharp fall in the birth rate and a dramatic rise in the mortality rate, especially of premature deaths caused by suicide, murder and accidents. The number of people who died owing to those causes in 1993 increased by 1.75 million, as compared with 1989 (see Figure 4)
These losses can be compared to the casualties of a full-scale war and it is the Russians who suffer most.
- The income-gap between different regions of the country has widened dramatically. The focus of the crisis has shifted to the agricultural regions and regions with a high concentration of defense plants, while Moscow has become a kind of enclave with part of its population earning unreasonably high incomes (See Figure 3)
- The wide income-gap and the impoverishment of a large part of the population have become a major cause of health problems and a key stress factor. There has been a sharp fall in the birth rate and a dramatic rise in the mortality rate, especially of premature deaths caused by suicide, murder and accidents. The number of people who died owing to those causes in 1993 increased by 1.75 million, as compared with 1989 (see Figure 4)
These losses can be compared to the casualties of a full-scale war and it is the Russians who suffer most.
Figure 4. Reform's demographic effect: population increment (1), birth rate per 1,000 (2) and mortality (3) per 1,000. New Figures updated to year 2000
The implementation of the IMF reform model has brought about serious differences and major conflicts between different branches of power and even inside each branch of power, whose intensity was unimaginable in late 1991. These differences provoked a major political crisis in September and October 1993, which put Russia on the brink of civil war. That was the last signal.
It is clear now that the crisis has become so great and the destruction of the economy has gone so far that even the most optimal decisions cannot stop this crisis. We must face the truth and honestly tell people that more hardships are ahead. However, catastrophe can be averted if different social forces rally together on the basis of an acceptable compromise. This country has all the required conditions for this: vast natural resources, the industrial infrastructure and skilled labor power. The important thing now is to restore an effective production-distribution system based on common sense rather than ideological dogma.
The political situation has become more complex, however. The members of the government who insist that reform should be continued in accordance with the same model have resorted to a ploy in order to clear themselves from responsibility for the results of their policy. They have assumed the pose of critics who are trying to gain political capital from the deteriorating situation, which is, in fact, the result of their own decisions. Taking into consideration that this position continues to receive considerable support from influential circles in Russia and abroad, one may predict yet another split in Russian society. Television, which has a major (not always constructive) role to play in the process of perestroika and reform has begun to condition public opinion in a corresponding way
It is a matter of honor for all those who advocate continuation of radical reform on the same model to take a closer look at the results of the past two years. There is vast evidence indicating that the supporters of this model are simply ignoring reality.
In this situation all political and public forces, which are not committed to theoretical and ideological schemes but want to save the people and hold the country together, are confronted with a dramatic choice.
One possibility is to let the radical reformers carry through their experiment to the end and thus increase public support for an alternative program. However, that would mean a total collapse of the economy, the death of a large part of the population and, possibly, a break-up of Russia.
The other possibility is to assume responsibility for the continuation of the reform on the condition of an open dialogue with all public forces and the signing of a social pact that would provide for a clear distribution of the hardships and support resources and for mutual obligations to maintain civil peace. This model of reform, which rejects the principles of Western neo-liberalism with its orientation to individualism, was put into practice in Spain, Sweden, Japan and the Southeast Asian countries and thanks to this reform model, China and Vietnam are rapidly developing today. The important thing is not to demonstrate one's loyalty to artificial ideological concepts but commit the specific national communal and patriotic stereotypes and traditions to the cause of reform.
One possibility is to let the radical reformers carry through their experiment to the end and thus increase public support for an alternative program. However, that would mean a total collapse of the economy, the death of a large part of the population and, possibly, a break-up of Russia.
The other possibility is to assume responsibility for the continuation of the reform on the condition of an open dialogue with all public forces and the signing of a social pact that would provide for a clear distribution of the hardships and support resources and for mutual obligations to maintain civil peace. This model of reform, which rejects the principles of Western neo-liberalism with its orientation to individualism, was put into practice in Spain, Sweden, Japan and the Southeast Asian countries and thanks to this reform model, China and Vietnam are rapidly developing today. The important thing is not to demonstrate one's loyalty to artificial ideological concepts but commit the specific national communal and patriotic stereotypes and traditions to the cause of reform.
It is a very difficult change of policy to execute, one which will compel all the parties involved in the political process to "sacrifice" their principles. The communist hard-liners must give up their attempts to take revenge and realize that it is no longer possible to make this country return to the old bureaucratic egalitarian system. Even if such a return were politically possible, it would cost society a lot more than the movement towards a socially-oriented mixed economy. Advocates of a liberal utopia should honestly admit the fact that the traditional ways of thinking of the peoples of Russia as to how people should live have proved to be incompatible with the principle of individualist capitalism and that the reform based on these principles has failed. They may console themselves with the view that our nation is not mature enough to accept these ideals, but we have no other. When it becomes mature enough, our economy may gradually move towards the liberal ideal, but it should be allowed to do so without any shocks and upheavals.
If the second alternative is chosen, the first thing to do will be to work out the conditions of a social pact and discuss a program. The main elements of this program are self-evident:
- restoration of state control over a limited number of system-forming enterprises and the implementation of the minimum required investment programs (permitting a growth in the budget deficit);
- creating, with state assistance and the use of raw material reserves, equipment and premises of the fatally weakened enterprises, regional "incubator" centers for small private and collectively-owned enterprises capable of absorbing the labor power made redundant by restructuring and quickly saturating the market with domestic products;
- establishing control over foreign trade and capital movement;
- taking urgent measures to bolster the farm sector and related industries;
- guaranteeing low-income population groups a minimum of vitally important foodstuffs with the aid of government subsidies;
- reforming the taxation system with a view to encouraging production and investment and increasing taxes on excessive consumption.
Russia is at a crossroads. Hopes that it will survive the crisis are based on the fact that more and more people are closely watching developments and tendencies here and trying hard to grasp their meaning.
FOOTNOTES
1
For example, Marxism, which provided the theoretical basis for industrialization in Russia (USSR), in bourgeois society ideologically armed the workers in their class struggle against capital. Put differently, it countered liberalism, which defended the right to private property and the free purchase and sale of labor. However, both these conflicting ideologies are based on the same picture of the world and the same anthropological model and proceed from the same idea of progress. They are two branches of industrialism.
For example, Marxism, which provided the theoretical basis for industrialization in Russia (USSR), in bourgeois society ideologically armed the workers in their class struggle against capital. Put differently, it countered liberalism, which defended the right to private property and the free purchase and sale of labor. However, both these conflicting ideologies are based on the same picture of the world and the same anthropological model and proceed from the same idea of progress. They are two branches of industrialism.
2
Over the past four years the question of cutting down or freezing discharges of CO2* into the atmosphere was repeatedly raised at the most representative international forums. However, even the inclusion of this question on the agenda was blocked by industrially developed nations (primarily the USA). US President Bush said bluntly that this would mean to place progress itself under control.
Over the past four years the question of cutting down or freezing discharges of CO2* into the atmosphere was repeatedly raised at the most representative international forums. However, even the inclusion of this question on the agenda was blocked by industrially developed nations (primarily the USA). US President Bush said bluntly that this would mean to place progress itself under control.
3
A system-forming enterprise should not necessarily be big. It is its function in the entire economic system that matters. When the production of such "money-losing" products as fodder additives was halted, the entire mixed feed industry was paralyzed. As a result, grain was increasingly used as fodder for livestock, the country became even more dependent on imported grain and the livestock population decreased.
A system-forming enterprise should not necessarily be big. It is its function in the entire economic system that matters. When the production of such "money-losing" products as fodder additives was halted, the entire mixed feed industry was paralyzed. As a result, grain was increasingly used as fodder for livestock, the country became even more dependent on imported grain and the livestock population decreased.
4
From 1983 to 1987 Mexico paid its creditors $48.5bn in interest and only $18.5bn of its debt principal. For each dollar it borrowed the country paid $2.5 on its old credits and as interest on them.
From 1983 to 1987 Mexico paid its creditors $48.5bn in interest and only $18.5bn of its debt principal. For each dollar it borrowed the country paid $2.5 on its old credits and as interest on them.
5
In 1993 Russia was scheduled to pay nearly $40bn, although the most it could pay was $2.5bn. The Paris Club agreed to re-draft the debt, but the conditions on which it agreed to do so have never been made public. The press has reported, however, that an American company has been installed in Moscow to convert Russia's debt obligations into the shares of major industrial enterprises, especially in the fuel and energy sector.6
In 1993, for example, the depletion of the coal production capacity was estimated at 22 million tons, while new production capacity put into operation was at the level of 3 million tons (as compared with 20 million tons envisaged earlier by the Soviet plans). The process of degradation of the basic assets in agriculture, especially soil, is not so obvious. The annual rate of removal of nutrient substances from soil as a result of the use of modern methods of farming is 120-125 kilograms per hectare. In 1988 the Soviet Union produced and used enough fertilizers to compensate for the nutrients removal rate, 122 kg per hectare, that is stabilized soil fertility without increasing it. In 1992 the figure dropped to 43 kg and in 1993 to 33 kg. Experts believe that in 1994 the rate will be 10 kg per hectare. During the last three years soil fertility has been undermined for many years to come. In 1993 the reduction of the crop yields owing to this factor amounted to an equivalent of 25 million tons of grain, a figure comparable with Russia's entire grain imports.
In 1993 Russia was scheduled to pay nearly $40bn, although the most it could pay was $2.5bn. The Paris Club agreed to re-draft the debt, but the conditions on which it agreed to do so have never been made public. The press has reported, however, that an American company has been installed in Moscow to convert Russia's debt obligations into the shares of major industrial enterprises, especially in the fuel and energy sector.6
In 1993, for example, the depletion of the coal production capacity was estimated at 22 million tons, while new production capacity put into operation was at the level of 3 million tons (as compared with 20 million tons envisaged earlier by the Soviet plans). The process of degradation of the basic assets in agriculture, especially soil, is not so obvious. The annual rate of removal of nutrient substances from soil as a result of the use of modern methods of farming is 120-125 kilograms per hectare. In 1988 the Soviet Union produced and used enough fertilizers to compensate for the nutrients removal rate, 122 kg per hectare, that is stabilized soil fertility without increasing it. In 1992 the figure dropped to 43 kg and in 1993 to 33 kg. Experts believe that in 1994 the rate will be 10 kg per hectare. During the last three years soil fertility has been undermined for many years to come. In 1993 the reduction of the crop yields owing to this factor amounted to an equivalent of 25 million tons of grain, a figure comparable with Russia's entire grain imports.
7
This remark has nothing to do with freedom of speech. The problem is that a very small group of people with almost exclusive access to television intentionally misinforms the public for definite political purposes. Television coverage of Prime Minister Victor Chernomyrdin's recent speeches was highly indicative in this sense. Newscasters intentionally distorted the Premier's remarks, offered biased comments on them and thus conducted a crude smear campaign against the government without giving its representative a chance to answer back. How can any stabilization be achieved in this situation?
This remark has nothing to do with freedom of speech. The problem is that a very small group of people with almost exclusive access to television intentionally misinforms the public for definite political purposes. Television coverage of Prime Minister Victor Chernomyrdin's recent speeches was highly indicative in this sense. Newscasters intentionally distorted the Premier's remarks, offered biased comments on them and thus conducted a crude smear campaign against the government without giving its representative a chance to answer back. How can any stabilization be achieved in this situation?
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