Russia's Failure to Reform

CAMBRIDGE: Russia continues to stupefy and amaze. Ten years after the Berlin Wall fell, and nearly eight years since the end of the Soviet Union, Russia has failed to find its way in the world. The economy has collapsed, with little sign of recovery. Corruption is everywhere. The political system lurches from crisis to crisis without any apparent connection between the political leaders and Russian society. President Yeltsin is ill and erratic. There are no trusted Russian voices on the world stage.

So the age-old Russian question echoes: "What is to be done?" One view holds that the problem lies in the strategy of economic reform that Russia adopted after 1991. Some people argue that Russia reformed "too fast," that it should have adopted a gradualist reform strategy, something like that pursued by China. Others argue that Russia put privatization ahead of institutional reforms such as establishing a judicial system. According to this view, the key to Russia's stabilization and eventual economic growth lies in a reinvigoration of state control over parts of economic life.

It is a big mistake, in my view, to blame Russia's problems on the "speed" of its economic reforms, especially since there were so few actual reforms! I was an economic advisor to Poland (1989-91), Estonia (1992), Slovenia (1991-92), and Russia (1992-93). I watched all of these countries (and many others) up close. I gave similar general advice in these countries. Estonia, Poland, and Slovenia have prospered; Russia has not. The reason for these differences lie not in an excessive "speed" of Russia's reforms, but in geography, structural conditions, and of course politics.

Geography is critical, though often neglected by commentators. The countries closest to the markets of Western Europe (Poland, Hungary, Czech Republic, Slovakia, Croatia, Slovenia, and the Baltic States) have had a much easier transition to capitalism than the more distant economies of the former Soviet Union. When a Western European enterprise, say Volkswagen, decides to purchase parts from a firm in Eastern Europe, it almost surely goes first to a neighboring country – for example Poland – rather than to Ukraine or Russia. Therefore, the countries closest to Western Europe have received the largest flows of foreign investments from Western Europe, and have also been able to expand their exports to the European Community. Foreign investment and exports have been the two main engines of economic recovery in countries like Poland, Slovenia, and Estonia.