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Shock Therapy for Russia’s Bureaucrats

CAMBRIDGE: All the postcommunist countries that implemented radical reforms, except for Russia, began to see rapid growth by 1994, at the latest. Russia’s GDP, on the other hand, fell in 1995 and 1996. So why hasn’t the Russian economy benefited from the kind of liberalization that worked so well elsewhere?

The answer is that the benefits of shock therapy depend critically on how well the government itself makes the transition from overseeing a communist regime to supporting a market economy. While other countries which pursued radical reform, such as Poland, are now advancing smartly in their political transition, reform of Russia’s political system has barely nudged forward. It is this tardiness in the transformation of government that shackles economic growth.

One element key to helping smooth the operations of a market economy is the creation of institutions and laws protecting private property. Another is depoliticization. Although shock therapy, with price liberalization, stabilization, and privatization, greatly diminished the extent to which the Kremlin controls Russia’s economy, remnants of the massive communist bureaucracy remain. Politicians continue to exercise overweening sway, especially on the local level, and they abuse their regulatory powers to enrich themselves and assist their political allies. This kind of behavior, along with a lack of private property protection, is devastating for growth.

At the core of Russia’s political backwardness is the structure of incentives that drive the behavior of local and regional officials. While the incentives in other postcommunist countries, primarily East European, nowadays reward local officials when they promote business growth, the incentives facing Russia’s bureaucrats work in the opposite way.