The Struggle Of Russia Toward Capitalism Economics Essay

俄羅斯對資本主義的斗爭
 

“俄羅斯是一個謎，由神秘包裹，里面是一個謎；但也許那是一個關鍵。關鍵就是俄羅斯的國家利益。”溫斯頓丘吉爾（1939年，10月）

引用
 

資本主義全球化的現象在過去幾十年里展現開來，已經帶來了西方世界前所未有的進展。通過市場機制和自由競爭，資本全球化已經引起了巨大的技術性和經濟性進步，使人們享受到各種各樣的自由權和機會。然而，對于20世紀的大部分時期，世界的大部分人并未參與到這個過程中--后蘇聯的社會主義國家已采取了避免資本主義社會結構的形成。特別是蘇聯。然而，一旦國家的行政力量削弱了足以預測共產主義的倒臺（和聯合國的崩潰），全球化的西側將促進和對該國的實行新自由主義思潮，看成是它的責任。主流的西方經濟學家和政治家，還有國際性經濟機構，深信采取民主和資本主義是俄羅斯的正確道路
 

“Russia is a riddle, wrapped in a mystery, inside an enigma; but pe'rhaps there is a key. That key is Russian national interest." Winston Churchill (October, 1939)

 

Introduction

 

The phenomenon of capitalist globalisation which has unfolded during the past decades (?) has brought about unprecedented advances for the Western world. Through the market mechanism and free competition, capitalist globalisation has led to tremendous technological and economic progress, allowing human beings to enjoy various freedoms and opportunities. However, for a large part of the twentieth century a vast part of the world did not participate in this process – the post-Soviet states had adopted structures of state socialism which prevented the formation of a capitalist society. The Soviet Union in particular... However, once the administrative strength of the state had weakened enough to predict the fall of the communist regime (and the collapse of the Union), the globalised West took it as its duty to promote and impose neo-liberal ideas on the country. Mainstream Western economists and politicians, as well as the International Financial Institutions, were convinced that adopting democracy and capitalism was the right path for Russia and did not hesitate to march in and preach in favour of a market economy.

 

Main Statement

 

Together with the neo-liberal convictions of presidents Gorbachev and Yeltsin (Russia’s first reformers) the globalising tendencies of Western capitalism played a major role in the transformation of the country. The adoption of Anglo-American neo-liberalism meant that Russia had to destroy its current economic and political base and build capitalism through industrial and property re-organisation. First, prices had to be freed from government control, followed by mass privatisation of state assets and the reconstruction of enterprises. Such was the stabilisation/liberalisation/privatisation programme that was intended to minimise the role of the state in Russia’s economic and business life. However, after ten years of reform and transition it became clear that Russia had failed to meet the expectations of western modernisers. Price liberalisation had brought about double digit inflation that had robbed people of their savings, while mass privatisation had allowed the politically connected elite of the country (the so-called oligarchs) to assume control over major sectors of Russia’s economy. The neo-liberal policies strongly advertised by the West had in fact left the country weakened, lawless and indebted, not at all comparable to a modern capitalist system. It was only in the second decade of Russia’s transition – after the crisis in 1998 that the economic situation in the country started to show signs of improvement – in terms of real GDP per capita, levels of FDI inflows and standard of living. Those improvements occurred largely because of the move that the new Russian government at the time (headed by president Putin) has made towards a cooperative, state-led capitalism. This essay argues that while striving towards a western form of capitalism was a mistake with devastating consequences, Russia should instead pursue a more realistic and suitable strategy to develop its industrial resources and business potential – namely by continuing to promote a state-led capitalist system, which would allow the government to exert influence on the private sector. Such a strategy is more beneficial for Russia’s multinational organisations as well as for the SMEs in the country. Furthermore, this should not necessarily be considered as the end form of capitalism that the country has achieved and should maintain. Regardless of whether Russia makes a successful transition to a western capitalist model in the future, the current structure of state-led capitalism is certainly a better direction towards the country’s development.#p#分頁標題#e#

 

Chapter 1: “Shock therapy” and the effect of transition on Russian businesses (Russia throughout the 90s)

 

The socialist economy of the Soviet Union was organised and functioned in a radically different way compared to capitalist market societies. The state controlled and coordinated all sectors of the economy. A system of state ownership of all resources and industrial activities was implemented, which did not tolerate the existence of any autonomous economic units (SOURCE). The government had control over employment and wage rates, price levels and investment distribution (SOURCE). It is obvious that a capitalist class did not exist in former Soviet states, and the building of such a class was a major task to be executed during Russia’s transition from communism.

 

The transformation of Russia, which started in the early 1990s, was a consciously coordinated process, evoked and carried out by both domestic and foreign political leaders, who attempted to import a western-style capitalist structure into the country and pursue neo-liberal economic policies. The strategy developed to ‘globalize’ Russia was known as ‘shock therapy’. Its implementation began with the elimination of price controls over most goods, aiming to rapidly create a market economy in Russia. This was to be achieved in two ways, namely by freeing prices and liberalizing trade policies which on its part would stimulate competition; and by privatization, which would create private property as the only successful way of giving incentives for new entrepreneurs. Meanwhile, the convertibility of the ruble had also to be ensured and its value had to be kept stable, which implied a policy oriented towards controlling the inflation and keeping an eye on the currency emissions and government spending (Saunders, 2001). Overall, state activity was to be brought to a minimum, while a neo-liberal framework of free markets, perfect competition and no government intervention had to be introduced.

 

However, the disappointing outcome of Russia’s transformation turned out to be rather surprising for its optimistic pro-Western reformers. By mid 1990s it was already becoming obvious that Russia needed less shock and more therapy. The instant price liberalisation led to sky-rocketing inflation figures, which quickly robbed people from their savings, necessitating the tightening of Russia’s monetary policy by raising the interest rate. Furthermore, as hyperinflation increased the poverty of the population, the majority of the Russians could not benefit from the second major pillar of the reform – mass privatisation. In fact, privatisation was a very important step of Russia’s restructuring, since it was to lay the foundations for a market economy and demand-led production. However, there were severe obstacles to taking this step. First of all, with the majority of the population being excluded from this process, most Russian enterprises were given away to few politically-connected magnates (so-called oligarchs). Second, the opening of the capital markets, which was also part of the restructuring programme, allowed the oligarchs to transfer the majority of their assets to foreign bank accounts, since keeping their money in the country at that point meant making an incredibly risky investment in a country which is in deep depression. Indeed, after almost a decade of reforms Russia was riddled with inflation, corruption and lawlessness and on the verge of a crisis. The government was becoming increasingly indebted to the IFIs but was continuing to give away its valuable assets to oligarchs, who on their part were taking tremendous amounts of wealth out of the country.#p#分頁標題#e#

 

It becomes obvious from the above analysis that the two social groups that became the main actors in this transformation process (and were to lay the foundations of the previously non-existing capitalist class) were the until-then-dominant administrative stratum and the acquisition stratum. The former consisted of the current political leaders who possessed executive power over economic activities, while the latter was composed of skilled workers and potential entrepreneurs, who (while previously disadvantaged) had the potential to become the new capitalist class in charge of Russia’s big businesses (Lane, 2006). As a result of the policies employed during the first years of transition the administrative stratum was significantly weakened, while the acquisition stratum was both politically and economically empowered. Hence, the latter came to realise the potential for asset ownership and wealth creation, which can be identified as the first signs of class interest within the ‘new’ Russian society (Lane, 2006). This could be the basis of a stylized fact: class creation and empowerment is a pivotal part of the successful development of developing/transition economies.

 

This to a large extent represents the desire of the acquisition stratum to emulate the Western consumption model, which suggests that the globalising tendencies of Western-style capitalism became the major driving force Russia’s transition from state socialism. Therefore, the process of building a capitalist Russian society and a property owning class was strictly overseen by the international political elites, the leading Western governments and the IFIs as intermediaries.

 

Nevertheless, what these foreign and local ambitions resulted in could be roughly described as ‘chaotic capitalism’, which bore very little resemblance to the ‘model’ western-style capitalist structure. In fact, the new social and economic system that was developed in Russia during the first decade of transition was not supported by a solid institutional structure and instead created social fragmentation. As a consequence, the big business scene in the country was characterised by high degrees of uncertainty, elite disunity, criminalization, corruption, and rent-seeking. Furthermore, few large corporations had assumed control over a considerable part of the economy, including natural resource industries, and even gained access to political power (Guriev and Rachinsky, 2005).. Despite the tycoons’ rapid acquisition of political and economic power, they failed to win any support from the Russian society. In fact, their legitimacy was rather fragile, given their involvement in lawless practices, tax evasion and asset stripping.

 

Meanwhile, the reforms after the fall of the fall of the Union lay the foundations of Russian small entrepreneurship, which did not exist as an economic activity during the communist regime. Therefore, the first few years after the start of the reforms are associated with a considerable rise in the number of private small entrepreneurs in the country. By 1995, small enterprises constituted 65% of all Russian businesses. However, the political and economic environment in Russia at the time was extremely hostile to the development of medium and small enterprises. Not only was their economic significance neglected by policy makers, who were overly concentrated on macro-economic indicators, but the direct consequences of the shock therapy policies created a particularly hostile environment for SMEs. The high degree of income inequality, widespread corruption and the lack of rules and laws to eliminate the risk and unpredictability of the economic environment resulted in rather high failure rates of SMEs, their law-evasive behaviour and increasing involvement in the informal sector. Furthermore, since all the invested money had left Russia and people lost their savings due to inflation, it was particularly difficult for SMEs to gain access to necessary funding and to overall business know-how and transferable knowledge (SOURCE). This left small businesses isolated not only from the economic life, but also from the political sphere. Not only did they have no lobbying power and no way to defend their interests, but they were also largely neglected by economic policy making. By the end of 1999 there were around 890,000 small enterprises in Russia (defined as those with a turnover of 550 000 dollars per year of less and with less than 200 employees). This number however has been stable throughout most of the decade, a proof for the rather limited development of SMEs at the time. Furthermore, the share of SMEs in the total number of employment at the end of the 90s was barely 10%, while their share in the total number of enterprises was only 65%, compared to the staggering 90% for EU countries. This underperformance of Russian small entrepreneurship is largely due to the lack of state support, and the tremendous economic and political pressures.#p#分頁標題#e#

 

Overall, by the end of the 90s Russia had undergone tremendous economic reform in the form of full price liberalisation, mass privatisation and receding state intervention. A form of market capitalism was established, which despite the high hopes of both Russian and foreign reformers substantially differed from the Western capitalist structures. Russia’s big businesses had ended up in the hands of the politically connected oligarchs who assumed ownership over major sectors of Russian economy, and engaged in asset stripping, corruption and political interference. Furthermore, the development of small entrepreneurship was depressed and hampered by the unstable and chaotic economic environment, while the much awaited economic growth and development did not occur during the first decade of transition.

 

Sources:

 

Guriev, S. & Rachinsky, A. (2005). The role of oligarchs in Russian capitalism. The Journal of Economic Perspectives, 19(1), 131-159.

 

Hoff, K. & Stiglitz, J. (2004). After the big bang? Obstacles to emergence of the rule of law in post-communist societies. The American Economic Review, 93(3), 753-763.

 

For SMEs part:

 

Astrakhan and Chepurenko (2003) Small businesses in Russia: Any prospects after a decade?

 

Kihlgren (2003) Small business in Russia: factors that slowed its development

 

Radaev (2001) The development of small entrepreneurship in Russia

 

Chapter 2: Signs of Russia’s economic and business revival (Russia during the past decade)

 

However, after the ’98-crisis and the change of political power (Yeltsin was replaced by president Putin), the economic horizon for Russia has become significantly better – in terms of real GDP per capita, levels of FDI inflows and standard of living. There are two separate reasons for the positive turn in Russia’s economic development at the end of the century. First of all, the effective depreciation of the immensely overvalued ruble that took place at the end of 1998 can be identified as a very crucial precondition for macroeconomic stabilisation. This gave way to a period of recovery, lasting until the beginning of 2000, during which the country’s cost-price structure was brought in line with the current international competitive conditions. Moreover, during this initial recovery phase and following the currency devaluation, output was mainly generated through import substitution. There was a tremendous reduction in the amount of imports, accompanied by an increased volume of exports, including non-energy exports. Therefore, by the end of 1999 Russia’s balance of trade had soared and brought about an equally rapid increase in retained earnings and profits. This in turn caused a considerable increase in investment, both in the industrial and the agricultural sectors.#p#分頁標題#e#

 

The second reason behind Russia’s economic revival is the considerable increase in energy prices, which occurred at the beginning of 2000. The combined functioning of these two factors – the depreciation of the ruble and the rising energy prices, in the setting of an overall enabling environment provided by the new political administration allowed for a rapid improvement in the economic conditions in the country throughout the second decade of Russia’s transition. This is mainly reflected in the country’s GDP growth rate – it has shown a steady increase from 5.3% since the end of 1998, to 6.3% in 1999 and the impressive 10.0% in 2000, finally stabilising at an average of about 6.5% during 2000-2005 (compared to a negative GDP growth rate all throughout the 90s). Furthermore, FDI levels have also been increasing tremendously/steadily since 2000…elaborate!

 

Apart from Russia’s improving economic climate, the political and macroeconomic reforms introduced by Putin’s presidency at the end of 1999 have deeper implications about the development of the small as well as the big businesses in the country. It is only after the second half of 2000 that Russian SMEs became the object of special policy measures and consequently assumed a more prominent and important role in the economy. The number of SMEs in the country increased rapidly and by 2004 it amounted to over 8900 thousand, which represented 94% of all enterprises in the country. Furthermore, the share of SMEs in total employment had also reached the considerably higher level of 49%, also approaching European levels. While during the 90s the development of small entrepreneurship was weak and highly obstructed by the political dominance of the oligarchs, significant changes can be observed under the new administration. A number of reforms, specifically aimed at SMEs were introduced and helped small-scale Russian entrepreneurship to gradually take shape. One of the first areas targeted by president Putin was the ease of setting up a business. New laws were introduced aimed at reducing the bureaucratic difficulties small firms face during the processes of registration, licensing and inspection, thus reducing the set-up waiting time. However, the most important and radical step taken by the new administration was reforming the tax system, introducing significant changes and reductions to the benefit of small companies.

 

On the other end of the spectrum, the large oligarch-controlled enterprises, which previously made little sense as business units, have also undergone a massive transformation. A series of reforms introduced by the new administration has paved their way to becoming functional firms, which are able to operate in an economic environment. First of all, the currency devaluation following the 1998 crisis and the overall economic stabilisation brought about a new confidence among the business circles about the ability of the domestic output to increase. Moreover, this constituted a signal that conducting a profitable business at home is now a more profitable alternative to asset stripping. In addition, the greater political stability and the stronger leadership of president Putin contributed to the positive transformation of Russian businesses, even if it was only the message sent by the reforms programme that had the growth-stimulating effect, rather than the actual results of the reforms (SOURCE).#p#分頁標題#e#

 

Add more on the reforms introduced: improved rule of law, and the legitimacy of businesses, stronger tax controls (eventually led to Yukos affair), and various other business friendly reforms...

 

Instead of destroying the oligarchic class, the above reforms in fact succeeded at radically transforming Russian big businesses. Not only have the oligarchs increased in number, but the wealth they hold has also increased. However, the nature of the game differs radically from the previous decade. Putin has succeeded at enforcing the rule of law and seeing that the oligarchs abide by those rules in order to keep their businesses (from Putin and the oligarchs). The Yukos affair is an example of....Overall, during the second decade of transition, Russia’s big enterprises have benefitted considerably from the political stability and economic growth. The new reforms have transformed them into legitimate businesses,

 

Add (similarly to the SMEs) some statistics on number of giants and amount of GDP (pay credit to the fact that these figures imply that Russia is not among the very equal countries)

 

Chapter 3: From chaos to a state-led capitalism

 

From the above analysis it becomes clear that by liberalising the economy, president Yeltsin managed to create a capitalist class, allowing the Russian oligarchs to accumulate their wealth. However, the form of capitalism created during the 90s was chaotic, missing institutional framework. Furthermore, the crucial forces of market competition which were necessary to discipline the new tycoons into running legitimate industries beneficial for the country’s economy were also absent. By the end of the decade it was already clear that this situation was highly inefficient and unstable. What was observed after the change of political power in1999 (?) was that the new president Putin pushed Russia in a rather different direction along its way towards capitalism – namely, towards a new form of state-led capitalism.

 

In the context of Russian post-soviet transition, a state-led capitalist structure implies that Russia’s economy operates on the basis of cooperation between the state, the market and competitive and cooperative economic institutions, similar to Western economies. However, while the role of the market is limited, the state assumes a regulative role and creates the necessary institutions. Furthermore, in a state-led capitalist structure ownership is allocated to both government-run and private businesses, which operate in cooperation with financial institutions (Lane, What kind of capitalism for Russia). The justification behind the adoption of such a structure (instead of importing western capitalist models) is that it fits better local Russian economic and political conditions, hence it proves to be more stable and sustainable in the medium run. Moreover, this ‘tailored’ structure can better guarantee economic accumulation, since the cooperation between state and business allows the rents earned from various industries to be better channelled by the state (Lane, What kind...).#p#分頁標題#e#

 

The positive changes observed on Russia’s economic horizon (described in Chapter 2) all occurred after president Putin assumed power and took steps towards the implementation of the above new capitalist structure. Moreover, this essay argues that the former is a direct consequence of the latter and that the political stabilisation and consolidation of power observed during the second decade of Russia’s transition have resulted in the improvement of the overall business conditions in the country, an increase in the business confidence, thus benefitting both the SMEs and large enterprises. More importantly – improvement rule of law!! Better reputation. Under president Putin the country has for the first time (in its history/since the fall of the Soviet Union) had a functioning form of capitalism, which meets all the above features of state-led capitalism. Putin has ensured that the state is strengthened and still holds substantial ownership rights in most sectors of the economy. Furthermore, it is also concentrated on creating and stimulating employment, enforcing the rule of law and exerting positive influence over the private sector. And while, the degree of state involvement observed currently in Russia is beyond the levels deemed acceptable in Western economies, this essay argues on the basis of the improvements observed that state reliance is a more sustainable direction towards Russia’s economic development. Moreover, a stronger Russian state is necessary to provide a more solid basis for the operation of small entrepreneurship and is especially important for the country’s big businesses.

 

In fact, one of the most radical changes observed under Putin’s administration has been the state’s relationship with the oligarchs. Putin displayed a rather independent authority and worked towards distancing the business tycoons form the political power... More on Putin and oligarchs.

 

Finally, the above analysis does not imply this particular type of state-led capitalism currently achieved in Russia is the end-form of capitalist structure that once in operation should be therefore maintained. This essay only argues that regardless of whether the country makes a transition towards a different, western-type capitalism in the future, the current structure is certainly a right step along the way. Furthermore, it is a better option of political and economic organisation, given the country’s history, local conditions and business characteristics. So far, the striking contrast between the country’s development during the first and the second decade of its transition has suggested that a system of state-led capitalism is certainly more beneficial for the SMEs as well as the big businesses, thus a step in the right direction.

 

Chapter 4: Stylized facts

 

!! Summary of CH3: This essay develops the idea that the above improvements in the economic and business sectors have directly resulted from the move Putin has made towards a corporate, cooperative state-led capitalism (similar to China and South Korea, mention in footnote). While striving towards a western-type of capitalism was a mistake with devastating consequences, Russia should instead pursue a more realistic and suitable strategy to develop its industrial resources and business potential – namely by adopting a state-led capitalist system, which would allow the government to exert influence on the private sector. Reliance on the state is a more realistic and appropriate way for Russia to develop its industrial resources and institutional framework. Furthermore, Putin’s strategy is more beneficial for Russia’s multinational organisations as well as for the SMEs in the country. Furthermore, this should not necessarily be considered as the end form of capitalism that the country has achieved and should therefore maintain. Regardless of whether Russia makes a successful transition to a western capitalist model in the future, the current structure of state-led capitalism is certainly a better (define why it is better – is it because its more stable, because it will achieve better results, or because it is faster) direction towards the country’s development.#p#分頁標題#e#

 

On the basis of the above discussion, a number of stylized facts can be derived. Those can be used for policy advice in the case of countries making a similar transition from authoritarian/dictatorship regimes. (For example: In a developing/transition economy a gradual transition approach is more effective.)

 

!! Be sure to link the essay back very strongly to the context of a developing country in a globalized/globalizing world!!

 

As concluding sentences: Back in the 1990s many suggested that importing western capitalism was the way to Russia’s development. Very few authors acknowledged the fact that Russia could develop a capitalist system in its own way and that…whatever Nolan said!! *consult book*. However, modern day Russia has become a proof for the possibility to develop such a system which is functional. Unfortunately it was also a proof how importing blueprints never works. This can be taken as a lesson for countries in their development process and in their journey towards capitalism.

 

!!! Bring forward the issue of globalisation.

 

General: mention things in footnotes (to show that you have thought about things)
 

Filatotchev, I. V., Hoskisson, R. Buck, T., & Wright, M. (1996). Corporate restructuring

 

in Russian privatizations. California Management Review, 38(2): 87–105.

 

Leonidou, L. C., & Katsikeas, C. S. (1996). The export development process: an integrative

 

review of empirical models. Journal of International Business Studies, 27(3): 517–552.

 

Sachs, J., & Warner, A. (1995). Economic reform and the process of global integration.

 

Brookings Papers on Economic Activity, Vol., 2: 1–118.

 

Sachs, J., & Wu, W. T. (1994). Structural factors in the economic reforms of China,

 

Eastern Europe, and the former Soviet Union. Economic Policy, 9(18): 102–145.