Russian Political Crisis Reflects Failure of Economic ‘Reform’

August 30, 1998

Mark Weisbrot
St. Louis Post-Dispatch, August 30, 1998

Knight-Ridder/Tribune Media Services, September 1, 1998

With President Clinton visiting Russia in the midst of an economic and political crisis there, attention has been focused on the most recent events that triggered it: the collapse of the ruble and Russia’s partial default on its debt.

But there is much more here than meets the eye. While the current crisis is serious– especially for foreign investors– it is not nearly as disastrous as what most Russians have already suffered over the last seven years of “reforms.” These “reforms” were designed by U.S.-based economists and institutions, who have yet to admit responsibility for the failure of their programs.

American economists– together with the International Monetary Fund– have presided over one of the worst economic declines in modern history.

Russian output has declined by more than 40% since 1992– a catastrophe worse than our own Great Depression. Millions of workers are not being paid, and most economic transactions now take place through barter. The majority of the population has fallen into poverty. Death rates have risen sharply, and the decline in male life expectancy– from a pre-reform 65.5 years to 57 years today– is unprecedented in peacetime, in the absence of a natural disaster.

These are the results of “shock therapy,” a program introduced by the International Monetary Fund in 1992. Things were supposed to get worse for about six months, and then get better. Six years later, Russians have undergone many shocks, but still no therapy.

In retrospect, it’s hard to see what could have been done wrong that wasn’t. First there was an immediate de-control of prices, which given the monopoly structure of the economy, sent inflation to 520% in the first three months. Millions of people saw their savings and pensions reduced to crumbs.

In order to push inflation down, the authorities slammed on the monetary and fiscal brakes, bringing about a depression. Privatization was carried out in a way that enriched a small class of people, while the average person’s income fell by about half within four years.

“Shock therapy” has also created a large and powerful criminal class: Russian police have to wear masks to conceal their identity when arresting organized crime figures. The head of the Russian Interior Ministry’s organized crime division estimated that 20 percent of Russian bank loans were actually payments to organized crime. Democracy, too, has been compromised. U.S. support for President Yeltsin’s dissolution of the democratically elected Parliament in 1993, and other anti-democratic measures, has been particularly destructive.

The whole idea that Russian industry had to be destroyed, so that they could start from scratch on the basis of foreign investment, was wrong from the beginning. But no apologies have been forthcoming from the West. On the contrary, the Clinton Administration is insisting that more “disciplined, hard things,” need to be done, such as closing down more enterprises, and balancing the central government budget. Never mind that we would not expect to balance our own federal budget during a recession, much less during a depression.

The current standoff between Parliament and the executive over the reappointment of Viktor Chernomyrdin is portrayed here as resulting from political infighting, or at worst, a desire by communists in the parliament to return to the old order. The idea that elected officials might oppose failed policies that promise to further impoverish their constituents has apparently not occurred to most pundits and policy makers here.

Now that they have little left to lose, Russian elected officials are talking about rebuilding their economy on the basis of their own domestic needs, as opposed to the IMF vision of an economy that exports raw materials and imports everything else. Washington and the IMF have responded with denunciations and threats to cut off further loans.

Maybe it’s time we left them to try their own solutions– they can hardly do worse than the outsiders have done.

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