Capitalism with a Russian Face

“Death of a Nation” http://www.youtube.com/watch?v=J1OyI

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The Design of Post-Communist Reforms

“The Washington Consensus”, also known as

the Neoliberal Orthodoxy, also known as

“Shock Therapy” Simultaneous economic and political transformation under

Western guidance Proclaimed goal: to create capitalist economies and liberal

democratic states integrated with the West The destruction of the old system has to be as rapid as

possible

Yeltsin with Clinton at Camp David: http://www.youtube.com/watch?v=vHfbp

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The economic blueprint:

LIBERALIZATION STABILIZATION PRIVATIZATION (added later: INSTITUTIONALIZATION)

Liberalization

Replace command with self-interest as the economy’s driving force

The government stops setting prices, let them be determined by supply and demand (easy to do)

Trade should be as free as possible, both internally and externally

Expected result: replacement of the hierarchy of state control with a network of free economic agents

THE STATE RETREATS

Stabilization Liberalization leads to hyperinflation, which may destroy the

economy Need for tight monetary policy: the government limits the

amount of money it prints Sharp reduction of government spending Raising taxes Expected result: the new market economy gets its most vital

component: a solid monetary base which can service all those myriads of free market interactions stimulated by liberalization

THE STATE COMES BACK WITH A TIGHT FIST

Privatization Restoration of private ownership of the means of production Transfer of state property into private hands Creation of a bourgeoisie – a capitalist class capable to act

as the main agent of transformation (no capitalism without capitalists)

Methods: Sell state companies to local buyers Sell to foreigners Allow managers of state companies to become owners Mass privatization through vouchers Allow employees to become owners

Effects of “shock therapy” Production falls while trade flourishes Living conditions worsen Rapid concentration of wealth in the hands of a small

minority Expansion of “underground economy” The state loses most of its economic sovereignty

TEMPORARY DIFFICULTIES, ACCEPTABLE SIDE EFFECTS –

OR FAILURE OF THE DESIGN?IS NEW CAPITALISM SUSTAINABLE ?

The Missing Link: Institutionalization

You can’t build any system without a well-functioning state

The state is badly needed to make a market economy work. Since mid-1990s, “institutionalization” has been listed as the fourth key component of the neoliberal transition orthodoxy

What kind of a state is needed to accomplish the transformation?

The question of democracy

During the fall of communism, democracy was viewed as an essential value in itself

It was also associated with prosperity If the main issue is the dominance of the communist

bureaucracy over society, democracy is a natural remedy: the people should have the power to determine how their society is to be organized and governed

Did the people get that power under the neoliberal orthodoxy?

“Shock therapy” vs. democracy

PROBLEM 1: “Shock therapy” does not depend on popular participation. Its main agents are the state, the West, and the New Rich in the East. Citizens’ main role is to adapt as best they can.

PROBLEM 2: “Shock therapy” inflicts tremendous costs on the society. How will citizens react? They may keep patience, if they are convinced that the

transition moves in the right direction, but requires temporary sacrifices. This allows the reforms to go through

They may protest, using democratic institutions, and force their governments to change reform policies. This slows down and distorts the reform process

If one is committed to the reform blueprint, one has to try and minimize public impact on policy-making

PROBLEM 3: “Shock therapy” creates new forms of power and control for the elites through concentration of wealth

PROBLEM 4: Ethnic nationalism rises as a channel of popular protest and mobilization, resulting in tensions, wars, persecution of minorities, rise of fascist-type movements

Possible solutions:

1. --Liberal democracy (elections, rule of law, accountable government)

--Reform authoritarianism

--Reliance on external forces (joining NATO, EU)

--Alternative reform strategies based on democratic principles

Challenges to society:

Accumulation of capital

Unemployment and poverty

Dismantling of the welfare state

Zero-sum struggles for survival

If society accepts capitalism as something normal, it is better prepared to cope with these challenges

If society is not familiar with capitalism, it tends to reject the changes

In the first case, democracy aids in the transition

In the second case, it may prevent it

Which factors account for success in transition from state socialism to capitalism?

1. ACCEPTANCE OF CAPITALISM AS NORMAL The degree of development of market economy Poland, Czech Republic, Hungary, Slovenia – elements of

capitalism in the economy were present to a higher degree Russia, Ukraine, Belarus, Romania, Bulgaria, Central Asian

countries – market institutions were almost non-existent

So, it was a case of reversal, rather than a re-invention

2. SOCIETY’S POTENTIAL TO INFLUENCE THE COURSE OF TRANSITION.

The strength of civil society The stronger the civil society, the more the reform

strategies have to take into account citizen reactions to the transition

As a result, the transition process is relatively less costly Since the transition costs fall most heavily on the majority of

society, the ability of citizens to defend their interests presents challenges to the transition

3. ETHNOPOLITICS Multiethnic societies

Patterns of and results of transition vary between different ethnic groups

Competition easily acquires ethnic connotations Ethnopolitical mobilization leads to conflict

Monoethnic societies Similarity of patterns Competition not ethnically coloured Ethnopolitical mobilization may shore up stability

Success is most likely: In a country with embedded market institutions, a strong

civil society, not significantly divided along cultural-ethnic lines

Failure is most likely: In a country with embryonic market institutions, weak civil

society, ethnically divided

Most countries are somewhere between these two extremes

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The transition shock Russia’s Great Depression Contraction or collapse of the welfare state Unemployment and poverty Rapid rise of social inequality Crisis of the value system

04/19/23 24

‘‘What emerged after the defeat of communism was the ethos of competition, the ethos of getting wealthy… Economic evolution pushed our

countries toward… heartless market economy… a rat race, and money became the only measure of the value… of life’s success’’ (Adam Michnik, leader of Poland’s Solidarity movement, 1999)

The world’s billionaires, 2009 (Forbes Magazine, March 11, 2009)

Total – 793 (down from 1,125 in 2008) Russia – 55 (down from 87 in 2008) The 55 Russian billionaires own assets estimated at half of

Russia’s total Most of them live in Moscow

http://www.forbes.com/2009/03/11/worlds-richest-people-billionaires-2009-billionaires_land.html

The Rise of Russia’s Oligarchs: http://www.youtube.com/watch?

v=QUspDd2Ecuo&feature=related

Former Russian billionaire No.1 – Mikhail Khodorkovsky

Khodorkovsky’ letter from jail, 2004: “Russian liberalism has suffered a defeat because it

ignored two things: first, some key elements of Russia’s historical experience, second, vital interests of the overwhelming majority of the Russian people. And it was mortally afraid of telling the truth.

I do not want to say that Russia’s liberal leaders set it as their goal to deceive the people. Many of the liberals who came to power with Yeltsin were convinced that liberalism offered the only right solution for Russia, and that a “liberal revolution” was needed in this exhausted country which had historically tasted so little freedom. But they understood this revolution in a very peculiar, elitist way. They cared about the conditions of life and work of those 10% of Russians who were ready to embrace decisive social change and to abandon government paternalism. But they forgot about the 90%. And they covered up their failures with lies.

…They deceived most Russians about privatization. They gave everyone a privatization voucher, promising that at some point, one would be able to buy two cars with it. Well, if you were an enterprising financial dealer with access to insider information and the brains to analyze it, you would probably be able to buy ten cars with your voucher. But the promise was given to everyone. They closed their eyes to the social realities of Russia, as they carried out privatization. Ignoring the social costs of it, they called it painless, honest and fair. But we do know what the people think of this privatization.

…No fundamental reformation of society is possible without social stability and social peace. But the Russian liberals chose to disregard it and created a chasm between themselves and the people. And they used the information-bureaucratic pump of PR technologies to fill the chasm with liberal myths…”

“Vedomosti”, March 29, 2004

Russia’s Great Depression 1991-96:

GDP - fell by 45% Industrial output – fell by 49% Agricultural output – fell by 32%

1991-1999: Textile, leather and fur, and footwear industries:

Output fell by nearly 10 times, Garment industry - by 5 times, Meat and dairy industries - by 3 times. The share of high-tech products in GDP fell

from 45.3 to 25 percent of the GDP. In 2000, labour productivity in Russia was 5 times lower than in the

United States ---------------------------------------

Dying for Growth: Global Inequality and the Health of the Poor: Jim Yong Kim, Joyce V. Millen, Alec Irwin and John Gershman (Eds.), Common Courage Press, Monroe, 2000

Facts and Figures: Raw Materials Exporter. - Ekonomika i zhizn, No. 43, 2000

The social impact: A double blow to the livelihoods of most Russians:

a decline in their incomes and savings a drastic reduction of social services for which they depended

on the state.

In 1999, the incomes of over 40% of the population (60 million people) were below the official subsistence level of 1,138 roubles a month, which was the equivalent of about US$40.[i]

The official (government-determined) minimum wage in 2000 was 132 roubles (US$ 4,74) a month.[ii]

The average monthly salary was 2,403 roubles (US$86).[iii] About half of all families with one child lived below the subsistence level.

In 75% of families with three children, each family member had less than a dollar a day to live on.[iv] [i] Izvestia, 4.07.2000.

[ii] Moscow Times, 18.10.2000 [iii] AFP, 31.10.2000 [iv] Moscow Times, 18.10.2000 [v] VCIOM, Press-vypusk 3.03. 2000

Social inequality In the last years of the Soviet Union, the gap between the

rich and poor was estimated to be 4:1. It is usually assumed that if the gap grows beyond 10:1,

society becomes unstable. In 1999, the gap in Russia was 15:1, according to official

statistics. According to the estimates of the Institute of

Socioeconomic Problems of the Population of the Russian Academy of Sciences, the actual gap was much wider:

Total income of the 10% richest households was 44 times higher than that of the poorest 10%.[ii]

[i] Izvestia, 4.07.2000 [ii] Moscow Times, 18.10.2000.

Implications for democratic development…

Who needs democracy – and for what ends? The Russian experiment with democracy, started in 1985,

was driven by elite perceptions of the efficiency of democratic political systems compared to authoritarian systems

It was expected to save and revive the Soviet system When democratic practices began to threaten the Soviet

system, there was an attempt to suspend it – The August 1991 coup

After the attempt failed, democracy was used as the most effective way of destroying that system

Democracy was a potent weapon against communist rule and the Soviet state

Democracy did help accomplish the demolition mission

What about the mission of construction? How useful has democracy been as a tool to build a

capitalist political economy? It did help accomplish:

The shift to market economy and private ownership Partial legitimization of capitalism Partial integration with the West

Accomplishing even those tasks did considerable damage to democratic governance

Consolidation of capitalism? A capitalist political economy capable of reproducing

and sustaining itself in the context of globalization Productivity and competitiveness A functional state Improvement of socioeconomic conditions Social and political stability

How does political democracy relate to these tasks? In general, we can say: democratic capitalism works better

than authoritarian capitalism In the long run, a virtual circle A normative liberal democracy would best suit Russia But what about the short run?

There is a deep and acute conflict between the requirements of democratic development and the tasks of capitalist consolidation

Democracy became an obstacle to consolidation of capitalism, a mortal threat to the preservation of Russia’s post-communist regime

The only way that regime could survive the social upheaval of the 1990s was through subverting and limiting democratic practices in Russia

Yeltsin’s record as a great democrat 1992: Shock therapy 1993: suspends the Constitution, suppresses the

Parliament by armed force 1994: Launches a war on separatist Chechnya 1996: Rigs the presidential election to keep himself in

power, empowers the oligarchs 1999: Launches a second war on Chechnya 1999-2000: appoints Vladimir Putin as his successor

President

Putinism Focus on national security Restoration of the power of the state Re-centralization of political authority Fall back on command methods Expansion of the power of security services Increased control of media – both direct and indirect Increasing resort to Russian nationalist ideas

At the core of Putinism, is the restoration of a Russian state – not a Western-type liberal-democratic state, but a state shaped by Russian traditions

A corporate-bureaucratic regime fuelled by energy exports Coexists with society which tolerates it for now – because it

does not see viable alternatives “I want a guy like Putin…” http://www.youtube.com/watch?v=Z9gqQnAvYn4

They support Putin And don’t see Putinism as a threat to freedom BUT: They desperately want socioeconomic change which would

reverse the trends of the 1990s They assert the values of justice and equality They are sceptical about capitalism Agitation for democracy continues Threats to regime are suppressed