Michael Mcfaul - Privatization, Conversion, And Enterprise Reform In Russia

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Privatization, Conversion, and Enterprise Reform in Russia

Published in cooperation with the
Center for International Security and Arms Control,
Stanford University

Privatization, Conversion, and Enterprise Reform in Russia

Edited by
Michael McFaul and Tova Perlmutter

with a foreword by
Kenneth J. Arrow

First published 1995 by Westview Press

Published 2019 by Routledge
52 Vanderbilt Avenue, New York, NY 10017
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN

Routledge is an imprint of the Taylor & Francis Group, an informa business

Copyright 1995 by Taylor & Francis

All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers.

Notice:
Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe.

Library of Congress Cataloging-in-Publication Data
Privatization, conversion, and enterprise reform in Russia / edited by
Michael McFaul and Tova Perlmutter with a foreword by Kenneth J.
Arrow.
p. cm.
Published in cooperation with the Center for International
Security and Arms Control at Stanford UniversityCip's pub. info.
Includes bibliographical references.
ISBN 0-8133-2548-X
1. Russia (Federation)Economic policy1991- . 2. Privatization
Russia (Federation) 3. Economic conversionRussia (Federation)
4. Post-communismEconomic aspectsRussia (Federation)
I. McFaul, Michael, 1963- . II. Perlmutter, Tova. III. Stanford
University. Center for International Security and Arms Control.
HC340.12.P75 1995
338.947dc20 94-24412
CIP

ISBN 13: 978-0-367-28431-2 (hbk)

Contents

1. ii

Guide

These papers examine a transformation whose rapidity is rare in world history. Only once before have countries tried to change their economic systems so completely in so short a time. The emergence of capitalism was measured by centuries, not by years or decades. The transition from capitalism to socialism is the only change comparable in speed. Even so, when we look back at the experience of the Former Soviet Union, the process was fairly lengthy, with errors, reversals, and recommencements. In fact, it was more than a decade from the initial Bolshevik takeover to the real movement toward the classical form of Communist control. The change in Eastern Europe was swifter because of the massive military power of the Soviet Union and the by-then well-developed example it furnished of state socialism.

We are observing then one of the most interesting economic experiments in history. The papers in this workshop are an ongoing record of observations and data that are the basis of our current policy analyses and will be essential raw material for the more scholarly and less engaged historical analyses of the next twenty years. Economic theory supplies a set of demonstrations that a free enterprise system operating under a somewhat hypothetical set of conditions will lead to an efficient allocation of resources. But these conditions are rather stringent. In particular, they require that the future be well predicted by those currently in the market. It appears that precisely during rapid transitions expectations are most likely to be vague, uncertain, and contradictory. Much of the behavior in formerly socialist economies that does not fit the predictions of economic theory is a reaction to these surprises and doubts.

In general, in times of uncertainty, human beings, whether in the market or elsewhere, try to stabilize their environment. In market conditions, this often leads to interference with the free market through guarantees or cartels, to give two examples. This reaction is classic even in much milder crisis conditions in a capitalist system. The term "rationalization" may be unfamiliar now, but it was common currency in periods such as the 1920s in Germany. Similar motivations at the end of the nineteenth century in the United States led to the formation of trusts, not a state interference but an illustration of what is called "corporatism" in one of the papers here. Investment bankers considered unrestrained competition to be anarchy, so they created a whole series of monopolies in the United States. This tendency contradicted the basic interests and traditions of the country, with its reliance on small business and individual initiative, and so led to a political reaction around 1900 against the tendency to monopoly.

Thus it is not surprising that in a period of uncertainty, there is a demand for security. In the Russian case, history suggests the state as a potential source. That the state will play an important role seems to be inevitable. The question is whether its role will be to freeze the status quo and prevent the emergence of a reasonably competitive system or, on the contrary, to stimulate such a system.

Russia today can be compared with developing countries. None has succeeded or even tried to succeed without considerable state interference. In some countries, such as India and Latin America, state intervention encouraged inefficiency and slowed progress to almost a halt (at least until the last few years). In others, however, such as Korea, Taiwan, and Chile and Argentina in the last five to ten years, the state has nurtured industries capable of competing in the world market.

The Russian state will have to play a significant role in large-scale industry for some time to come. I am not optimistic about creating efficiency by rapidly privatizing large firms. In Russia, "privatization" by worker ownership is creating a very rich managerial class that will need large subsidies to keep the workers content. (Of course, there will be many exceptions to this general rule.) This is no incentive for efficiency. In the long run, the entry of new, small firms will be the basis of the future industrial system. The aim of the state should be to operate the large firms while gradually letting them be replaced by new entrants.

It must be emphasized that the state has other functions of the greatest importance. Above all, it must create macroeconomic stability, a requirement which itself will serve to harden budget constraints and improve efficiency. To counter the turmoil of transition, it must create a comprehensive social security system to provide for the victims of restructuring for greater efficiency. A reliable social welfare system will obviate the otherwise inevitable and justifiable demands for worker security. Finally, the state must create the legal and financial framework needed for a modern free enterprise economy.

The papers that follow show clearly the current situation and offer recommendations for the future. A consistent, state-led program that encourages entry of new firmsa program that can be relied upon to last at least a decade or moreis needed to let the highly educated Russian people earn the steadily increasing incomes they deserve. Whether the political struggle will permit this, however, remains to be seen.

KENNETH J. ARROW
PROFESSOR EMERITUS OF ECONOMICS
STANFORD UNIVERSITY

The papers in this volume are revised versions of presentations made by the authors at a conference on economic reform in Russia, which was held at Stanford University on November 22 and 23, 1993. Professor Kenneth Arrow from Stanford chaired the conference, which was sponsored by the university's Center for International Security and Arms Control (CISAC), under the auspices of its project on Russian defense conversion, and by the Moscow-based Institute for the Economy in Transition. Speakers included all the authors in this volume, as well as other representatives of the Institute for the Economy in Transition, the World Bank, and the European Bank for Reconstruction and Development (EBRD).

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