Back in the USSR

Post-communist society's top economic output: capitalist straw men

There is now a rolling undertow in many of the news stories about East European countries, particularly Russia: Capitalism is by its nature corrupt, and only a generous dollop of governmental control--a check on the thugs who inevitably rule the marketplace--can save the wretched masses since the communist state has withered away. As The Nation, yet tearful over the collapse of serious socialism, frames the lesson: "After seven years of economic 'reform' the majority of the Russian people find themselves worse off economically. The privatization drivehelped to create a system of tycoon capitalism run for the benefit of a corrupt political oligarchy."

Curiously, the media has mostly ignored the successes of places such as Estonia and the Czech Republic, where rapid and sweeping privatization programs--along with relatively secure property rights --created momentum for the legal, political, and cultural changes necessary to make the transition from a command economy to a market-based one.

When the Soviet Union imploded in 1991, virtually all productive assets (not counting human beings) belonged to the state and were controlled by Communist Party hacks--the nomenklatura. The government owned the factories, shops, stores, airlines, telecoms, energy sources, land, farms, houses, hospitals, schools--you name it. With the collapse of the socialist regime, do you simply flick a switch and put these productive resources in the hands of new, private owners?

Sure---in the made-for-TV version. In fact, the managers of these enterprises maintained their power: Only they knew where the inventory was kept--the state had barely the roughest idea about what assets were held by the various entities. There's no question that these greedy denizens of socialism made Donald Trump look like Mother Teresa.

Since the reformers who brought on capitalism and democracy in Russia consciously chose not to employ Bolshevik methods to pry assets loose, they "left 'red directors' in possession of all the economic assets and privileges that they enjoyed in Soviet times," observes Russia expert Leon Aron of the American Enterprise Institute.

Rejecting civil war, however, left the reformers with little choice but to privatize assets in a way that mitigated opposition from entrenched interests. The path chosen in the 1992-94 period was to award two-thirds of the ownership rights to workers and managers, with the remaining shares distributed via vouchers to 144 million Russians (each man, woman, and child). This strategy left company insiders in charge, immune to the pressure of outside shareholders or the threat of takeover. By 1996, just one-fifth of Russian firms featured majority shareholding by people outside the company they worked for.

The result, in other words, was capitalism without capital markets. Bad things are bound to happen in such a scenario. And they certainly have in Russia, most notably the pilfering of firm assets (and the interests of minority shareholders) by firm management.

But far from demonstrating the inherent logic of capitalism, such unproductive shenanigans have been exacerbated by market reforms not taken. Price controls to avoid "shock therapy" led to political insiders brokering their access to cheap energy. Export licenses provided monopo-ly profits for the politically connected. Loans issued at below-market rates created a brisk business in currying favor with central bankers. And massive subsidies to inefficient factories further tilted the competitive struggle in favor of politics and away from economics.

So terrible things have befallen the former Soviet Union. But the overwhelming task of turning around an entire system of ownership rights while not killing anyone and while holding truly democratic elections is not a job for sissies.

Fortunately for the reformers, Soviet history set a low baseline for progress. With Gorbachev's communist economy as their starting point, Yeltsin's capitalists are actually making headway. A key metric on social progress is that Russian auto ownership has risen from 18 per 100 families in 1990 to 31 per 100 in 1997, a statistic that becomes all the more impressive when it is remembered what kind of jalopies those 18 lucky Soviet families owned in 1990. Here's another sign of progress: Average monthly wages, just $75 per worker in 1993, rose to $175 in 1997.

Buying off old communists has been an expensive proposition for the Russian people, but paying the ransom to avert a bloodbath was a wise and noble choice. To be sure, crony capitalism seriously under-performs what will obtain once real capital markets develop and bring about true competition. That will take further liberalization and more time.

But the biggest job has been done. As Anatoly Chubais, Russia's privatization guru, has put it, "Controlling managers is not nearly as important as controlling politicians." In the end, history will record that the corruption of post-communist Russia handily outperformed the corruption of the late--and strangely lament-ed--USSR.

Contributing Editor Thomas W. Hazlett (hazlett@primal.ucdavis.edu) is an economist at the University of California at Davis and a resident scholar at the American Enterprise Institute.

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