Russia's Real Radicals

Creating a Moscow market

When I first met Larissa Piyasheva in April 1990, she had been described to me as one of the Soviet Union's leading free-market economists. I knew that she had jolted the Soviet public at the dawn of perestroika by asserting in the monthly journal Novy Mir that seeking a "third way" between the market and socialism was like trying to "get a little pregnant." It was the first time a major Soviet periodical had printed what amounted to a capitalist manifesto.

Told of her advance billing, Piyasheva smiled self-deprecatingly. "A leading economist? I wouldn't say that. After all, I haven't been asked to work on any legislation or program. I'm not leading anybody anywhere."

Piyasheva's ground-breaking essay, "Who Has the Puffier Pies?" (that is, which system gives its people a better life), was roundly attacked by economists and commentators when it appeared in May 1987 under the alias "L. Popkova." Some of her critics even suggested that "Popkova" was a fiction made up by Novy Mir editors: No real person could hold such extreme views. As recently as last spring, when she spoke at a Moscow conference co-sponsored by the Cato Institute, a left-wing American correspondent sneered at Cato for digging up some obscure economist with crazy ideas.

Today, while it is surely too early to say that the libertarians have had the last laugh, the 43-year-old Piyasheva, aided by a small group of like-minded economists, heads an ambitious though troubled project to privatize virtually all commercial properties in the Russian capital. If all goes well—a big "if"—Piyasheva expects most enterprises in Moscow and all city-owned properties to be privatized this year. Piyasheva and her colleagues, who convinced the city government to approve their privatization plan last fall, have also helped inspire republic-wide reform efforts. But they achieved this influence only after a difficult struggle to overcome resistance from reformers attracted to Swedish-style social democracy.

For the past two years or so, "the market economy" has been a buzzword in Russian political discourse. Yet William Eggers, a Heritage Foundation policy analyst who specializes in East European economic affairs, recently observed that, compared to other ex-communist countries, few of the reformers in what used to be the Soviet Union seem well versed in classical-liberal economics. Mikhail Gorbachev's economic advisers, such as Abel Aganbegyan and Leonid Abalkin, spent five years preaching a "regulated" or "socialist" market and trying to formulate government policies that would accelerate economic growth without privatization. Even Grigory Yavlinsky, author of the 1990 "500-Day Plan" for a leap to a market economy, envisioned a transition expertly managed by the government every step of the way.

Piyasheva describes a mere handful of her colleagues as true market economists. But the real puzzle may be how anyone trained under the old Soviet system could emerge as a champion of free enterprise. "I think that in a sense, every Soviet person is a believer in the market, even if he doesn't realize it," Boris Pinsker, Piyasheva's husband and occasional collaborator, told me in 1990. "There is simply an innate sense of what is natural to human beings and what is not."

Besides, even the Soviet state had a need for economists with technical knowledge and the ability to analyze economic processes in the West—which required access to non-Marxist books. Piyasheva delved into John Maynard Keynes's General Theory of Employment, Interest and Money as a young researcher studying West German social democracy. Then the economic crisis of the mid-1970s convinced her that the Keynsian model was deeply flawed, prompting her to turn to Milton Friedman and F.A. Hayek. Vassily Selyunin, who is now working with Piyasheva on the Moscow privatization plan, was able to find copies of The Road to Serfdom and Capitalism and Freedom, translated into Russian for strictly limited editions, at the office of the daily Socialist Industry, where he worked as a commentator.

For all its rigidity, the old Soviet system had more niches for people with heretical views—if they were lucky and willing to maintain some decorum—than one might suspect. For a man without Party membership to be a commentator on a newspaper published under the auspices of the Central Committee was a shocking violation of the rules. Yet Selyunin was protected by an editor who, orthodox though he was, knew good journalism when he saw it. Long stretches of silence when journalists were instructed to accentuate the positive alternated with periods when the Party recalled the need to highlight certain stubborn economic problems so they could be corrected: "That meant our time had come, and I wrote article after article."

Glasnost allowed dissenting academics such as Selyunin, 63, and Piyasheva to express their views more openly and to gain a broader readership. Despite the initially hostile reception for "Who Has the Puffier Pies?" and the fact that the Soviet academic establishment was pointedly ignoring them, Piyasheva and Pinsker were soon reaching a wide audience in newspapers and magazines ranging from the radical Moscow News to the establishment daily Izvestia.

These were years when other Soviet writers were testing and expanding the limits of free speech in historical, political, or literary discourse; the economic radicals were doing the same in their field, which was often hard to separate from politics. Selyunin was the first to argue in an official Soviet periodical (in the essay "Sources," Novy Mir, May 1988) that one-party dictatorship and the command economy were not Stalinist perversions but the essence of Leninism itself. As time went on at what seemed an ever-quickening pace, it was not just fringe extremists anymore who were saying that profit was not a dirty word, that there could be no responsibility without ownership, that inequality was not to be feared.

But even as Soviet-style socialism had fewer and fewer defenders, the communist myth was being replaced by the myth of the benevolent welfare state. "We still have the notion here that there's the Swedish model, it's great, let's imitate it, we don't need this ruthless American system," Selyunin complained in late 1991. He was hoping to help dispel that notion with a magazine piece about a recent trip that took him to America, then to Sweden, and then to Germany.

"Your reaction to Sweden," he says, "depends on what country one is coming from. If you just left the Soviet Union, you will say, 'My God, we'll never have it so good.' But when you go to Sweden from America.…" He was shocked by the high cost of goods and services in Sweden, the smaller selection at supermarkets, the poorer quality of housing. His conclusion: "It's clear that the more socialism a country has, the lower its standard of living.…The Swedish model is a kind of socialism where property remains private, where they say to the capitalists: You produce, you're good at that, but leave the distribution to us." The weakening of incentives to produce, he adds, is a self-evident result.

When the Soviet media began to admit, three or four years ago, that people in the West were far better off than in the so-called socialist world, the point was usually made that "pure" capitalism no longer existed anywhere and that Western democracies really had a far more extensive system of social welfare than any country in the Soviet Bloc. The clear implication was that the secret of the good life in the West today was its ingenious combination of markets and government controls.

It fell to Piyasheva and Pinsker to challenge this notion in magazines whose combined readership numbered in the millions. Their articles exposed the economic and social failures of the welfare state in Great Britain, Germany, and Scandinavia, and cited the successes of the Reagan and Thatcher revolutions (on which they co-wrote a book, published in 1988). Above all, they pointed out that if statist policies were sufficient to sap even strong economies with vast accumulated wealth, it was absurd to expect them to help rebuild a ravaged country.

In a January 1990 essay, "The Lessons of the 'Third Way,'" Piyasheva argued that when societies try to combine capitalism and socialism, they get the worst of both: "On this 'convergent' path to a mixed economy, the capitalist world…contracted 'socialist' ailments—bureaucracy, overregulation of economic life, the growth of the underground economy.…Socialist countries, on the other hand, contracted 'capitalist' ailments—unemployment, open inflation, bankruptcies, growing income disparities and social instability," even as their intrinsic problems remained essentially unchanged.

To varying degrees, every professed free-market economist I have met in Russia accepts state ownership in areas perceived as natural monopolies—highways, rail transportation, telecommunications, possibly energy. And they do not question the need for government aid to those truly unable to help themselves. Says Yuri Kochevrin, 59, a top adviser to the Moscow privatization program who has worked closely with American libertarian scholars in recent years: "While I share, on the whole, the ideal of minimal government. I see the realities that make it necessary for us to borrow some important elements of the welfare state if we are to have a civilized society in Russia." What matters, he insists, is putting the horse—the creation of wealth—before the cart.

These economists also seem resigned to the fact that in the harsh transition period, in a country where the pauperized natives are getting restless and private aid institutions barely exist, the government will have to play a larger role in providing social benefits than would normally be desirable. Selyunin proposes that, in order to phase out military production without causing "10 million angry men" to pour into the streets, arms-industry workers should be paid their full salaries for a year and a half while the industry is being privatized and converted to civilian needs; additional pay based on the output of consumer goods would serve as an incentive for such production.

But the subsidies Selyunin and his colleagues advocate are temporary and structured so as to minimize interference in the market process—direct aid to needy individuals rather than price controls or subsidies to losing enterprises. Piyasheva has been one of the earliest and most vocal advocates of price deregulation, explaining that artificially low prices breed shortages, lines, and pervasive dishonesty. Unlike most Russian reformers, she is willing to go the extra mile of freeing the prices of staple foods such as milk and bread. She does, however, see the need for a food-stamp-like program for retirees, large families, and the disabled.

Selyunin cautions that, given the lack of resources, even pension indexing "should be targeted to help the really needy retirees on a case-by-case basis." Able-bodied people who are productively employed "should not get any subsidies, indexing, or minimum wage. They should take care of themselves. If life is too expensive, work two shifts and you'll make more money. Price decontrol triggers real progress for one simple reason: It gets people to work." (He would make an exception for some groups, such as teachers.)

Can this hard-headed approach be accepted by ordinary Russians? In April 1990, I asked Piyasheva if she feared that the transition to the market might spark violent unrest. She shrugged. "I am afraid of violent discontent for the opposite reason: The people keep getting poorer, they are being promised some sort of mythical reforms, yet they get only inflation and more shortages. But if goods appear on the shelves, I don't think that will cause anger." In early December, Selyunin predicted that price deregulation would be accepted without much turmoil: Most Russians were already forced to buy most necessities at prices not only free but artificially inflated by pressures from the corrupt state sector, and sometimes they had to stand in line to boot. To a large extent, he seems to have been right.

What may indeed spark intense anger, radical reformers have warned, is the kind of privatization that would put the fruits of reform in the hands of the old Communist elite, leaving the majority of the population swindled by another grand promise. To avoid such an outcome, Pinsker, Piyasheva, and Selyunin, early in 1990, devised a two-phase privatization plan for the Soviet Union. In the first phase, small businesses—stores, cafés, repair shops—would go on sale. Next, the total value of properties to be privatized would be divided by the number of people in the country, and every citizen would get an investment voucher for that amount, redeemable for stock in enterprises.

"Of course there is something socialistic about this scheme," says Selyunin with a grin, "but we thought we'd divide everything up one last time, and no more redistribution after that. Those with money can buy additional stock, but everyone will get an initial fair share. In a year or two, we'll be back to rich and poor. Some will sell their shares and use the money for personal needs, or to get drunk."

But the Russian radicals have enough confidence in the innate common sense of most men and women to believe that the damage to individual initiative caused by 70 years of communism is not permanent. "The sense of property is in people's blood," says Piyasheva. "Everyone wants to be an owner. And if people were given back this right and left alone, the attitudes would come around in no time at all"—as soon as the government made it clear that the rights of property owners were taken seriously.

When Selyunin, Piyasheva, and Pinsker were working on the details of their privatization plan early in 1990, it might have seemed an interesting academic exercise. Two years later in the new Russia, their radical vision has, to some extent, become the foundation of current programs of economic reform. But the road to recognition was a long and rough one, and the road ahead remains difficult.

In spring 1989, when Piyasheva ran for the Soviet Congress of People's Deputies, copies of her program were seized as "unconstitutional" in the town of Zagorsk, and the local Party machine mounted a nasty campaign against her. That hardly came as a surprise. But in the elections for the Russian parliament the following year, her outspokenness made her unexpected enemies: the anticommunist democrats. By that time, they were all paying lip service to "the market" even as they advocated policies far removed from economic liberalism.

Piyasheva was particularly dismayed by plans to ration essential goods, proposed by such democratic leaders as Gavriil Popov, the future mayor of Moscow, and Ilya Zaslavsky, up for chairmanship of the Oktyabrsky district council. Piyasheva's February 1990 article in Izvestia attacking the rationing proposals, "Whom Will the Democrats Bar from GUM?", provoked a storm. The coordinating council of Democratic Russia voted to strike the heretic off the list of "democratic candidates" endorsed by the coalition—to "expel her from the party," as she put it with some bitterness.

Selyunin, perhaps because of his less combative temperament, was able to become an adviser to Democratic Russia; in the summer of 1990, parts of his economic-reform proposal, which stressed private ownership and low taxes, were incorporated into the program Yeltsin adopted as newly elected chairman of the Russian Republic's legislature. (The plan was never implemented, since Russia was still wrestling with the central Soviet government for control over its trade and property legislation.)

At the first congress of Democratic Russia in January 1991, Selyunin prophetically urged those gathered to accept the breakup of the Soviet Union as a given. "When power slips away from the Communists," he warned the democratic leaders, "we have to be ready to pick it up." Yet even he was taken by surprise when, as he puts it, "power fell into the lap of Yeltsin and the democrats after August 21. We were still thinking of defending the rights of Russia and other republics, and suddenly there no longer was a union." The democrats in the Russian state and in the governments of major cities were now in a position to do something about the economy—and be held responsible for the outcome.

It was almost certainly desperation that prompted Mayor Popov, at whom Piyasheva had continued to snipe relentlessly for his rationing and price controls, to approach her in October 1991 with an offer to head a city-wide privatization program. She was stunned by the offer and wanted to make sure that she would be allowed to pursue the kind of reforms she considered necessary. After several meetings, Piyasheva accepted the post; her plan for a sweeping privatization of the city's trade and services, developed with Pinsker, Kochevrin, and Selyunin, was quickly approved by the mayor's administration.

But the Moscow City Council and the municipal government had other ideas: For the next 15 years, the city would lease properties to private businesses. Council members cited concerns about real-estate speculation and fears that if given complete latitude, shop owners would start selling nothing but luxury goods and let the common people starve. Pinsker recalls that in one discussion, prominent democratic activist Alexander Muzykantsky put it to him more bluntly: "Dealing with leaseholders is simple. If I don't like him, I'll tell him to go to hell in six months. But if we sell him the property.…"

After an unseemly squabble, the mayor backtracked, though remaining apparently supportive of Piyasheva. She spoke of her bewilderment and disappointment at "this social democratic crowd" now holding the reins of power. "These are people who believe in power, in the creative quality of coercion," says Pinsker. "They are wholly devoted to the socialist model of statecraft even though they don't believe in any socialist ideals such as equality. What they do believe is that the state knows best, and they should run the state."

The newspapers were already writing ironic obituaries for yet another reform plan smothered at birth in political bickering and red tape. But the fight was not over. Piyasheva, Pinsker, Selyunin, and Kochevrin wrote an open letter calling for the resignation of Moscow's municipal government. Then, in late November, the leadership of the Democratic Russia coalition—with the Communist Party gone, the country's largest political organization—met to discuss the deadlock. Most of the so-called Moscow radicals were strongly in favor of long-term leasing.

On the 26-member leadership council, Piyasheva had only two strong supporters: Yuri Afanasiev, who currently chairs the coalition, and Leonid Batkin, a highly respected Moscow political commentator. Yet in the end, the council voted to endorse Piyasheva's plan. What swayed them, says Batkin, was Afanasiev's threat to bring up the matter at the forthcoming full congress of Democratic Russia—where the council would be up for re-election—and disclose the names of those who killed a viable privatization program.

Days later, after a long huddle between Piyasheva and city officials, a compromise was achieved. Small and medium-sized shops and service outlets—with footage under 150 square meters, or about 1,600 square feet—are to be privatized immediately, with first option given to employees. (For one year after purchase, the new owners are obligated to run the same type of business as before—they cannot close a dairy store and open a fur salon.) Larger units can be bought after a one-year lease, with the rent payments counted toward the purchase price, while about 400 "unique entities"—establishments with a distinct identity, rather than the generic "Café," "Groceries," or "Hair Salon" that one sees all over ex-Soviet cities—are to be converted into joint-stock companies, with the Moscow city government automatically acquiring 25 percent of the stock. Warehouses are to be privatized at the same time.

Despite the program's obvious flaws, which allow the new authorities to retain substantial control over the private sector, Pinsker defended the concessions: The important thing was to start putting properties in private hands. Early in December, Piyasheva appeared confident that if she were given the latitude to proceed with the plan, most trade and services in Moscow could go private by spring, and all city-owned properties by the fall of 1992. Her only concern was that the Russian government would drag its feet on republic-wide reform, especially price deregulation and monetary stabilization, leaving her with the unenviable task of trying to dismantle socialism in one city.

The Russian government, which took the plunge into free prices in January, has announced plans for extensive privatization, based in part on the plan developed earlier by Pinsker, Piyasheva, and Selyunin. The program incorporates additional suggestions from Selyunin, including the idea of selling profitable enterprises at higher prices than losing ones of the same size and a proposal to distribute no more than 25 percent of the stock to employees. But the future of market reform remains uncertain. Piyasheva is unhappy about the plans of Yeltsin's economic team to privatize small enterprises by auctioning them off for money. While she has no moral qualms about businesses ending up in the hands of unworthy people, her concern is that such buy-outs will provoke not just popular resentment but vigorous resistance from employees. Pinsker worries that the Russian republic's privatization project lacks the key element of speed: "It is similar to our program in all but one detail, in the same way that a person whose heart has stopped beating is similar to one whose heart still beats in every way but one."

Moreover, the price liberalization was marred by serious errors. The first mistake, Selyunin said last December, was to announce the measure far in advance and then postpone the lifting of controls by another two weeks. The anticipation—"just like sitting in the dentist's waiting room," as Selyunin put it—not only frayed people's already jangled nerves but prompted panic buying, lines longer than ever, and a catastrophic depletion of food stocks. Another blow was the simultaneous imposition of a steep (28-percent) value-added tax, which has led to a situation that, for Russia, is paradoxical: Black-market prices are lower than those in the stores. In addition, the tax encourages people to barter rather than buy.

And while it is clear that free prices need to be coupled with privatization if they are to stimulate the economy, even the Moscow privatization plan is proceeding haltingly at best—not for lack of popular support but because, Pinsker believes, it is being deliberately tied up in red tape by the Moscow bureaucracy. Under the compromise agreement, Piyasheva has no executive powers; her decisions have to be sanctioned by the mayor in order to be enforced, and she has new doubts about the mayor's actual commitment to the program.

Public response, meanwhile, has been enthusiastic: By January 15, individuals and employee groups had filed about 10,000 applications for buy-outs of state properties in Moscow. Yet no more than a dozen outlets actually had been sold. At this rate, the privatization effort will take years to complete—years the Russian reformers do not have.

For parallels to the leap from the wreck of a centrally planned economy to the market that the republics of the former Soviet Union now need to make, Selyunin and Piyasheva look back to the "German miracle" engineered by Konrad Adenauer and Ludwig Erhard. "Postwar Germany was in ruins, hardly better than we are today," Selyunin observes. "They had churned out so much money that the money was worthless; cigarettes were the real currency. And then, they deregulated prices in two days. So we are not the first to face this problem."

Some may argue that the analogy is faulty; Germany, after all, had not had private enterprise suppressed for 70 years. But any glimmer of optimism is refreshing in today's Russia. What makes Piyasheva most hopeful is the support she has received from Moscow's business and financial community, which has repeatedly pressured the mayor on her behalf: "I saw that there is now a segment of people in this society who have a stake in market reform and will support it," she said last November, the day after her compromise with the city government had been achieved. But even more important, she added with a weary smile but only half joking, she has the support of Mikhail Zhvanetsky, Russia's most popular stand-up comedian, who now gives her a plug in every show.

Contributing Editor Cathy Young, author of Growing Up in Moscow, is a writer in Middletown, New Jersey.