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Trajectories of Economic Transformations. Lessons from 2004 for 2024 and Beyond
Valery Kushlin
The first English-language edition of a landmark 2004 work by a prominent Russian economist, Professor Valery Kushlin, offers profound insights into the painful challenges and crossroads of Russia’s post-socialist transition, nesting them in the 21st century’s emerging global socioeconomic trends and contradictions. Twenty years after the book’s original publication, its key observations on the nature of economic transformations strongly resonate in the context of contemporary global challenges.

Trajectories of Economic Transformations
Lessons from 2004 for 2024 and Beyond

Valery Kushlin
To Oksana, my beloved wife and
trusted companion for life

Kushlin Valery
Trajectories of Economic Transformations: Lessons from 2004 for 2024 and Beyond / Valery Kushlin. – Ekaterinburg : Издательские решения, 2024. – 346 p.
ISBN 978-5-0064-6474-2

The first English-language edition of a landmark 2004 work by a prominent Russian economist, Professor Valery Kushlin, offers profound insights into the painful challenges and crossroads of Russia’s post-socialist transition, nesting them in the 21st century’s emerging global socioeconomic trends and contradictions. Twenty years after the book’s original publication, its key observations on the nature of economic transformations strongly resonate in the context of contemporary global challenges.


Translated and edited by Andrey V. Kushlin, 2024.

Cover design by Ivan A. Zherebtsov, 2024.

All rights reserved.

© Valery Kushlin, 2024

ISBN 978-5-0064-6474-2
Created with Ridero smart publishing system


Introduction
The modern world economy is a complex combination of transnational structures and national economic systems of different scales and levels. There is much to be said about the increased interdependence of economic systems in the world and the dynamism of economic and socio-political changes. But no matter how economic interactions in the world change, most people judge them by what happens in their home country. The peoples of Russia, as well as the peoples of several other countries. In the last decade of the 20th century, they were involved in transformations that were very sensitive to them, which primarily took over the economy and, through this, all areas of people’s lives. These transformations were initiated by the conscious actions of the most active representatives of the country’s elites and tacitly supported by the people. From the very beginning, they acquired the character of purposeful changes in the economic system, so it became appropriate to talk about the policy of economic transformations.
Although these transformation processes started a long time ago, and mountains of literature have already been written about them, the comprehension of what is happening not only does not seem complete, but with each step from the old to the other, it gives rise to more and more questions that do not receive explanations. Among such questions are both directly mundane, pragmatic, related to the lives of people today and tomorrow, and conceptual, worldview, related to the understanding of the driving forces and patterns of qualitative and quantitative changes in the economy and society.
The focus is rightly on changes in the economic system, which also determine other qualitative features of society. In studying them, it is important to agree on fundamental approaches related to the understanding of the general and the specifics. Since economic transformations have occurred many times in the history of countries and peoples, there is a natural desire to use the facts of history and their systematization in literature to derive the laws of economic transformations. applicable to today. Such an approach cannot be excluded, but neither can it become the main method of analysis. The transformations of the economic system that have unfolded today in Russia and other post-socialist countries cannot be adjusted in terms of content and consequences to analogues in the past. They are truly unique and need to be approached in all their complex concreteness. It is also necessary to consider the very complex relationship between the transformation processes in the countries of the post-socialist zone and the rest of the world economy. These external blocs are influencing post-socialist countries more strongly than in the past, and not necessarily positively. The increasingly contradictory development of events in the world economy, including in the system of economies of countries that have always seemed stable, gives rise to expectations of serious transformations in themselves along not entirely clear trajectories.
These considerations have predetermined our approach to the chosen topic of economic transformation. We will talk about the content and methods of transforming the Russian economy as a particularly complex phenomenon that does not fit into some known schemes, but at the same time as a process that is part of contradictory economic and socio-political transformations around the world.
When analyzing such complex transformational phenomena, the question inevitably arises about their causes and effects, about real (and hidden) goals, and about the trajectories of progress towards them.
The word “trajectories” in the title of this book is somewhat symbolic. It denotes the need for the economic systems of all countries to move towards new states in order to overcome global contradictions, and at the same time emphasizes the limitations of managerial influences on these advances. It is no coincidence that the concept of “trajectory” is taken here in the plural. I proceeded from the fact that there are a great many ways to transform the economy in each country. Moreover, the endpoints of each of the trajectories are also not unambiguous, but multivariate. The goals achieved by economic transformations are clarified and concretized only in the course of the practice of transformations. This means that the analysis of transformation trajectories should include a constant clarification of the content of transformations and their goals.
In fact, today, when assessing economic transformations in Russia, they are guided by their comparisons with the situation in the developed countries of the West. But to what extent this benchmark can serve as an objective criterion of socio-economic progress, no one has a confident answer today.
For some time now, it has become axiomatic that the most efficient economy is a market-type economy, i.e., one based on the principles of self-regulation, on the automatic laws of supply and demand, and on individual interest as the engine of development. The assertion of the axiomatic nature of this truth was facilitated by the long-term practice of the dynamic development of the economies of the countries of the capitalist West against the background of the rest of the world. At the same time, however, the question of the price of this “effectiveness” was left unanswered, as it is associated with the unique conditions for consuming the potential of the world’s resources within the “model” countries. Nevertheless, practically all deviations from the supremacy of the principles of the Anglo-Saxon market, be they patriarchal economies, command economies, collective or socialist economic systems, have remained in the historical past and are considered to have lost the competition with the market capitalist economy. Hence the choice of ways to transform the economic systems of the countries of the socialist camp made in the last decade of the second millennium.
It was the processes of radical transformations of economic systems in the countries of the post-Soviet and post-socialist zones that gave rise to a special elaboration in the literature of a special category – “economic transformation” or simply “transformation.”[1 - In 1990, the World Bank began to publish a special periodical bulletin “Transition” in several languages, designed to highlight the experience and problems of radical economic reforms in countries with economies in transition.] Over the past decade, several publications have been issued in which the topic of economic transformations is brought to the level of theoretical generalizations[2 - Lyubimtseva S. V. Transformation of Economic Systems. Moscow, Economist Publ., 2003; Minaker P. A. Systemic transformations in the economy. Vladivostok: Dalnauka, 2001; Monakhova L. I. Transformation of the Planned Economy into the Market Economy in the Context of Globalization. Moscow, Economist Publ., 2003; Olsevich Y. Transformation of economic systems. Moscow, Institute of Economics of the Russian Academy of Sciences, 1994.]. Attempts are made to identify certain laws of economic transformations common to the long history of mankind. But the desire for universalization in the description of the laws of development is fraught with the generation of errors. The probability of such outcomes is high if theorizing on the topic of economic transformations begins to follow the path of logical analysis concepts or juxtapositions of phenomena that are similar to each other in form, but in fact, perhaps not of the same order.
In this book, the reader focuses on the understanding of specific processes of transformation of economic systems at the turn of the second and third millennia, which started in the former socialist countries because of the conscious actions of the elite of society. Their objective reason is the need to establish economic institutions that ensure higher economic efficiency and the growth of the well-being of peoples. In practice, however, the proclaimed reform plans have largely failed to materialize. A few contradictions of the old economy, such as insensitivity to scientific and technological progress (STP), heavier structure, as well as social problems, have become even more acute. Moreover, after 10—15 years, the content and trajectories of the transformations that have begun in many countries today do not look quite predictable. The economic downturn has been inexplicably large and long-lasting. There is a great gap between the people who have benefited greatly from the reforms (the minority) and the people who have clearly lost (the majority).
In the context of the obvious divergence of interests of the existing social groups, it is difficult to count on the coincidence of assessments of the effectiveness of economic transformations among different segments of society. The number of people who are dissatisfied with the transformations is very high, and many are inclined to criticize these processes at the conceptual level. There are reasons for this, because the role models – the economies of highly developed countries – are in many ways more discredited than before. Under the influence of the aggravation of contradictions, the uncertainty about the future of the peoples of formerly prosperous countries is increasing. Local and international financial and economic crises have become more frequent. In the full sense of the word, some respectable concepts of transition to a market economy developed by international institutions on the basis of classical schemes for developing countries and countries with economies in transition have gone bankrupt. A striking example is the widespread negative effectiveness of the transformation programs formed on the basis of the so-called Washington Consensus.
With the rejection of the alternative economic structure to capitalism, it seems that all systemic obstacles to the establishment of homogeneity of economic space on the entire planet and to the harmonious socio-economic development of the world along the well-trodden track are being removed. Meanwhile, the latter is just an appearance. In fact, there are growing contradictions associated with the unevenness of economic development, the struggle for limited resources, and the new scale and quality of structural changes in the global world.
World-renowned philosopher and sociologist Alvin Toffler argues that “the recent shifts in Eastern Europe and the Soviet Union are only minor firefights compared to the global power struggle that lies ahead. And the competition between the United States, Europe and Japan has not yet reached its climax.”[3 - Toffler A. Metamorphoses of Power. Moscow, AST Publishing House, 2002. P. 16.]
The development of events in the world in the first years of the third millennium showed unexpected and very tough conflict situations that manifested themselves in the “prosperous” spaces of Europe and America, not to mention the Middle East and Africa.
But so far, in the literature, the theme of the struggle for power, touched upon by Toffler, reflects the side of the contradictions between the present and the future, which is limited to the interests and lifestyle of the most highly developed countries of the world. The rest of the world is present in the arguments only as a general background, as a condition for the implementation of the strategies of highly developed countries. Such an accentuation of research is a typical feature of the works of modern social scientists living in the West: apparently, it reflects stable priorities of thinking that exclude the manifestation of a deep interest in the needs of peoples who are not included in the “golden billion.” Meanwhile, future processes in the world are not reducible to relations between the United States, Europe and Japan (for all their significance). The most unexpected turns in world processes may occur, which will be determined by the nature of the development and resolution of contradictions between the North and the South, between the West and the East, between transnational corporations (TNCs) and the rest of the world, between religions, etc.
So far, there has been almost no scientific research on the content and trajectories of possible transformations of the economic systems that have developed in highly developed countries. Most researchers and politicians prefer to think that everything in these countries will continue to follow the well-trodden path. However, given the real trends, there is less and less hope for such scenarios.
In this context, materials on economic transformations in post-socialist countries, especially analytical and evaluative materials on such a large-scale and truly complex country as Russia, are becoming increasingly important. They are important both for finding the right decisions regarding the outcome of the experiments that have been initiated and the fate of hundreds of millions of people living in these territories, and for eliminating the mistakes of “arrogance” on the part of global strategists. It just so happened that the course of history created a unique test site in the space of the former USSR and the former Council for Mutual Economic Assistance (CMEA). This consideration was fundamental in shaping the idea of this book.
The book is based on materials on the economy in the former Soviet Union and, first of all, on materials from Russia. This emphasis is due, firstly, to the author’s personal interest as a citizen of his country, and secondly, to the author’s direct impressions of the behavior of high state structures both during the period of transformations and long before the collapse of the USSR. Thirdly, the author proceeds from the fact that it is the post-Soviet (especially Russian) transformations that today have a sufficiently representative factual base to make broader generalizations about hypotheses about the future of economic transformations in the world. Both the geopolitical position of the object of study (USSR, Russia) and the scale of the phenomena observed here during economic transformations provide grounds for global assessments.
An important circumstance that predetermines the choice of the vector of economic policy in specific countries and in the world is the correlation of forces of the functioning scientific and economic schools. Therefore, to the extent possible, when considering the main topics of economic transformations in Russia and in the world, the book traces the changes in the contours of economic thought that affect real life. Such an analysis is directed by the author to determine the scientific basis for the implementation of further economic transformations in Russia in the most effective way for the country.

Part I: Prerequisites and the Course of Transformations in Russia

Chapter 1. The Turn of the Millennium: A Time for New Directions

The transformation processes in Russia and other post-socialist countries began and unfolded at a time when the world of highly developed countries seemed to be rushing forward at full speed and ideally embodying the phenomenon of socio-economic progress. At the turn of the second and third millennia, however, the intellectuals of the world began to talk more and more often about the sense of a dead-end path based on the evolution of the age-old system of capitalist economy. The reason for this was the frequent economic and financial crises in various parts of the world economy, the aggravation of contradictions between competing centers of economic dynamics, including between traditional allies within the bloc of highly developed countries, the emergence of fundamentally new processes and forms in the global economy that cannot be explained within the framework of the usual scientific and economic concepts, the growing threats of energy (and resource shortages in general), and the lack of harmony between industrial development and the preservation of the human environment, the unevenness of scientific and technological progress (STP) and the ambiguity of its consequences for different countries and social strata.
The famous philosopher Jean Baudrillard, professor of sociology at the University of Paris, put it succinctly: “We are moving at an increasing speed, but we do not know where.”[4 - Ekspert. 2002. No. 17. P. 65.]

A Local Knot of Global Contradictions
In the last quarter of the 20th century, the aggravation of contradictions in socio-economic development manifested itself in all countries and regions of the world, but not simultaneously and with varying intensity. Despite the spurring effect of globalization, which has provided a significant head start to countries that have concentrated the potential of transnational capital on their territories, the world economy has not accelerated, but even slowed down. Average annual growth in gross domestic product (GDP) in the world fell from 3.1% in 1980—1990 to 2.0% in 1990—1995.
Let us name several more socially specific negative processes noted by international experts. First, there is a deepening inequality in the world. Average incomes in the richest 20 countries are now 37 times higher than in the poorest 20. That gap has doubled over the past 40 years, largely due to slow growth in the poorest countries. Similar phenomena of deepening inequality can be observed within many countries. An increasingly serious destructive factor is conflict situations have become more frequent. In the 1990s, more than half of the poorest countries were involved in conflicts, mostly civil conflicts. The result has been enormous losses, reversing the elements of progress and leaving a legacy of destruction and mistrust that undermines future opportunities. The relationship between nature and society has sharply deteriorated. Air pollution has reached critical proportions in many countries. Freshwater scarcity is increasing, with a third of the world’s population living in countries that already experience some or significant water scarcity. Since the early 1950s, nearly 2 million hectares of land (23% of the world’s arable and grazing land, forests, and wetlands) have been degraded. Deforestation of the land is proceeding at a significant rate (for example, since 1960, a fifth of all tropical forests have been destroyed). In many ways, there is a loss of biodiversity.[5 - World Development Report 2003: Sustainable Development in a Dynamic World – Transforming Institutions, Growth, and Quality of Life. Moscow, Ves Mir Publ., 2003. P. 2—3.]
Of course, these and many other problems did not come to the fore all at once. It is rather difficult to name the specific years of their crisis escalation, just as it is impossible to record the exact years when major corrective steps were initiated by governments or international organizations. It should be noted, however, that the period of heightened concern in the world about new problems coincided with the maturation and unfolding of fundamental transformations of economic systems in several developing countries and countries that have for some time been called countries with economies in transition. It can be argued that active actions on the part of the institutions of the international community to overcome the aggravated problems were asymmetrical, they acquired the character of correcting the situation mainly among those who did not get into the “mainstream,” who lagged the leaders in the field of technological progress and social development.
Russia and the other countries that made up the socialist system were among the first in the world to identify the most obvious economic contradictions. They manifested themselves in relief in the crisis of the extensive path of economic development, the inability to turn from which to a more adequate path of intensive type of expanded reproduction became a stumbling block for the countries of the Soviet bloc. And it is no coincidence that since the mid-1970s, in the USSR (and in Russia, which structured this union), in other socialist countries, there is talk of the dangers associated with a slowdown in economic growth. Table 1.1 shows that between 1980 and 1990, Russia’s already less impressive share of world GDP (compared, for example, with the United States or Japan) fell to 2.7%. The share of the other leading countries of the Eastern European bloc in world GDP fell to less than 1% in 1990.


Looking at the table, we notice while there was a slight decrease in the quota in the production of world GDP also in the United States and Japan. The shares of China and India also declined slightly during this period, but in the following years there was a steady increase in the economic weight of these countries.
The contradictory course of events in the economies of the socialist countries is very clearly illustrated by the parameters of exports and imports. Table 1.2 shows that in 1980—1990 the average annual growth rates of exports and imports in the transition economies[6 - The use of the concept of “countries with economies in transition” in relation to the periods before 1990 is very conditional and is permissible only in view of the subsequent transformation processes in the socialist countries. According to the IMF methodology, the transition economies usually include the republics of the former USSR and Yugoslavia, Bulgaria, Hungary, Poland, Slovakia, Romania, the Czech Republic, and Mongolia.] fell to symbolic values of 0.9 and 1.5%, respectively. At the same time, when considering three consecutive periods (1960—1970, 1970—1980, and 1980—1990), the nature of the dynamics of the average annual growth rate of exports and imports in transition economies is identical to those in developed and developing countries. However, the decline in the average annual growth rate of exports from 17.6% in the 1970s and 1980s to 0.9% in the 1980s and 1990s was egregious.


Table 1.3 shows how rapidly the share of transition economies, especially Eastern Europe, in world exports declined in the period after 1970.
In the context of the obvious aggravation of the problem of efficiency in the economies of the socialist countries, the decrease in their economic weight in the world economy and considering the increased desire among the elites of these countries to change the situation as quickly as possible, the active transformations of the economy that have begun here have become the center of the global search for new solutions. The conceptual dominant in transformation programs has been reduced to the formation and stimulation of market entrepreneurial forces on the model of the United States and other highly developed Western countries.


Transformations as systemic transformations in the economy and state structure unfolded differently in different countries and regions. In some places, for example, in Poland or the Soviet Baltic republics, political processes and demands came to the fore, followed only by radical economic reforms. In other cases, as in Hungary, for example, the process of economic reforms in the market direction was far advanced in the depths of the past, socialist system, and developed primarily in an evolutionary way. And in a completely evolutionary way, without the destruction of the political system, transformations developed in China. One way or another, the main content and motive of transformations and reforms was the formation of a market economy as a basis for familiarization with the values and lifestyle of highly developed countries of the West.
The totality of transformation processes in post-socialist countries appears to the observer, who undertakes to comprehend them, as a socio-political shift, which has no analogues in history. Nevertheless, the researcher must be able to rise above the abyss of events, otherwise the vector of objectivity will be lost.
Overcoming the euphoria inherent in the start of market reforms, it is impossible not to admit that the transformations that have unfolded in the post-socialist part of the world combine contradictory qualities: the uniqueness of the scope, on the one hand, and conceptual traditionalism, on the other. Indeed, the spatial scale of these transformations is impressive: they encompass at least a fifth of the Earth. They have begun to be implemented on the principle of almost instantaneous changes in the previous economic system, but, except for nuances, they are proceeding in different countries according to an almost uniform scenario in conceptual terms. In essence, transformations appear to be revolutionary only for the countries where they take place, and in a broader sense they are more than evolutionary, since they work by design, not to destroy, but to strengthen the prevailing traditional economic system.
Recognition of this conclusion has serious methodological significance for understanding the origins and driving forces of transformations in post-socialist countries. They are initiated and moved not only by the contradictions that have accumulated within the socialist system, but to no less extent by the approach of a deadlock in the evolution of the highly developed world along the traditional trajectory.
“The order formed in the post-war years, the ‘order of the 20th century,’ is being destroyed all over the planet, and not only in the former Soviet Union,” the outstanding thinker Nikita N. Moiseev remarked shortly before his death. “And our Russian conception of the future, and above all of the future of Russia, cannot be at all correct if we begin to regard the national internal crisis only as our own, outside of those general processes of global development that clearly testify to the general planetary ill-being.”[7 - Moiseyev N. N. How far until tomorrow… Free thoughts. 1917—1993. Moscow, MNEPU Publ., 1997. P. 251.]
This global malaise prompts the highly developed countries – the most active and powerful part of the world – to use all means to overcome the emerging contradictions based on their understanding of “progress.” And far from a secondary place among the actions taken is given to the use of the processes of purposeful adaptation of the space of the post-socialist countries – a space that was not previously part of their direct influence – to the tasks of such “progress.” Hence the activity of external consultants in Russia and other countries of the transformation zone. But the concepts and programs developed with their decisive role in today’s coordinates of the globalization of the world economy cannot, in principle, be impartial. In practice, they are built to a large extent on the interests of the developing party and only insofar as they are based on the interests of those countries that have undertaken to implement them on their territory.
Thus, in the concepts and composition of the driving forces of the processes of economic transformations in Russia and similar countries, a significant “specific weight” is occupied by the interests of the external order. Recognition of this fact prompts a more thorough assessment of the reasons for the ambiguous outcome of the activities recommended by the programs for reforming countries. In Russian practice, analysts of the official circle usually interpret the contradictions of the ongoing transformations because of deviations from the planned ideal course, as “inconsistency in the implementation of the reform program.” But what is to be done when this program only to some extent corresponds to the interests of the people of the country, and largely works either for the false benchmarks of “progress” or for the interests of competitors?
If the model models that were decided to be followed during the transformations are not completely good, then is it not logical to first make sure of the correctness of the goals and content of the reform programs, to assess the degree of their compliance with the interests of the people of your country? Only based on such continuous verification can the issues of the adequacy of implementation efforts to the proposed reform goals be properly resolved. Such a continuous feedback loop between the idea and the result is, among other things, a guarantee of maintaining confidence in reform actions and preventing possible irreversible disappointment in society regarding the very idea of systemic transformations. All this should further strengthen us in the opinion that a comprehensive study of the meaning of the overdue transformations in the economy and society, as well as the trajectories of their optimal implementation, will remain the central problem of social science for a long time.

Evolution of Strategies for Change
Economic reforms, filled with a market component, started in our country long before the collapse of the USSR and the socialist system. In 1955—1956, Nikita Khrushchev set the pace for the shake-up of the Soviet system. Although the reforms he initiated were essentially administrative and even voluntaristic, they to a certain extent paved the way for the inclusion of market mechanisms. A new quality of research (at least in the ideological sense) appeared with the start of market reforms in 1965 that were associated with the name of Alexey Kosygin, Soviet Prime Minister, as well as following a number of attempts at economic and political reforms in Czechoslovakia, Hungary, and Poland.
If we talk about the Soviet Union in the second third of the 20th century, the frequency of reform initiatives seems to be synchronous with the growth of difficulties in socio-economic development. Accordingly, in the 1990s, the start of market transformations was conditioned by the need to resolve a huge number of fundamental contradictions within the socialist economy. However, it is still impossible to understand the driving forces and factors of these transformations only on the basis of an analysis of intra-system contradictions. It is also necessary to address the contradictory course of processes in global space.
The middle of the 20th century was characterized by many positive changes in the world, which promised great hope. A special place is occupied by a complex of phenomena that at that time acquired the title of a complex scientific and technological revolution (STR). Philosophers, economists, sociologists, and systems engineers from all over the world enthusiastically joined the study of this scientific and technological revolution. Turning to the topics of scientific and technological development has greatly changed not only the economy, but also attitudes. Prospects for accelerating socio-economic development in the field of scientific and technological development. They were seen both in the developed capitalist countries and in the camp of the socialist countries led by the Soviet Union. The modernization direction of economic development was a logical response to the situation of that time. On this basis, the concept of “competition between two systems” has developed in a quite serious and long-term direction. For a while, this competition became quite constructive. Scientific conferences of an international nature began to be held on this problem, and quite serious works were published. The concept of convergence has emerged and has been powerfully developed capitalism and socialism.
It is noteworthy that the ideas of convergence originated on Western soil, and its developers included not only objectivist figures such as Pitirim Sorokin or John Galbraith, but also the likes of Zbigniew Brzezinski who were clearly ideologically biased against socialism and the USSR. This circumstance alone confirms the conclusion that the issue of competition between the two socio-economic systems at that time was by no means far-fetched, and its outcomes were a matter of serious concern for influential forces in the West.
In the USSR and other countries, hopes arose at that time for the objective presence in the depths of the socialist system of certain serious advantages in the sphere of the development of scientific and technological development. Studies have been launched on the problem of combining the achievements of scientific and technological development with the advantages of socialism (in which the author of these lines also joined with sincere intentions) and books and articles have been written. A set of “advantages” of this kind was multifaceted and characterized in these works. But it turned out to be hypothetical and did not manifest itself in practice. It can be argued that the unfulfilled hopes for the “advantages” of socialism in the sphere of scientific and technological development turned out to be a key factor in the rapid aggravation of many economic contradictions in the USSR and in the socialist system.
The long-term peaceful coexistence and competition of the two world systems meant that the USSR made strenuous efforts to maintain military parity with the United States (and NATO), for which the arms race and the unconditional priority of the defense and space complex in all economic policy were vital. This steadily maintained a relatively high level of science in the country, but, on the other hand, created the most complex structural distortions in the economy and society and prepared the way for the exhaustion of the economic system of the USSR. This exhaustion was largely the result of the extensive processes of expanded reproduction in the existing structure of industries and the inability of the Soviet system to respond to the challenges of innovative development.
At the same time, the long period of real rivalry between socialism (led by the USSR) and capitalism (led by the USA) and its inherent undoubted progress in the USSR in a number of areas – a breakthrough into space, the development of nuclear technology, the industry of modern weapons, the high class of the education and culture system, the general availability of many social services, etc. – had its impact on the world of capitalism. It was forced to respond to the increased cost of social components in the eyes of the masses of their peoples. These changes in public sentiment largely led to the emergence in the West of the concepts of the “social market economy,” the “consumer society,” the “welfare state” and so on.
These concepts influenced the practical policies of the governments of most developed countries, especially in the period immediately after the Second World War. They have also primarily served to intensify Western assistance to the underdeveloped countries. But the triumph of these ideas was short-lived, since the expansion of the number of people who wanted to live according to the laws of consumer society soon exposed the fundamental contradictions associated with the limited natural resources on Earth.
In response to the accelerated consumption of natural resources caused by the growth of production and mass welfare, social movements were formed to limit industrial development and economic growth. Especially famous was the activity within the framework of the Club of Rome, which formulated a firm socio-scientific position on the “limits to economic growth”.
A logical continuation of this line was also the advancement of the concept of post-industrial society, which put the factors of science, innovation, and human intellectual activity at the center of socio-economic development. In literature, the ideas of forming a “knowledge-based economy” began to be actively developed. This concept fits well into the emerging trend of globalization of the world economy, which is characterized by the displacement of many elements of the world economy. material production (especially dirty industries) from the territory of highly developed countries to the periphery of the world economy, to less developed countries. The displacement of the “factory pipe economy” (according to Alvin Toffler) opened space for a “knowledge-based economy” and for a post-industrial society, but only in certain parts of the world economy. Material production did not disappear because of this, but only moved to other spaces. Therefore, the thesis of a knowledge-based economy cannot be interpreted as an absolute global trend. From the very beginning, it has been prepared for borders that close to the economic interests of highly developed countries.
While in his book Future Shock Toffler fundamentally revealed the fundamentally new place of the factor of science and knowledge in the economy and society, at the same time he touched upon the new power functions of this factor. In The Metamorphoses of Power, he examined how the three main components – knowledge, violence, and wealth – are at different stages and the relationship between them determined the power in society. At the stage of post-industrial society, it is knowledge, according to his data, that becomes the determining factor of power. In this regard, Toffler cites Winston Churchill’s “prophetic” remark that “the empires of the future are the empires of the intellect.” Today, this has become true, writes Toffler[8 - Toffler A. Op. cit., pp. 30—38.].
As we can see, one of the strategists of the domination of the capitalist economy has long drawn attention to the potential of the imperial functions of an order based on intellect (knowledge). Consequently, the post-industrial conception of progress does not at all exclude but presupposes the scope for the intensification of exploitation by one part of the world community of other parts of it. Failure to understand this delicate circumstance obscures the objective boundaries inherent in the dissemination of the concept knowledge-based economy. In any case, it is impossible not to notice that at the present stage its establishment is accompanied by an increasingly rigid division of the world in the socio-economic sense into highly developed and underdeveloped parts. At the same time, the implementation of a policy of deriving unilateral advantages from the possession of knowledge potential is far from an absolute trend.
The informatization of the economy and society, which has engulfed the world for some time, creates both the prerequisites for the realization of the power of the strong over the weak, and the prerequisites for the alignment of countries and regions at the socio-economic level. Many technological processes in industry and communications, in trade and finance are changing radically. On the one hand, the network structures that complement the matrices of vertical and horizontal relations complicate the trajectories of managerial impulses, make the subjects of control implicit, and thus weaken the resistance to pressure on the part of the governed, and, on the other hand, make it possible to form and implement actions in the depths of the controlled mass that compensate for and prevent their subordination to the centers of power.
Thus, the trend of widespread informatization of society based on network technologies leads to the possibility of eliminating the foundations of the centuries-old problem-free division of the world into the elite and the plebeians. Controlling the illiterate and uninformed is one technology, but controlling the masses, who already have wide access to information, including information about who exploits them and how, is a qualitatively different type of problem. Under these conditions, “feedback” can turn into a powerful force that counteracts the ambitions of contenders for absolute leadership in the world.

Resource Scarcity at the Heart of Transformation
The turn between the second and third millennia was marked by a series of achievements and crises caused by uneven access to natural and, above all, energy resources. In the last quarter of the 20th century, the energy problem came to the fore among all the world’s problems. The developments of scientists and the analysis of specific practice show that the level and quality of life of the population, the scale of production of GDP per capita, consistently correlate with the level of energy consumption per capita in the respective countries. The relationship between these parameters is not simple, non-linear, and it largely depends on the structure of the country’s economy, its territory, and natural and climatic conditions. But one thing is certain: all highly developed countries are guided by high levels of per capita energy consumption. This is typical not only for countries with low winter temperatures, such as Norway, Canada, Finland, but also, of course, for the United States, as well as Australia, Belgium, Sweden, etc.
If we take the United States, a country with a far from cold climate and focused not on the predominant development of raw material industries, then they, nevertheless, in the aggregate, not only consume, but also produce more energy resources than Russia. The data for the year 2000 given by Aleksey E. Kontorovich in one of his public analytical reports are interesting. At that time, the U.S. produced 495 million tons of fuel equivalent, while Russia produced 459 million tons of fuel equivalent, while Russia consumed 1,256 million tons of fuel equivalent, while Russia consumed only 173 million tons of fuel equivalent. At the same time, gas consumption in the United States was 753 million tons of fuel equivalent, while in Russia it was only 434 million tons of fuel equivalent. Up to 1991, as follows from the materials of the above-mentioned author, Russia was steadily developing (by the nature of the relationship between the level of energy consumption and the dynamics of GDP) in line with global trends, but as a result of the collapse of the USSR and the economic crisis caused by it, In the words of A. E. Kontorovich, “described a peculiar loop of hysteresis.” And from the trajectory of development typical of developed countries, over the ten years of reforms, Russia “has decisively moved to the trajectory of the most backward countries, in which the growth of energy consumption does not affect GDP growth in any way.”
The increase in the energy supply of life in developed countries has caused such an increase in the production of energy resources that has come into conflict with the stability of the Earth’s ecosystem. And today it is already a characteristic sign of the limits of the evolution of the old (and especially Western) economic system. An extremely difficult situation has emerged, when developing and post-socialist countries are trying to catch up with the trajectories of the economies of developed countries, which is impossible without a significant increase in energy consumption. But this (and maybe even larger) “delta” of energy resources is no less claimed by highly developed countries, since maintaining the existing lifestyle requires it. The Earth, on the other hand, will not be able to sustain the simultaneous development of these aspirations.

Overcoming Inertia: Opportunities for Progress
The problem of the objective limitation of the natural potential and the insufficiency of energy resources for the extension of the lifestyle of highly developed countries to all the inhabitants of the Planet is constantly hidden behind other problems that periodically come to the surface, although it is precisely this problem that is a concentrated expression of the content of the dead-end path imposed on humanity by the inertia of the experience once formed in a group of countries that have hitherto had the opportunity to grind down the overwhelming majority in production and consumption. part of the world’s total resources.
For many years, the 80-to-20 ratio has characterized the distribution of total resources between the rich and the poor (between the highly developed countries and the rest of the world), while the proportion between them is the opposite and looks like 20 to 80% in terms of population. This correlation seems to be known to everyone, but it is not considered to be the fundamental cause of the impasse to which the world has come.
With the exhaustion of extensive growth opportunities within the socialist countries, the problems that aggravated the socio-political situation in them in the 1980s were perceived by the masses and interpreted by the advanced politicians exclusively in terms of the vices inherent in the economic and political system of socialism. These vices did exist and irritated society. They had to be overcome. But the big look at the situation turned out to be superficial. Under the influence of this circumstance, the beginning of the restructuring of the economic and political system followed a simplified, although seemingly logical path – the path of copying the order that had developed in the developed countries, and in fact it was reduced to an adaptation to the system of capitalism surrounding the socialist countries.
In Russia, the problems and contradictions of the external environment immediately overwhelmed domestic needs. In this context, it is no coincidence that Russia’s transformations resulted in the accelerated entry into the world market of only one sector of the Soviet economy, the oil and gas industry, which was further aggravated in post-reform Russia. In 2002, the share of export supplies in oil production in Russia reached 47% and gas – 31%, while in 1990 19% of oil and 13% of gas were exported from the USSR. The rapid inclusion of Russia’s energy resources in the balance of global deficits was a direct response to the key needs of the external environment. But this also contributed to the import of a heavy bouquet of deep contradictions of the world economy into the country. And they became an invisible companion of the motivations that guided the transformation processes.
Unbeknownst to many inside the country, these processes have become dominated by more powerful economic interests. Outwardly, these interests appeared to be equilibrium market interests, but in fact they reflected the hidden balance of power in the new configuration of the global world. There was an increase in the subordination of energy flows to the needs of highly developed countries. At the global level, this trend reveals a quite understandable motivation for the behavior of the key actors in highly developed countries, which is conditioned by hopes for continuation of the usual evolutionary development of the world (Western) economy through the implementation of transformations similar to a systemic revolution in a number of “insufficiently market” countries.
Considering the awareness of all these latent mechanisms within the transition countries, and in Russia in particular, there is a desire to single out in the adopted programs of systemic transformations those components that are not directly related to the service of national interests. Of course, before they are rejected, they must be analyzed from the standpoint of compliance with global interests, because Russia is a significant part of the world’s potential. But in the current conditions of Russia, when correcting programs, priority cannot but belong to the goals and objectives that correspond to national interests.
With all the innovations of globalization, international economic relations are still based on competition, including inter-country competition. And although the above-mentioned growing contradictions in the economic structure of the world objectively require new turns in the relations of all agents so that they are based more on constructive cooperation and even altruism, in reality, the success of countries in the field of economics can now be ensured only by a rigid attitude to their competitiveness and a consistent struggle for their national interests. Altruism in economic relations cannot be implemented in any one economic platform of the world, its development requires a difficult rethinking of worldview approaches in the entire world community.
At this stage, Russia’s contribution to the establishment of new economic relations in the world cannot but be based on a more aggressive national economic strategy. Therefore, Russia’s economic policy can no longer be passive and imitative. Objectively, it should include the motivations of our society to an increasing degree, determined by our own vision of the future of the country and the world.
First, it is necessary to strengthen the conceptual influence on the world’s ideas about the future, contributing to the assertion of the still veiled truth that it is not only the countries with “transition economies” and developing countries that will have to transform their economies and lifestyles, but also the current space of the “countries of the golden billion”. And to have such a conceptual impact, we need a groundwork of research based on creative practice.
Secondly, during the transformation of Russia’s own economy, it is extremely important to strengthen the component of real success that extends to the entire Russian society. In this regard, the policy outlined today by President Putin to accelerate the pace of economic growth can act as a powerful catalyst for moving forward. And here a very important point is the overdue transition to a new quality of economic growth based on scientific and innovative factors.
In fact, humanity has no other reliable resource than science and knowledge that can be counted on as a life-saving component in the policy of sustainable socio-economic development. Only the aggregate knowledge that summarizes the experience of all earthlings can ensure the finding of satisfactory answers to the aggravating problems of the universe, suggest acceptable ways to transform the economy of both individual countries and the world.
“Radical innovations are the main lever for the transformation of society,” say Boris N. Kuzyk and Yuri V. Yakovets in a recently published multifaceted book on the problems of Russia’s long-term strategy[9 - Kuzyk B. N., Yakovets Y. V. Russia—2050: Strategy of Innovative Breakthrough. Moscow, Ekonomika Publ., 2004. P. 45.].
All experience shows that our country developed most dynamically when integration tendencies were strong on its vast territory and creativity in human activity was encouraged. Therefore, science and scientists have traditionally been in a high place in our society. And today, despite the colossal losses in scientific and technical potential in Russia during the first years of reforms, there are still all the prerequisites for the development of the economy along a science-intensive path. For example, in terms of the number of scientists and engineers in the field of R&D per million inhabitants, Russia is on a par with the United States and is ahead of Germany, France and the United Kingdom, not to mention a huge gap with Poland, China, and India.
Development, based on the priority of innovative approaches, is the main way for Russia’s self-assertion in the world, which is necessary today. But it is also a way of correcting dead-end branches of development, into which, under the influence of the trends of the past, significant parts of human society are ready to stray.
Thus, much will depend on how the transformation processes initiated in the post-socialist countries develop further. This is important not only for the large number of people living in their territories. The experience of these transformations should also clarify the attitude towards the trajectories of changes in the economic systems of the global world. The events of 9/11 gave an impressive signal that history will not be able to follow the traditional milestones that are derived from the evolutionary prolongation of the economic paths of the 19th and 20th centuries.

Chapter 2. Internal and External Drivers of Transformations in Russia

The transformation processes that unfolded in the second half of the 1980s in the USSR and in the countries of the Soviet bloc are considered and comprehended in the literature in their various manifestations and in various contexts. Great interest was aroused by critical and at the same time constructive reviews of trends in the Soviet and post-Soviet economies in large monographs, which were prepared by prominent Russian economists whose authority was established in Soviet times and who continued to lead an active research life in the new conditions[10 - Abalkin L. I. Russia. Search for Self-Determination. Moscow, Nauka Publ., 2002; Bogomolov O. T. My Chronicle of the Transition Time. Moscow, Ekonomika Publ., 2000; Lukinov I. I. Evolution of Economic Systems. Moscow, Ekonomika Publ., 2002; Medvedev V. A. Facing the Challenges of Post-Industrialism: A Look at the Past and Future of the Russian Economy. Moscow, Alpina Publisher Publ., 2003; The Way to the XXI Century: Strategic Problems and Prospects of the Russian Economy. Author. Coll. D. S. Lvov. Moscow, Ekonomika Publ., 1999; Fedorenko N. P. Russia: Lessons of the Past and Faces of the Future. Moscow, Ekonomika Publ., 2000 and others.]. Valuable information is drawn from works containing a view of the transformation processes in Russia on the part of well-known and experienced foreign scientists[11 - Reforms through the Eyes of American and Russian Scientists. O.T. Bogomolov. Moscow, Nauka Publ., 1996; Stiglitz J. E. Globalization and Its Discontents / Transl. from English and note. G. G. Pirogov. Moscow, Mysl Publ., 2003.].
Does the existence of such authoritative sources mean that there is no need to stir up the past? Of course not. The longer the path traveled, the higher the price of appeals to various events that become the property of history, if they are covered by witnesses of time. The process of “cleansing” events of layers caused by political biases and limited information is very complicated. After all, the interpretation of the essence of events is always subjective and strongly depends on the needs of the moment of analysis. One of the most difficult issues in this case is the arrangement of representations made from diametrically different points of observation: representations based on comprehension of the internal logic of events, and representations containing the logic of the external contour of transformation processes.

Two Key Drivers of Economic Transformations
The transformations in Russia and other post-socialist countries have been caused, as already noted, for a variety of reasons. However, in my opinion, the analysis somewhat underestimates the division of the causes and factors of transformations into two large groups, related, on the one hand, to internal (intra-country) circumstances and contradictions, and, on the other hand, to the conditions and factors of an external order.
The internal reasons that necessitated the transformation of Russia’s economic system were determined by the accumulated contradictions in the country itself, contradictions that began to hinder the development of productive forces on an intensive basis and clearly limited the growth of the nation’s well-being in accordance with new conditions and socially justified criteria.
Here it is necessary to emphasize the socio-economic factors and contradictions that have developed in connection with the stable isolationism of the development of the country (Soviet Union) in relation to the world community. This state hindered the free exchange of ideas, seriously impoverished the motivation of citizens and business entities, excluding long-term entrepreneurial interest from it, and ideologized the criteria for economic development. The lack of competition, the tendency to stagnate, the costly nature of the economy, the dominance of extensive reference points of reproduction, the inhibition of incentives (motivations) for scientific and technological innovations, the substitution of real business in the economy with the imitation of results adjusted to the reporting and planned indicators, the cumbersomeness of the system of administrative and ideological management, and others – all this generated and strung together numerous contradictions that needed to be resolved radical changes in the system.
The external causes of economic transformations, in turn, can be divided into two large groups.
In the first group, we include those drivers of change that are determined by a country’s competitive position relative to the economies of other countries in the world. The comparison of trends in the external (seemingly prosperous) world with stagnant trends within the country was a significant source of motivation for changes in the economic system. Such aspirations in Soviet society became especially strong after the removal of political barriers to various contacts with the outside world, including mass tourism and official trips of our citizens to capitalist countries. In the practice of subsequent reforms, however, these motivations were reduced to imitations of the outside world and meant mainly the desire to adapt to it, and to a lesser extent the desire to compete with dynamic countries.
The second group of external driving forces of institutional transformations consists of the special economic and political interests of other (primarily highly developed) countries and transnational economic entities in relation to Russia and entities on its territory. In our society, they did not timely assess the existence of such external interests that oppose national interests and failed to neutralize their negative impact on their development, at least by clear statements about their strategic intentions, not to mention clearer actions in practical policy in accordance with the strategy put forward.

Setting Criteria for Economic Reform
The internal need to ensure a more efficient management and transfer the economy to a comprehensively intensive, innovative type of development has in fact been and remains the main impetus for the transformation of the economic and socio-political system of Russia. Therefore, it is quite justified to continue to focus on domestic problems during reforms, on overcoming the negative legacy of the stagnant past, and on the formation of a new level of institutional base. The fundamental question on which the attitude of society to the ongoing reforms depends in this approach is the question of the compliance of the reform actions with the basic criterion that would meet the long-term interests of the country as an integral community of people.
This basic criterion is extremely difficult to quantify unambiguously in one or more indicators. In addition, in dynamic terms, it changes from period to period, is supplemented with new parameters or, on the contrary, is characterized by a decrease in the weight of some controllable quantities. But that doesn’t mean it’s elusive or completely subjective. The criterion of socio-economic progress is inevitably felt and controlled by society. as well as its individual individuals, regardless of what analytical summaries the official authorities prefer to publish and control. In the final analysis, this criterion is always based on society’s assessment of the dynamics of the country’s productive forces as a factor and condition for a stable positive change in the level of the nation’s well-being.
If this conclusion is recognized as valid and fundamental for the formation of the country’s strategic policy, then a sufficiently stable, clear, and consistent methodological basis for analysis in unity of goals, factors and conditions for effective socio-economic development, for a correct understanding of the driving forces and tasks of economic transformations appears.
With the passage of time since the start of reforms in Russia, it has become more obvious that when choosing the ways of transformation, the elite of our society has not been able to show independence and has succumbed to assessments that do not quite correspond to an objective approach.
First, the state of the economy and society was overly dramatized. In fact, at the time of the start of the reforms, Russia was far from being in the last echelon of the world economy, although it lagged the United States, Germany, and similar countries in most of the parameters accepted in the traditional analysis. As of 1987, Russia’s GDP per capita (in purchasing power parity prices) was 30.9% relative to that of the United States, while similar figures were in South Africa (22.4%), Brazil (24.2%), Turkey (20.4%), South Korea (27.3%), Malaysia (22.9%), and Egypt (14.3%). And in the lowest echelon – the low-income countries, in the terminology of the World Bank (for example, in Ethiopia, Mozambique, Tanzania, Chad) – per capita GDP relative to the United States was only about 3%. In other words, Russia did not need to be tempted to start from scratch.
Secondly, the emphasis was not placed on the most important problems that determined the unsatisfactory trends in the USSR (Russia) in the pre-reform period. The focus was on the problems of the economy in the narrow sense of the word and on the transformation of the institutional framework, while the fundamental contradictions rested on the shortcomings of human resources, the educational system, and the anti-innovation nature of management. As of 1980, the share of education expenditure in GDP in Russia was only 3.5%, while the world average was 3.9%, in the United States 6.7%, in Sweden 9%, in Japan 5.8%, and in the United Kingdom 5.6%.
Third, the chosen external “models” based on which the national reform program was formed turned out to be unjustifiably one-sided. The experience of the “non-Western” countries, such as China, India, Malaysia, etc., was ignored. Meanwhile, in terms of objective parameters, there have already been many “neutral” countries that have developed more dynamically (Table 2.1) and are more balanced in the structural sense than, say, the leading countries of the G7.


Many of these countries have not become passive actors in globalization processes. They did not allow themselves to be strayed into the style of complaining about the behavior of the “sharks of globalization”, and by all their routine steps in economic policy they tried to join the slightest progressive consequences of this for themselves. For example, China, according to some experts, is undoubtedly implementing the outcomes of globalization with undoubted benefits for itself (despite some costs)[12 - Silvestrov S. On the Global Modernization of the World Order (Theses) // Society and Economy. 2004. No. 3. P. 8.]. As a matter of fact, Japan also made its famous breakthroughs during the post-war modernization of the economy due to the rapid absorption of the achievements of external global development, especially in the field of scientific and technological development, management technologies, and so on.

A Romance with External Aid
Today, it is clear to an increasing number of observers that over the past period of market transformations, Russia has not so much gained as lost its economic potential (we will dwell on these pros and cons in more detail below). The losses incurred were largely due to the inability of analysts and political leaders of those times to understand the correlation between internal and external incentives for the process of transformation of the economic system and the lack of will on the part of society to demand an account from the elected leadership for the actual, corresponding to the above criterion (and not imaginary) effectiveness of the transformations carried out.
In some cases, the external factors of transformation in Russia have played a rather insidious role. This is especially true of the group of factors that was conditioned by the special economic and political interests of highly developed countries and their large economic entities, which were laid down (sometimes explicitly, but more often covertly) in various kinds of recommendations regarding reforms to Russia, in the loans granted, in foreign economic transactions, and so on.
At the same time, I would like to unequivocally note that the negativity resulting from this circumstance in the form of losses and ineffective outcomes for Russia cannot be presented as an accusation against our foreign partners. These partners deserve respect as truly sensible economic and political actors who pursue their policies and persistently build them in accordance with their own economic interests. It would be strange for a country (or a firm) that has long lived under capitalist competition if it cared more about Russia’s interests or its own “universal values” than about its own interests in the course of its behavior.
Accusations should be brought against us, for all citizens of the country for the frivolity inherent in the advanced elite, for the lack of qualifications and experience of our leaders and businessmen, for tolerance in society towards those who managed to take advantage of the confusion to organize “trade” in the interests of the nation for their own selfish purposes. If society was to accept the realities of market relations, it should have demanded that the elite and the government develop immunity from the behavior of Russia and its representatives in external relations as a weak, dependent partner. The market has never nurtured the weak, it must, by definition, subordinate them to the strong or destroy them altogether.
The long period of peaceful coexistence of countries with different political systems and levels of development and the absence of major conflicts have led to illusions about the harmony of their relations. Therefore, at the start of market reforms in Russia, many people had the idea that, for example, the West was asleep and saw the longed-for future, when Russia, after the completion of the transformation of socialism into capitalism, would join a friendly alliance of highly developed countries as a more powerful force than before. For some reason, it did not occur to the relevant conceptualists that this idea was, to put it mildly, illogical, inconsistent with the normal psychology of capitalist competition.
Over the years of peaceful coexistence and subsequent globalization, the competitive principles of economic and political relations in the world have not weakened but have become more strategic. The intensity of competition has increased due to the sharp increase in per capita consumption of energy resources in highly developed and medium-sized countries and the perception that these resources are finite. In addition, there are significant technological opportunities for those with financial and intellectual advantages to influence the positions of competitors by initiating deliberate crises. Such attempts have become almost the norm of behavior of the powerful of this world.
The Western countries had powerful motivations to weaken and liquidate the socialist camp led by the USSR and its economic system. After all, it was the main economic and political competitor at that time. The ideological component helped the West to accomplish this task, since the communist (socialist) system was already presented in the eyes of the mass philistine as the main concentration of “uncivilizedness,” as an “evil empire,” and so on. Subsequently, it became clear to many that the goal of suppressing communism as such was secondary, not the most important. Communism as an ideology was no longer dangerous for the developed West. In fact, the task of suppressing our country, as the main center of economic competition and military rivalry at that time, was of fundamental importance. Another aspect of this orientation of the West’s policy was the prospect of advantageous access to the rich resource base of the USSR.
The fact that one country has benefited the most from this – the United States, which has turned from just the leader of the West into the only superpower in the world – did not immediately become obvious. But with the passage of time, it has become apparent that the world is entering a new era of fierce competition. This was especially evident after several global and local financial crises initiated by transnational corporations, and as the formation of serious centers of opposition to American financial and economic hegemony in Europe and then in Asia. The euro has become an obvious competitor to the U.S. dollar as a world currency. From time to time, the Japanese yen and even a hypothetical Asian currency based on the Chinese yuan indicated themselves in the same capacity.
Thus, today there are enough grounds to isolate the real meaning of the interests of those circles that were the most active conductors of the ideas underlying the Western options for the transformation of the economy in Russia and in other post-socialist countries. The conceptual limitations of these options will be discussed in later sections of the book. At this point, it is necessary to emphasize the conclusion that these external impulses for the transformation of the economic and political system carried a significant share of deliberately destructive components in terms of their impact on Russia’s productive forces and competitiveness.

Shifting Internal Forces Driving Change
The noted impact of the external contour has had a significant impact on the structure of the internal driving forces of the transformation of the economic system in Russia. In the structure of the interests of our society, the interests of small but powerful groups of people have taken an undue place due to economic support from the outside. The real interests of the entire Russian society were largely crushed by the force of special economic interests emanating from the milieu of pseudo-entrepreneurs. which arose on a special soil, which was a mixture of the “Komsomol” and semi-criminal mentality. Moreover, such a specific entrepreneurship began to gain ground in business at a time when effective institutions of normal market relations simply could not yet appear within our country.
The initially formed structure of economic interests strongly influenced the further change of institutions in the country. The vector of these interests was determined by two major components: first, the emergence of the interests of the shadow economy with a criminal orientation of the owners of this capital, and second, the emergence of a layer of enterprising people who quickly got their bearings in the new situation and managed to find themselves on the crest of privatization of the most lucrative parts of the national wealth in the context of the “denationalization” of the economy. Among this last group, there were unions of nomenclature figures of the former system with initiative people from the scientific and creative environment. Some representatives of the former Komsomol apparatus turned out to be especially active in the field of not quite pure privatization.
These structural groups, merged in their mercenary motivations with the interests of external forces to weaken the economic potential of the former Soviet bloc, set the tone for major changes in state and public institutions in Russia and many other countries. Under their decisive influence, the political and economic system of the country was formed, and the new state machine, in turn, began to serve its creators to an increasing extent.
Many researchers who have observed the processes of institutional transformations in Russia have believed that the initial distribution of ownership of capital in the implementation of reforms is important only in the sense that it must correspond to the private capitalist principle and be based on individualistic motivation. The expectation was that, in accordance with Coase’s theorem, after a while all possible injustices of the primitive accumulation of capital would be eliminated by themselves.
Indeed, Coase’s theorem in its original version states the following: “The redistribution of property rights takes place on the basis of a market mechanism and leads to an increase in the value of the products produced,” hence “the final result of the redistribution of property rights does not depend on a legal decision [regarding the original specification of property rights]”[13 - Coase R. The Firm, the Market, and the Law. Chicago: The University of Chicago Press, 1988. Р. 115, 158.]. However, it should be borne in mind that both Ronald Coase himself and his followers and interpreters later made important clarifications about the boundaries of this theorem. It was pointed out that the initial distribution of title deeds was irrelevant from the point of view of efficiency only “under conditions of perfect competition” and “if transaction costs are negligible”.[14 - Economic Issues. 2002. No. 3. Pp. 138—141.]
That these latter conditions are far removed from reality in the real modern economy probably does not require extensive proof. It should be asserted even more confidently that the assumptions about “zero transaction costs” or the existence of “free competition” did not correspond to the realities of the period of the reversal of market transformations in Russia. The asymmetry of information used in economic decision-making by different agents of the entrepreneurial class was glaring in Russia. Involvement in this information radically depended on the proximity of economic agents to the power structures and on “investments in corruption”. Under these conditions, transaction costs were by no means zero, but commensurate with the volume of the final economic product.
It would also be necessary to assess in a transactional manner the cost components that arise from external efforts to transform institutions in countries with economies in transition. The level of external investment in different countries of this group was different at the initial stages of transformation. The volume of foreign aid was especially large in such countries as Hungary, Poland, the Czech Republic, the Baltic states, which were formerly part of the USSR, – Estonia, Lithuania, Latvia. The selective nature of financial assistance to transforming countries speaks for itself in many ways. For example, net official assistance to Poland from international organizations amounted to $876 million in 1998, $1,186 million in 1999, and $1,396 million in 2000. These are the largest amounts of aid compared to what has been received by other countries in Central Europe and the Baltics. For example, the three Baltic states together received $323 million, $318 million, and $254 million in the corresponding years.[15 - Statistical data of the Committee for Assistance to the Development of the ECOS. Public Administration in Transition Economies. Open Society Institute. Spring 2002. P. 3.] In this regard, if we talk about the level of official assistance to Russia and such countries that were formerly part of the USSR as Belarus or Moldova, then it is absolutely symbolic against the background of even the volume of assistance provided to the above-mentioned Baltic countries.
In addition to the channels of “official aid,” “foreign investment,” “forgiven” foreign loans, and so on exert a significant and varied external influence on the transformation processes in the post-socialist countries. In Russia, so-called foreign investment had almost no positive impact on the real economy. A significant part of them were various kinds of “systemic” loans, which either patched up the needs of the country’s current budgets, or flowed through complex channels, settling in private funds of incomprehensible social purpose. Many commercial loans were “tied.” In addition, the volume of foreign investment in Russia was not commensurate with the scale of the country, and it was an order of magnitude (or more) lower than, for example, foreign investment in the economy of China or even Poland. Between 1994 and 1998, Russia received $13.6 billion in foreign direct investment, while China received $198 billion. According to some reports, Poland has received about $450 billion from the West in various kinds of investments and assistance during the entire period of market reforms.[16 - Currency Rain Dried Up the Polish Economy // Rossiyskaya Biznes-Gazeta. 2001. 20 March.] It should be noted that the foreign investments that came to these and many other reforming countries were implemented by their governments (unlike Russia) for the benefit of macroeconomic development.
China has experienced and is experiencing a real boom in foreign investment, which actively contributes to maintaining consistently high rates of socio-economic development of the country. For example, in 2003 (despite the destructive impact of the SARS factor) foreign direct investment in this country amounted to $53.5 billion, in 2004 – about $60 billion, and in 2010 it is expected to reach $100 billion. per year. And in total, over the years of moving towards a market economy, China has received (including from the Chinese from abroad) probably at least $0.5 trillion in foreign investment.
Thus, the external factors of economic transformations have a multifaceted potential that contains not only negative, but also positive aspects. Therefore, it is unreasonable (because of the dangers of negative external influences or for other reasons) to refuse to take an active part in world economic relations. The advantages objectively present in the international division of labor can and should be used as much as possible during transformations. A country that excluded itself from the global world economy would find itself outside the modern flow of innovation and managerial experience. But in everything, as has long been established, a measure is needed. Reducing the impact of the negative external factors of transformation and strengthening the manifestations of their positive aspects is an objectively necessary and quite feasible task for the governments of countries with economies in transition, even in the increasingly rigid grip of unipolar globalization. The realization of such opportunities depends on the specific policy in the country and the social and moral health of society.

Chapter 3. The Economic Structure of the Soviet Union: From Growth to Collapse

The complex problems faced by the former Soviet Union and Russia and other countries that emerged after its collapse, as well as the difficult course of reforms in them, have formed in a significant part of society a purely negative attitude towards the entire period of Soviet history, including the economic results associated with the 70-year period of socialism. Meanwhile, the USSR, even as of 1985—1986, when the Gorbachev perestroika began, the harbinger of market reforms, it had an economic potential that could not be ignored in the world. This was ensured by the high growth rates of production in the main sectors of the national economy over the previous years. The economy on the territory of the USSR functioned as a single (without exaggeration) national economic complex, all parts of which were located in the space of cooperation branched to detail and were subject to a common plan. For all its serious drawbacks, this cooperation has been quite powerful in binding the country’s economic structures together in a focus on sustainable economic growth. In the external dimension, the country’s economy was presented both objectively and subjectively as a significant factor.

The Nature of Soviet Economic Growth
In 1985, the national income in the USSR reached 66% (according to official Soviet statistics) of the level of the United States. Industrial output accounted for more than 80% and agriculture for 85% of the U.S. figures. The volume of annual capital investments was characterized as 90% of the level of the United States. The comparison in terms of the parameters of economic efficiency looked somewhat worse. For several years, according to the USSR Central Statistical Office, labor productivity in industry was at the level of 55% and in agriculture, about 20% of the U.S.[17 - The National Economy of the USSR for 70 Years. Moscow, Finance and Statistics Publ., 1987. P. 13.]
Consistently high rates of economic growth distinguished the Soviet economy from the economies of many other countries both in the pre-war (before 1941) and post-war periods. The national income produced in 1940 was 5.1 times higher than in 1928, and between 1950 and 1985 it increased 10.2 times.


As can be seen from Table 3.1, the USSR was basically ahead of the United States in terms of the average annual growth rates of national income, industrial and agricultural production, capital investment, and some other indicators. At the same time, in the context of the five-year periods presented in the table for the USSR, there is a noticeable tendency to reduce the growth rates of almost all economic indicators.
It can be stated that up to the Ninth (1971—1975) Five-Year Plan in the USSR, the average rate of economic growth was quite high, at the level of not less than 6—8% per year (Table 3.2).


This was facilitated by the high scale and rate of capital investment in the national economy and a significant and stable increase in the production apparatus over a long period of time. The growth rate of production in industry was higher than the average in the national economy. Although the productivity of social labor increased continuously, economic growth was extensive rather than intensive. The growth of the well-being of the country’s population clearly lagged behind the rate of economic growth.

Symptoms and Causes of Economic Stagnation
Since the 1970s, there has been a clear downward trend in the growth rate of such indicators as real per capita incomes and retail turnover of state and cooperative trade. During the Twelfth Five-Year Plan (1986—1990), for the first time in many years, the country faced a decline not only in the rate but also in the level of well-being of the people. This was so shocking that in 1986—1990 the government, glossing over this fact, removed the indicator of “real incomes of the population” from official statistics. It was replaced by the indicator of “cash incomes of the population”, which looked more decent due to the invisible presence of incipient inflation in it.
The deterioration of the overall economic dynamics affected the weakening of the country’s position in foreign trade. The average annual growth rate of foreign trade turnover fell from 8.3% in 1966—1970 to 0.7% in 1986—1990.
The dynamics of economic parameters in the USSR in 1985—1990 is indicative (Table 3.3).
From a comparison of the data for 1985, it is not difficult to conclude that it was a clear reflection of economic stagnation. This underscored the urgent need for major changes in the economy and society. The figures for 1986 and partly for 1987 testify to attempts to implement these changes proclaimed by perestroika and Gorbachev’s policy of “accelerating” socio-economic development. The growth rate of capital investment sharply increased (to 8.4% in 1986).


The growth rate of industry increased slightly, mainly due to investments in mechanical engineering. But then these intentions to accelerate economic development fizzled out. The year 1990 ended with an absolute decline in GNP, industrial and agricultural production, social labor productivity, and foreign trade turnover. In 1988—1990, as if in opposition to this, retail trade turnover and cash incomes of the population began to grow rapidly, which embodied the growing inflationary trends and, at the same time, the exhaustion of the ideas of “perestroika” and “acceleration”, which were replaced by new slogans of the “social orientation” of the economy.

Fundamental Flaws in the Soviet Economic System
It can be argued that the fundamental flaw of the economic system that existed for a long time in the country was its inability to overcome the extensive framework of economic development and to include the factors of economic intensification caused by the radical shifts in world science, technology, and management after the 1950s.
The sphere of science and engineering in the country, especially after the end of the Second World War, was among the most privileged areas of activity. As can be seen from Table 3.4, the growth rates of investments in science were quite high.
In terms of the level of knowledge intensity of the economy, the USSR quickly reached indicators commensurate with the most developed countries of the world. Even on the eve of the collapse of the USSR in 1990, expenditures on science from the state budget and other sources amounted to 5% of the country’s national income.
The total expenditures on science from the state budget and other sources for the period 1986—1990 in the USSR amounted to 153.3 billion rubles, i.e., their growth compared to the previous five-year period (1981—1985) amounted to 116.9%.


It is impossible not to admit that the initial period of the reversal in the world of the scientific and technological revolution was also full of events in our country that inspired great faith in its capabilities. In the USSR, there was a rapid increase in investment in the field of science. If in 1950 expenditures on science in our country amounted to 1 billion rubles, or less than 1.4% of the national income, then in 1960 it was 3.9 billion rubles (2.7%), in 1970 it was 11.7 billion rubles (4.0%). In the 1970s, the USSR was on par with the United States in terms of the relative value of spending on science to national income. Over the past 20 years (from 1950 to 1970), the number of scientific workers in the Soviet Union has increased by 5.7 times, and their share in the total number of workers and employees in the national economy has increased from 0.4% to more than 1%.
The significant absolute and relative increase in resource investment in science, especially in the 1960s, did not, however, lead to an adequate increase in its contribution to the national economy. The transformation of the productive forces based on scientific discoveries and inventions and the proclaimed task of “combining the achievements of scientific and technological development with the advantages of the socialist economic system” proved to be a much more complicated matter in practice than it was seen in theoretical reflections on the future of scientific and technological revolution. There was a lack of perseverance and dedication to ensure the effective materialization of R&D achievements at the level of state programs, and due attention was not paid to the reorientation of investment policy to the process of accelerating scientific and technological progress. Although during each five-year plan the fixed assets in the national economy were on average renewed by about half (see Table 3.4), the involvement of means of labor of a fundamentally new scientific and technical level in the economy did not occur on the required scale. As a result, from one five-year plan to another (except for the Eighth Five-Year Plan, 1966—1970), there was a decrease in the efficiency of capital investments in the national economy. The increase in the national income produced per ruble of capital investment in the Eleventh Five-Year Plan (1981—1985) amounted to 11 kopecks, which is 2.1 times lower than in the Eighth Five-Year Plan, and 2.5 times lower than in the Sixth Five-Year Plan (1956—1960). Was it possible to reverse this trend at that time? In principle, yes, if it were possible to organically combine the investment process with scientific and technological progress, to turn capital investments into a reliable guide to the national economy of the most effective achievements of science and technology[18 - Kushlin V. I. Scientific and Technical Revolution in the USSR: History and Modernity / History of the USSR. 1988. No. 5. Pp. 11—12.].
These assessments were made in the political conditions of the pre-reform period. They are rather harsh in their criticality, but inevitably still bear the imprint of faith in the country’s ability to correct the flaws of the system within the framework of evolutionary targeted reforms.

Missed Opportunities and Unrealized Approaches
Comprehending today, considering the time that has passed, what I, as a researcher, wrote in the pre-transformational period, I must be more critical of myself. Yes, at that time, many of my ideas about our economy and society, as well as those of a few other scientists, were formed under the influence of a priori belief in certain ideals. In addition, many of the deep-seated flaws of the socio-economic system were not fully revealed to researchers at that time due to insufficient access to information. It seemed that most of the shortcomings of economic management in the country depended on subjective causes and could be eliminated with proper adjustment of the policy of the authorities. There was a hope for the existence and operation of national (nationwide) economic interests as the main factor in motivating people’s behavior.
In many of my developments, I and some other economists proceeded from the possibility, through rational transformations of economic structures and forms of economic management, of building such a system of economic interests of enterprises and associations that would correspond to the structure of the long-term needs of society. In our opinion, this should ensure a stable interest of economic entities in the best (most effective) satisfaction of the needs of society and, accordingly, generate and reproduce the economic responsibility of these subjects for the degree of satisfaction of the needs of society.
All this presupposed a high degree of democracy in society, transparency of entrepreneurial aspirations and actions of the authorities, and broad opportunities for public control. At the same time, the mechanism of market competition (competitiveness) in the behavior of economic entities oriented towards satisfying the needs of society was thought to be organically immanent in the entire system of economic relations.
From these prerequisites, the proposed solutions to ensure socially promising (strategic) approaches to the reproduction of the technological base of the economy, the creation of conditions for achieving the greatest growth in the final efficiency of the economy in the process of renewal of the production apparatus followed[19 - Kushlin V. I. The Production Apparatus of the Future: (Problems of Efficiency). Moscow, Mysl Publ., 1981.]. The implementation of such approaches was focused on the mechanisms of optimal economic distribution of resources according to aggregate development goals within the framework of economic units specializing in meeting the basic needs of society. For this purpose, it was proposed to use detailed new methods of block-modular renewal of the production apparatus, which assumed an organic connection between investments in the economy and the implementation of the most effective scientific and technological innovations[20 - Kushlin V. I. Intensification of the Renewal of the Production Apparatus. Moscow, Mysl Publ., 1986. Pp. 72—107, 156—182.].
All these, as well as many other tempting offers, were not realized, for which there are many reasons. First, it is necessary to admit that in the development of the proposals, hopes were unjustifiably high for the possibility of understanding at the level of the central economic management bodies the key interrelations of the optimal development of the country’s economy, which is tuned to meet the needs of society. Here we must admit the truth of Friedrich von Hayek’s accusation against economists who believed (as we did then) in the possibility of a planned socialist economy, when he observed that “socialists, victims of arrogance, want to know more than is possible.”
Secondly, the policy of our state at that time was fundamentally lacking purpose and energy. Collectivist-socialist driving forces were no longer brought into action by this state policy, as had been the case at certain stages earlier. And competitive entrepreneurial driving forces were not given the opportunity to emerge and express themselves. Ideological frameworks and regulatory frameworks severely limited and suppressed entrepreneurial initiatives.
There was a great inertia of the approaches that assumed the eternal priority of the development of the “first subdivision” of social production (the branches producing the means of production) over the “second subdivision” (the production of consumer goods and services). Ideas about the expediency of building chains of expanded reproduction based on the structure and dynamics of people’s ultimate needs were rejected from the outset. Consequently, the technical level and the scientific equipment of the industries directly working to improve the well-being of the people fundamentally lagged behind the branches serving the production of means of production. For example, in 1987, the ratio of R&D expenditures to manufactured marketable products in the USSR Ministry of Light Industry was less than 0.09% compared to 2.9% on average in the country’s machine-building complex.
In general, as of the end of the 1980s, the level of knowledge intensity in the main branches of material production in our country was noticeably lower than in the most developed countries of the world. According to available estimates, the average ratio of science intensity in the USSR and the USA was about 1 to 2 in civil engineering, 1 to 3 in chemical and metallurgical industries, and 1 to 5 in electric power industry. Although expenditures on science in the USSR and the United States were considered close as a share of national income (in 1987 they were 5.2 and 5.8 percent, respectively), the absolute amount of spending on science in the USSR was much less than in the United States. In 1987 they amounted to 32.8 billion rubles against $123.6 billion (1986) in the United States.
The Soviet Union of the 1980s and 1990s was exhausted by competition (complex competition) with a much more powerful rival in the face of the United States (plus the countries of Western Europe, Japan, etc.). Maintaining military parity with the West required concentrating most intellectual and economic resources on the development of the defense complex. The volume of defense R&D in the USSR was estimated to be 3:2[21 - The Path to the 21st Century: Strategic Problems and Prospects of the Russian Economy. Moscow, Ekonomika Publ., 1999. P. 348.] on average. Moreover, the defense research sector was characterized by large overhead costs, which absorbed a considerable part of the appropriations for science and innovation. It turned out that the scientific support of that sphere of the country’s economy, which, under the normal structure of the economy, in fact, should be the main space of the economic process of expanded reproduction, was prohibitively low.

Perestroika: Ideas vs. Realities
The period of 1985—1990 was a very difficult and contradictory time for the country’s economy. In a political sense, it set the pace for the turbulent changes that were overdue. The beginning of perestroika was tinged with the euphoria of the emancipation of society, and therefore the strategy of “accelerating the socio-economic development of the country” looked like a completely natural direction for that time. The course taken for the rise of machine-building, the acceleration of scientific and technological development and structural shifts aimed at intensifying production was logical in concept and, moreover, relied on the historical confidence of the ruling party, which was accustomed to achieving its goals. But, faced with the very first difficulties and contradictions of the turn from an extensive to an intensive type of management, which presupposes a qualitatively different level of economic mechanism and management, the country’s leadership began to glide on the path of improvised gliding on the surface, moving away from solving real problems towards populist tasks that are in full view of the media.
Inconsistency and superficiality in the formulation of the main goals of state policy had a particularly destructive effect. As early as 1986, almost immediately after the announced decisions to “accelerate scientific and technological progress” and the short-lived propaganda of this direction, another slogan appeared, focusing on “overcoming technocratic approaches” in socio-economic policy. Moreover, it was presented in such a way that it disavowed the value of the task of deploying technological progress and the transition to qualitatively new technologies. At the same time, the idea of a “social reorientation of the economy” and its subordination to the “human factor” began to be intensively promoted. This formulation, which was justified in principle and even belated in many respects, was then taken to a primitive extreme, which blurred the previously initiated actions to reorient investment policy in the direction of technological progress.
An insidious role was played by the idea of regional self-financing, which gained special favor in the Soviet Baltic republics. It was used to show the supposedly significant driving forces of economic development that are revealed in the event of the separation of regions (republics) from the center that binds them into an independent circuit. To this end, the launched information about “injustices” in the macroeconomic exchange between the Russian Federation and the Baltic republics was actively circulated. The problem of “exploitation by the Russian Federation” was especially persistently raised in some circles in Estonia. None of the official statistics based on input-output balances, which testify to other (contrary to the emotional conclusions of local politicians) ratios of imports and exports between Russia and Estonia (other republics) were considered. Such sentiments have spread in a few other Union and autonomous republics. They contributed in no small measure to the collapse of the USSR as an integral state and as an economic complex.
Significant and far-reaching damage was caused by the ill-conceived advancement of the tasks of a universal turn in politics to “universal values.” This turn, seemingly logical in its essence, was again brought to the point of absurdity and eventually turned our own fundamental goals into tasks secondary to certain global values inherent in an abstract “civilized” community.
Many researchers, including the author of these lines, wrote about the mistakes and dangers of such a course at the time, but this was not perceived by the political elite. As an example, let us cite our statements on the situation and economic policy in the country, published in June 1991.
Based on the analysis of the dynamics of the main socio-economic indicators, we then tried to identify the “stage” causes that led to the escalation of the crisis in the economy. One of these reasons is related to the structurally unadjusted investment boom of 1986, when there was a sharp increase in capital investment in the national economy as a whole and in industrial facilities, especially in mechanical engineering. This boom turned out to be purely extensive, even though a policy was proclaimed for the use of qualitative factors of growth and for the effective acceleration of scientific and technological progress. Such a significant drawback of investment policy was later supplemented by the disproportion caused by an ill-conceived anti-alcohol campaign, as well as populist interpretations of the policy of social reorientation of the national economy and “overcoming technocratic approaches” in the economy. This, on the one hand, served to further deaden production investments in the unfinished construction of facilities of the technological level the day before yesterday, and on the other hand, prepared the conditions for a serious imbalance of supply and demand in the consumer market due to a sharp decline in the receipt of consumer goods (-10 billion rubles), accompanied by an increase (uncovered by resources) of cash income in the investment sector.
Another concentration of imbalances was 1988, when the growth of monetary incomes of the population increased by 2.5 times, and the output of consumer goods by 6.4%, but if we do not consider alcoholic beverages, then only by 5%. The state budget deficit reached a record level (81 billion rubles), having increased by 5.8 times compared to 1985. In 1988, there were high absolute increases in GNP (50 billion rubles against 26 billion rubles in 1987) and produced national income (31 against 12 billion). But there were no adequate increases in the physical quantities of the product behind this.
The dynamics of production in physical terms for the most important items of the nomenclature of industrial products considered in monthly reporting (158 items) is characteristic. If in 1986 there was a steady growth, and in 1987 a decrease in output affected a part of the products, mainly mechanical engineering, then in 1988 there was a decline in the production of every fifth type of product, and in 1989 – almost half of its most important types. The year 1988 was a springboard of inflation and economic anarchism, which was caused by unsuccessful laws on enterprise and cooperation, and the ill-considered breakdown of the old state structures. A huge destructive impact was exerted by the rapid removal of the previously existing distinction between cash and non-cash money turnover. All this has created space for the egoistic aspirations of the leaders of enterprises and cooperatives, the speculative elements, who are the most dexterous in redistributive actions.
In 1990—1991, the logic of events, prompted by the pressure of the concepts of economic romanticism and populism, led to a state of the national economy that can be characterized as close to collapse. In 1990, there was an abrupt shift from a positive to a negative trajectory in the production of GNP and national income. The imbalance of economic relations of almost all enterprises has exceeded the critically permissible level. The economic efficiency of the development of the material and technical base of the national economy has become not just declining, but negative.
One of the serious reasons for all this is the tendency towards the destruction of statehood. The economic reality that took shape in 1989—1991 became a synthesis of the worst features inherent in both the centralized model of management (its cumbersomeness, multiplied by the elimination of almost all incentives for power coercion) and the market mode of interaction (atomism, which develops into anarchy, the barter-speculative nature of relations, and the monopoly of the seller in relation to the buyer).[22 - Kushlin V. The State in the Economy: Yesterday, Today, Tomorrow // Planned Economy. 1991. No. 6. Pp. 5—6.]
The author of the article mentioned in the footnote noted that the contradictions that became the subject of the analysis stemmed from the fact that “the main landmarks of reforms were the forms, not the content, of economic development. The objective criterion of progress, which is limited to the dynamics of the productive forces of society and the satisfaction of the material and spiritual needs of the population, has been lost.”

Exploring Alternative Paths of Transformation
The Soviet Union and its national economic complex collapsed (if we single out purely economic reasons for this) precisely because of the loss of sources for the sustainable implementation of the process of expanded reproduction of its economy. Extensive sources of reproduction were exhausted, and intensive factors could not be used because they were concentrated in the “non-economic” defense sector of the economy.
There is no doubt that the economies of Russia and other countries of the former USSR were to undergo radical transformations. What kind of transformations would be optimal?
At that time, the most active part of the initiators of the transformations had no doubts that it was necessary to quickly form a market-type economy, the prototype of which was the economic models of the most developed Western countries. At the same time, theoretical positions that were based on the belief in the possibility of socialist principles of economic management, if they could be implemented in some form “cleansed” of the negativity of Soviet practice, also remained widespread. They, however, were “on the defensive” and increasingly retreated under the pressure of the radical market direction of reforms. It must be admitted that the direction of reforms towards the development of market relations was absolutely justified in principle. But this does not mean that there was no alternative to the specific paths of reform chosen.
Today, from the standpoint of the experience gained on the path of contradictory market transformations, it is becoming more and more obvious that ideological approaches are an extremely unreliable background for the choice of state decisions. The old communist ideology was a brake on effective entrepreneurial behavior in the economy, and, therefore, a brake on ensuring the country’s highly competitive position. But then a new ideology rose to the Olympus – the primacy of market individualism, and it proved to be intolerant of other approaches and aggressive. With unusual peremptoriness, decisions and proposals that did not correspond to the new ideology were labeled as “non-progressive”, “non-market”, and “conservative”, which was enough to remove them from consideration without delving into the content from the point of view of economic performance.
Was it then possible to carry out effective transformations without completely rejecting the signs of socialism, but, on the contrary, deriving certain advantages from them? It is hardly possible to answer this question today. Reasoning in the style of the subjunctive mood is always insidious. But it would also be a mistake to abandon any analysis of possible variants of socio-economic systems with components of relations of the socialist type.
Socialist and communist principles, which have been greatly discredited by the practice of the USSR, cannot simply be destroyed by some other ideology as fundamental values that attract many people. There is no reason to believe that they will not be in demand again and again by humanity in some respects in the future. Nikolai Berdyaev, one of the first and most profound critics of the model of socialism that developed in Russia after the October Revolution, remarked that “the movement towards socialism, understood in a broad, non-doctrinaire sense, is a world phenomenon” and that “it is not for the defenders of capitalism to denounce the falsehood of communism.”[23 - Berdyaev N. A. The Origins and Meaning of Russian Communism. Moscow, Nauka Publ., 1990. Pp. 126, 150.] It is no coincidence that many ideas and principles of communism coincide with the universally recognized principles of decent human behavior, which are enshrined in the dogmas of the world’s major religions.
The recent deterioration of relations between the countries of the world in claims to limited natural resources and the inevitable disillusionment with the models of absolute individualism on which Western prosperity was nurtured, has brought many thinkers back to the values of collectivism. An additional argument is the steady dynamism of economic development in China, a country where socialist principles continue to color the entire system of social relations while at the same time actively spreading creative market mechanisms.
Unambiguous answers to the question of which model of economic and political system will be acceptable to the entire world community can hardly be found now. But the fact that this model will not be purely capitalist in the Western version in the foreseeable future is already recognized as true by objectively thinking researchers. The search for answers in terms of combining the motivations of market individualism and socialist collectivism will inevitably continue.

Chapter 4. Radical Reforms: Concepts, Consequences, Challenges

The idea of radical reforms, which set the tone for the transformation of the economic system in Russia, was the result of a collective awareness of the need to give our economy and society a new dynamism. It seemed that these transformations would create a scope for economic progress that would provide benefits for all. It is this national economic interest that became the driving force and justification for the initiation of radical economic and political reforms. And it was in anticipation of improvements for all that society embraced the ideas of transforming the country.
The reforms were aimed at rapid systemic transformations that were supposed to change the entire structure of motivations, increasing the interest of enterprises, savers, banks, and managers in entrepreneurial strategies leading to high efficiency and income growth for all. But, if we recognize this as the starting point of the public choice made, then the assessment of the results of the reform plans should be carried out with the expectation of adequate socio-economic criteria.

A Bold Start: The Early Phases of Reform
It is believed that market economic reforms in Russia began to unfold at the end of 1991, when a team of young, educated, and radically transformative ministers was assembled in the government under the patronage of President Boris Yeltsin. As early as January 1992, bold measures were taken on the so-called shock therapy method. Control over prices was lifted, channels for the implementation of foreign economic relations on an entrepreneurial basis were wide open, a policy of all-round denationalization of the economy and privatization of state-owned objects was announced, etc. Almost at the same time, the existing money overhang in the retail market was removed, shortages of goods and queues in stores were eliminated, and the shelves were filled with imported goods that were previously unavailable for free sale.
At the same time, it was found that the prices of goods and services rose abruptly, at a rate that was many times higher than the rate of increase in production. Wholesale prices for cement, for example, in January 1992 increased by 6 times compared to December 1991, and by 8.4 times by January. Daily output was 99% by December and only 89% by January 1991. The shortage of goods was eliminated by a sharp decrease in the effective demand of the general population and enterprises.
The reversal of the events of the reforms of 1992 and subsequent years has been sufficiently described in the literature. The courage of the young reformers at that time was based on the desire to get rid of the shackles of the stagnant past as soon as possible and was fueled by the conviction that it was the radical version of economic liberalization that would lead to the rapid emergence of a workable market economy with automatic advantages over the Soviet economy. The realities, as we know, turned out to be much more complex than desires and hopes.

Measuring Success: Two Dimensions of Reform
The results of the reform efforts can be assessed in two main ways. The first is the final economic and social results recorded by statistics and felt by the population. These results are determined by the scale and rate of growth of the social product and shifts in the standard of living of the people. The second section is the institutional changes that mark the formation of a new economic system.
It is the second aspect that has been brought to the forefront of public attention during the first very long stage of reforms. The denationalization of the economy, privatization, and the expansion of all kinds of entrepreneurial principles were conceived as the most important directions for the formation of a new structure of institutions and a new economic climate. And quite soon in this respect it was possible to note many remarkable processes in the economy that strongly influenced the structure of economic interests:
1. Shifts in the structure of ownership, the multiplicity of interacting economic structures.
The multi-structuring of the economy has become a reality. It is known that the economic structure is a certain type of production relations that encompass a significant part of the economy and is capable of relatively independent reproduction. At the heart of every economic structure is first a certain type of property. After 1995, more than 70% of Russia’s GDP began to be created in the non-state sector. In 1994 this share was 62% and in 1993 – 52%. Especially characteristic were the changes in the structure of retail trade turnover by form of ownership. In 1991, 33% of Russia’s total retail trade turnover was sold through non-state forms, while in 1992 it was 59%, in 1993 it was 77%, in 1994 it was 85%, in 1995 it was 87% and in 1996 it was 91%.
2. A new influence of demand on the economy, turning it into a real structure-forming factor.
3. Openness to the outside world of the Russian economy as a whole and all its economic entities, ensuring integration into globalization trends.
4. The new role of money. Turning money into a short-term resource is most attractive to businesses, banks, and households.
5. Significant weight of large owners of financial capital in the relations on the formation of economic policy in the country.
These changes were carried out in a very contradictory way, but they were milestones in the ongoing transformation of the Russian economy into a market-type economic system. And it was this last aspect that the official authorities and the relevant media emphasized when it was necessary to report on reforms.

Socio-Economic Indicators of Success
As for the first cross-section of the effectiveness of reforms, related to the dynamics of real socio-economic indicators, it was not in the public eye. The parameters of GDP, industrial and agricultural production, real incomes of the population, etc., did not appear in the reports on changes in the Russian economy. It is difficult to find a satisfactory explanation for this circumstance (except perhaps the desire of the authorities not to disturb society in the hope of A quick turn for the better), because the dynamics of almost all socio-economic indicators were consistently negative.
As can be seen from Table 4.1, GDP, industrial output, agricultural output, and capital investment in the economy fell almost continuously until 1998. At the end of the period under review, compared to the pre-reform year of 1990, GDP was less than 53%, industrial output was 46%, and investment in fixed assets was only 21%. Average monthly wage by the consumer price index was only 42% of the pre-reform level. The dynamics of retail turnover indices were flatter (less declining), but it should be noted here that, despite the abundance of goods in stores, the physical volumes of trade turnover in 1998 were less than in 1990.
Attempts by some analysts to draw attention to negative socio-economic trends were drowned in a stream of assertive praise of the chosen course. Economic recession was seen as the inevitable price to pay for getting rid of the evils of the past. This view was persistently introduced into the literature covering economic transformations. And even today, there are stories in serious publications aimed at proving the idea that the reform recession in the Russian economy (in 1991—1998) was Not only is it inevitable, but it’s not too big either. For example, in one of the articles in Ekspert, to the question “what did we (Russia) lose as a result of the victory of liberalism in the economy,” the authors give the following answer: “From an economic point of view, exactly as much as we should have lost,” because, they say, “most of the Soviet economy that Russia inherited was not viable.”


To make the conclusion convincing, comparisons are made with the economic recession during the Great Depression of 1929—1933, which amounted to about 30% in the United States. Russia, according to the article, lost 40%: “more, but not fundamentally more.” On the other hand, according to the authors, the radicalism of economic freedom has brought thousands of super-qualified people to the capital and labor market, which “has not been seen in any country in the world.”[24 - Ekspert. 2004. No. 1. Pp. 16—17.] Such assessments probably have the right to exist in the press. However, a comparison of the effectiveness of two processes: the Great Depression, this natural disaster in the eyes of the US government and public at that time, and a conscious policy of reform in our country, it still looks very extravagant. If one of the politicians of the United States had declared then that the Great Depression was a planned reformation action, it is unlikely that he would have been in good luck.

Ideological Confusion: Goals without Clarity
However, it would be unfair to attribute the unsatisfactory approach to launching market transformations to the government of young reformers alone. The general situation of the time in and around the country was based on a mixture of the reformist romanticism with the conservative pressure of what George Soros defined as ‘market fundamentalism.’ Blind faith in the miraculous efficacy of institutional market changes somehow dominated the worldview of many politicians who entered the arena of the country’s political life at the stage of Gorbachev’s perestroika. And it was this cohort of politicians, in alliance with superficial publicists, who laid down in our society unverified ideological imperatives, which largely determined the course of reforms for a long time. The criterion of transformation has moved from the field of economic performance to the realm of slogans and ideological clichés. For example, the statement of one of the politicians of that time (E. J. Vilkas, Chairman of the Commission on Social and Economic Development of the Union and Autonomous Republics, Autonomous Regions of the Council of Nationalities of the USSR Supreme Soviet) during the discussion of the draft plan and budget for 1990 is very typical: “The progressiveness of any economic measures today is assessed by one criterion: to what extent it helps the market to establish itself.”
As a result of a multifaceted analysis of the initial stages of economic transformations in the country, Academician Nikolay Fedorenko rightly noted: “The main root of the failure of Russian reforms is buried in the fact that Russia entered the crucial stage of the transition period without a targeted program for this transition!”[25 - Fedorenko N. P. Russia: Lessons of the Past and Faces of the Future. Moscow, Ekonomika Publ., 2000. P. 369.]
The absence of a public program for the transformation of the economic system with clearly defined goals at the very beginning of the reforms can be explained by the lack of time of those who took up the transformations, and the sharp political struggle between supporters and opponents of changing the economic system. However, all subsequent (after 1991) reformation steps took place under conditions of almost complete monopoly on the conceptual content of the transformations. This monopoly belonged to those in power. This means that it was the government of those years and the forces behind it that should be considered fully responsible for both the development of goals and the implementation of economic reforms. In the end, the responsibility should be shared equally by Russian society as a whole, which allowed the uncontrolled development of events.

The Human Factor in Economic Transformations
Let us draw attention to two fundamentally important conclusions made by international experts based on the analysis of the practice of market transformations in a large group of countries. Both observations relate to the human factor of transformation, or more precisely, to the socio-psychological side of managing major changes in society[26 - The State in a Changing World: World Development Report 1997. World Bank: Prime-TASS Economic Information Agency, 1997. Pp. 172—202.].
First, the beneficiaries of reforms must set the goal of compensating the losers as much as possible. Without such motivation of the initiators of reforms, the transformations do not turn out to be attractive to society and will eventually either stall or lead to violent social conflicts.
Secondly, the leaders of the reforms in the country become such and gain authority only since they give their people a sense of ownership of the reforms, instilling confidence that the reforms were not imposed from the outside. They should take care to maintain a feedback mechanism that allows for timely adjustments to the content of reforms. To this end, broad discussions on key policy areas and priorities are usually ensured. Every effort should be made to create an atmosphere where people can be heard.
We must admit that both conditions were not even minimally met in the course of reforms in Russia. And if we talk about the first of these points, then we must admit that the task of social guarantees for the weak and “losers” was not only not put at the forefront but was simply ridiculed by many ideological leaders of reforms. As a result of this attitude, a colossal differentiation of society in terms of wealth and social status unfolded incredibly quickly.
This can be seen in a variety of parameters that characterize the structure of our population in terms of income, consumption, savings, property, etc. Academician Dmitry Lvov characterizes our Russia today in two of its images – rich and poor. “Rich Russia is home to about 15% of the population, which accumulates 85% of all savings in the banking system, 57% of cash income, 92% of property income, and 96% of foreign currency spending. In Russia, 85% of the population lives poorly. It has only 8% of property income and 15% of all savings[27 - Lvov D. It’s Time to Show Trump Cards // Rossiyskaya Gazeta. 2003. 15 January. Scientific Newspaper Supplement. No. 1.].
In 1990, the USSR ranked 33rd among all the countries in the world on the Human Development Index, at its worst, and Russia, which had already undergone reforms, ranked 63rd at the beginning of 2003.

Privatization in the Structure of Reforms
The institutional side of the transformations was dominant throughout the entire period of reforms, and the privatization of state property became the central point in it. This, by design, should lead to the emergence of more efficient owners. In fact, the question of efficiency in its generally accepted sense did not arise at all during privatization. The organizers of this process were dominated by two aspects of motivation: 1) the distribution (almost free) of the most attractive pieces of property among the most active figures of the reforms; and (2) the final burial of social property as a phenomenon and socialism as a system of economic management.
Indicative is the admission of Anatoly B. Chubais, who was its chief manager during the main stages of Russian privatization, in one of his interviews in 2002. Speaking of the goals of privatization at the stage of the loans-for-shares auctions, he emphasized that “there was a singular task at hand: creating large capital that could prevent the return of communism in Russia. Ninety-five percent of the task was political and only five percent is economic.” Yes, Chubais admitted, “one can make fair claims to the procedure of these transactions from the point of view of classical economic theory. But large-scale private property was created in the country in a very short time.”[28 - Interview of A. B. Chubais to the magazine Ekspert (2002. No. 47. P. 33).]
As we can see, economic efficiency was in fact of minimal importance in the acts of privatization of state property. But the political emphasis emphasized by Chubais as the dominant of privatization should probably be regarded in a wider range of motives than just the eradication of communism. Rather, behind this political slogan there is a very pragmatic motivation of a narrow stratum of people who received a gift of a huge amount of money in a short period of time property, to prevent its new redistribution.
As for the interests of society, which, by definition, must be protected by the state, they were pushed to the fore in the course of privatization – against the background of the private interests of the established oligarchs, as well as powerful shadow figures.
Here is just one aspect of the losses suffered by Russian society (represented by the state) from the distorted orientation of privatization, which is noted over time by Ilya Klebanov (then Minister of Industry, Science and Technology of the Russian Federation): “I consider it a big mistake that during the privatization of defense enterprises, the state did not value its intellectual property in any way. In fact, it ceased to own the rights to developments that were created with state funds and always belonged to the state. It simply took it out of its pocket and, saying ‘take it’, gave away its property for free. That’s wrong… Together with the Ministry of Property and independent appraisers, we conducted a study of several private defense enterprises and found out that all their capital, machine tools, real estate, etc., is only ten to fifteen percent of the amount that this enterprise would be worth together with intellectual property. It turns out that the defense industry was sold on the cheap.”[29 - Ekspert. 2003. No. 1. P. 48.]
Hasty steps to eliminate the leading role of the state in such spheres of activity as the production and sale of wine, vodka and tobacco products had an even greater impact on the bleeding of the national economy. It is known that revenues from these sectors of the economy have almost always been extremely significant for the state treasury. It is no coincidence that the problem of the “vodka monopoly” was unequivocally solved by the state in its favor back in tsarist times. Concessions in favor of private business in the field of wine and vodka products, cigarette and tobacco products, medicines, etc., have become key miscalculations of state economic policy. In the full sense of the word, they “slaughtered the chicken” that laid the main “golden eggs” for the state budget. It is impossible not to notice that the decisive beginning of these steps was set within the framework of the USSR, during the period of “perestroika”.
The outward amorphousness of the goals of economic transformation in Russia had its reasons. The absence of clearly expressed goals of reforms from the standpoint of society was primarily in the interests of the shadowy inspirers of the processes of breaking the old order. In the context of the blurring of strategic goals and in the absence of institutional constraints, it was easier to achieve the redistribution of the main parts of the previously social wealth, efficient capacities, and natural resources in the clearly defined personal interests of the new “elite,” which was locked in several positions with the criminals.

The Cost of Reform Programs
Criticism of the actions of the reformers’ government on the pages of the scientific press is quite often and rightly built around the thesis that there is no clear program for the transformation and development of the economy. Official circles usually respond to this by referring to the existence of several government economic programs related to the implementation of market reforms. Yes, there have been and continue to be such programs covering periods ranging from one to 4—5 years. Options have also been developed long-term socio-economic programs (for example, the well-known program of German Gref). However, none of these programs had the scope and status of a national strategy for socio-economic development. And the Gref program (claiming to be a strategy) was not even officially published and remained a semi-draft. It is impossible to name a single program document where the ultimate goals of economic programs would be presented in the form of reasonable parameters available for public scrutiny and would be supported by balance sheet calculations linking effects and costs in time and space.
The lack of a clear strategy for economic transformations was aggravated by the fact that there was no objective monitoring of reforms from the standpoint of results, and the government did not have the desire to self-critically evaluate its reform programs and actions. Meanwhile, there were numerous reasons to do so in a timely manner. It was necessary to at least analyze the assessments of qualified experts from the outside, if there was any distrust of critics inside the country. Here are some of the public assessments of the course of economic reforms in Russia, made by foreign experts whose reputation is beyond doubt.
For example, Joseph Stiglitz, the world-renowned economist and the 2001 Nobel Prize winner in Economics, in his analytical report Macro- and Microeconomic Strategies for Russia prepared jointly with David Ellerman, put forward very serious critical observations[30 - The report has been translated into Russian and is available on the Internet at www.ecaar-russia.org/stiglitz-ellerman_ru.htm (http://www.ecaar-russia.org/stiglitz-ellerman_ru.htm).]. Subsequently, Stiglitz has developed these observations in articles and in a book on the contradictions of globalization that has received worldwide resonance[31 - Stiglitz J. E. Globalization and Its Discontents. Translated from English and commented by G. G. Pirogov. Moscow, Mysl Publ., 2003.].
Let us cite a few excerpts from the above-mentioned report, because they were made at a time when there was an opportunity to correct many things. “Russia’s experience of transition from communism to the market has turned out to be much more complex than it seemed a decade ago. The increase in prosperity promised by the market did not materialize; moreover, GDP fell by more than 50%, and the share of the poorest population increased from 2% to 50%. It is necessary to recognize these facts and outline a program for the country’s exit from this state. Today, ten years later, we have inherited not only a new young emerging class of entrepreneurs, but also an even faster growing mafia. The state as an institution violates the social contract again and again, fails to fulfill its promises, and becomes an instrument for private profit at the expense of most of the population. At the same time, only a few are becoming fantastically rich, and most of the population is sliding deeper into the abyss of poverty, and the cynicism in relations with the state and the law is greater than it was a decade ago.
Many hoped that privatization itself, no matter how it was done, would create a demand for an institutional infrastructure that would conform to the market economy and the law, when the all-powerful hand of the hapless state would be replaced by the invisible hand of the market. However, there is neither economic theory nor historical precedent to support such hopes. Only the middle class in the process of its development creates a need for such institutions, and in the last decade there has been the destruction of the middle class in Russia and the creation of a new, more concentrated oligarchy that is not interested in the rule of law, healthy competition, and a fair bankruptcy regime.
The focus on the redistribution of property has diverted attention from the creation of new businesses. The way privatization was carried out did not pay enough attention to the management of firms and did not encourage the creation of new enterprises.”
The authors criticize the prevailing views on the role of the priority of anti-inflationary policy. “Attempts to strengthen the price mechanism by suppressing inflation,” they write, “may have the opposite effect. In addition, there is a view that if there are barriers to lower wages and prices, then moderate inflation is even desirable. Since transition economies are particularly in need of adjustment, the ‘optimal’ level of inflation may be higher than in other economies. The experience of the countries of Eastern and Central Europe shows that it was not the countries with the lowest inflation that developed the fastest… Wherever inflationary paranoia has contributed to the clampdown, macroeconomic policy appears to have played a significant role in the economic downturn.”
Some of these estimates, such as the arguments about inflation, can probably be argued with to some extent. However, in our opinion, it is inadmissible to consider the multilateral critical analysis of the above-mentioned work as some insignificant circumstance that allows it to be ignored. For my part, I tried to convey this position to the Russian public and the government as persistently as possible, but without a proper reaction[32 - Ekonomist. 2001. No. 8. Pp. 3—10.].
In addition, this material contains not only criticism, but also practical constructive conclusions and rational proposals. Thus, the authors believe that at the current stage in Russia, “the following macroeconomic strategies are needed:
– recognition that the country needs a growth strategy and should not focus only on financial stabilization;
– acknowledging that the current large-scale non-payment of taxes (as well as other direct and indirect obligations to the state) provides a unique opportunity to correct some of the mistakes of the past decade;
– recognition of the need to restructure the economy from top to bottom, through the creation of medium-sized and small enterprises that emerge anew or by spun-off from large ones;
– recognition of the need to build a resilient social democracy that can revive social capital.”
Nicholas Stern, the World Bank’s chief economist, has also published a rather critical assessment of the key stages of Russia’s reforms. Here are excerpts from his article: “The reformers ‘gifted’ ownership and control over enterprises to ‘their people’, insiders – nomenclature directors, who were the real owners of the enterprises. They also managed to forge relationships with a new class of oligarchs who made their fortunes either in the final years of the old regime or during the period of inflation that became a feature of the early years of the transition. The oligarchs have taken over the most lucrative sectors of the Russian economy. The reformers depended on the support of the oligarchs and, using a highly dubious scheme of mortgage auctions, transferred additional state assets to these tycoons. At the end of the article, the author noted that an important task of his organization (the World Bank) “is to help Russia” and that “today Russia has a chance to start all over again.”[33 - Transformation. 2000. No. 5. Pp. 1—3.]

Post-Default Economic Shifts
Analyzing the course of economic transformations in Russia, it is impossible not to single out the change in economic dynamics that took place after 1998. Since 1999, Russia has switched from negative parameters of GDP change to the dynamics of economic growth (Table 4.2). Surprisingly, the default of August 1998 helped to mobilize our economy.
The economic growth rate in 2000 was particularly significant due to the sharp fall of the ruble against the dollar after the default and a significant improvement in the foreign economic situation for Russian exports in the commodity markets, especially oil and gas, and a few other favorable circumstances. Economic growth continued in 2001—2004.
In December 1998, inflation was recorded at 84% and in 1999 it was 36%, but in 2000 and 2001 the consumer price index fell to 20%. There was a steady increase in gold and foreign exchange reserves in the Central Bank of Russia: if in 1999 they were at the level of $12.5 billion, by the end of 2000 – $28 billion, then at the beginning of 2003 – $50 billion, and in mid-2004 – $65 billion.
In Table 4.2, along with the data on macroeconomic indicators for the favorable years (1999—2003), a comparison of the indicators of 2003 and pre-reform 1990 is given (see the last column of the table). As we can see, the growth indicators achieved over the past 5 years are far from compensating for the recessions that were allowed during the previous period of reforms. In 2003, GDP was (in comparable prices) lower. 27% more than in the base year of 1990, industrial production by 33%, and agricultural products by 28%.


The situation is particularly destructive in mechanical engineering (-38% of the 1990 level) and in light industry (-85%). But the fuel and energy sectors, some managers of which are inclined to present their activities as “saving” for Russia, also have nothing to be proud of, because the decline in them was significant (-13%), but at the same time there was a significant increase in industrial and production personnel. Thus, in the first ten years of reforms, electricity production decreased by one quarter, and the number of personnel in the industry increased by 1.5 times. The volume of oil production amounted to 60% of the 1990 level, while the number of employees increased by 1.9 times.
It should be noted that investments in fixed assets remain at an extremely low level. Their volume in 2001 was 3 times lower than in the pre-reform year of 1990.
In 2003, real disposable incomes were almost one-third lower than in the pre-reform year. Moreover, according to this indicator, the gains achieved in 2000 and 2001 did not compensate for the losses incurred in the year of default. As of 2001, the share of the population with incomes below the subsistence level exceeded 30%.
Thus, the economic results of the entire past period, which is identified with radical reforms, do not look satisfactory even against the background of the rather favorable years of 1999—2003. Therefore, doubts that the current economic course has the necessary potential to reach the boundaries of the people’s well-being and the development of production soon, which would become compensators for the previously incurred losses in the economy, are more than justified.
The high levels of 2000 cannot be replicated or sustained, and economic growth rates in 2001 and 2002 were significantly lower. Further trends were in fact determined by the external environment in the energy markets, which is by no means a sustainable growth factor.
Professor Jacques Sapir, Director of the Higher School of Economics of Social Sciences in Paris, said: “After the 1998 financial crisis, Russia experienced significant growth over the next three years… This growth came as a real surprise to most Western observers. The Russian government, born out of the 1998 crisis, did not enjoy the sympathy of Western observers, who were more lenient with previous governments. Recall that in April 1999 the IMF provided for a decrease in GDP to -7% for the current year. However, the year ended with an increase of +5%. The error amounted to more than 12 points of GDP – a gap that is infrequent and unexpected for the estimates of well-known professionals. But it must be emphasized that this mistake occurred at a time when relations between the IMF and the Russian government, headed by Yevgeny Primakov, were bad, and the probable causes of the mistake must be sought in a misunderstanding[34 - Sapir J. Russia’s Economy in 2001: From the Satisfactory Present to the Unclear Future // Chinovnik. 2002. No. 2. P. 67.] of the mechanisms of the Russian economy.
Sapir, like other serious experts, points to the lack of an effective investment policy as the reason for the crisis state of the Russian economy. He notes the illusory hopes of some members of the Russian government for foreign direct investment and, in contrast to this, points to the importance of intensifying investment in the private sector. “Resources derived from both domestic trade and exports,” Sapir writes, “have been only partially reinvested.” At the same time, he states that from 1994 until the financial crisis of 1998, Russian oligarchs “played big.” They “actively used their financial resources to facilitate the re-election of Boris Yeltsin, and then played the card of devaluation of the ruble on the export of raw materials, when world prices fell as a result of the Asian crisis.”[35 - Ibid. Pp. 69—70.]

Balancing Ideals and Results
Comprehending the results and the course of transformations in Russia, analyzing the experts’ assessments, we must conclude that the percentage of negative phenomena in the overall balance of the results of transformations was exorbitantly high. Russia as a state has lost almost a quarter of its territory with the richest mineral reserves, half of its population and half of its economy, assets worth more than $500 billion have been exported abroad, and our military-strategic potential has been reduced by dozens of times.
The main destructive influence stemmed from two circumstances. First, it was the wrong choice of the conceptual basis of economic reforms and turning it almost into a religion. Secondly, from the inability (unreadiness) of society to resist the egoistic pressure of the criminals, who were increasingly merging with the authorities. Moreover, these circumstances taken together were well used by external forces interested in weakening the former political rival.
As is well known, our “elite” did not hesitate to choose certain refined principles of the free market as a conceptual basis for economic reforms, reduced to the form of universal recommendations of the “experienced” West for “newcomers” entering the market world. But more and more well-known economists of the world are forming an opinion that the standard reform policy, recommended at a certain stage by international economic and financial institutions as a model for developing countries and countries with economies in transition, in fact turned out to be quite ineffective and clearly does not correspond to the realities and requirements of the future. This type of economic policy is associated with a set of provisions developed in the early 1990s, called the Washington Consensus, and it remains the basis for existing Russian economic programs.
In fact, sharp criticism of the concept of the “Washington Consensus” now comes even from the circles directly involved in its development. The already mentioned Professor Stiglitz, who until recently served as senior vice president and chief economist at the World Bank, argues that the attractive simplicity of this scientific doctrine is in fact “using a very simplistic model of calculation.” He notes that these programs do not include effective financial regulation, measures to stimulate technology transfer, maintain competition and enhance the transparency of markets.
For example, as can be seen from Table 4.3, the structure of industrial production in Russia over the years of market transformations has undergone a clearly negative shift towards a decrease in the role of mechanical engineering and metalworking and a noticeable increase in the share of the fuel industry, metallurgy, chemistry and petrochemistry. Some progress has been made in the development of the food industry, but it is taking place based on the expansion of foreign capital and is often several steps behind the world’s highest technological level. A clear degradation is observed in the light industry sector.


The most tragic consequence of the mistakes of the economic course since the beginning of the reforms is the consolidation of the trend towards the degradation of the productive forces of our country, the transition to economic dynamics based on the consumer attitude to the resource potential of the nation. Clear evidence of this is the strengthening of the raw material orientation of the economy and the sharp curtailment of the manufacturing sector and high-tech industries, the outflow of capital from the country many times higher than foreign investment, the degradation and squandering of scientific potential, the brain drain and, in general, the best genetic fund abroad, a sharp weakening of control over the environment for the sake of current economic interests, etc.
As a justification for the absence of any active innovation and industrial policy with the start of economic transformations, interested politicians and experts usually refer to the lack of investment resources. But this reason is secondary. The main thing lies in the unsatisfactory structure of motivations at enterprises, in the orientation of the behavior of management in economic structures and employees of the relevant state bodies. Table 4.4 shows that there was a serious decrease in 1990—1993 in the share and volume of depreciation deductions, which, as is known, is the most important source of investment in fixed assets. The table also shows how little economic influence the item of labor costs has on the interests of entrepreneurs and workers in the real sector. If the share of labor costs in total costs is 11—13%, and 2/3 of the total costs are material factors, then the creative components of motivations, which are concentrated in the labor potential of enterprises, objectively cannot be properly developed.
The situation in many branches of industry, which in Soviet times reached indicators comparable to the best world ones in terms of technological level and scientific intensity, is very sad. Here is just one of the testimonies (published in 2002) concerning the domestic aviation industry. “Russian aviation has been in a severe crisis for more than a decade. To understand the depth of this crisis, suffice it to say that until 1991 we produced more than 80 long-haul aircraft per year, and in the last five to seven years – two or three, production has decreased by thirty to forty times. And if in 1990 the USSR controlled more than 25% of the civil aviation equipment market, i.e. every fourth aircraft in the world was produced in our country, then since the mid-1990s our share is practically zero. For many years now, the world’s largest aircraft manufacturers have not only not taken us into account, but simply not mentioned us in their marketing studies.”[36 - Ekspert. 2002. No. 16. P. 28.]
The Russian market economy, which did not yet have training in complex market bindings, easily succumbed to new attractive trends in the global financial and economic space, including those related to the separation of financial turnover into an independent business sector, isolated from the real economy, where the dynamism and profitability of operations seemed to be the highest. Under the influence of this circumstance, the formation and development of banks, one of the decisive components of a normal market economy, in Russia, the path of participation in speculative operations rather than the provision of investment and other services to the real sector has taken the path of participation in speculative operations. Most of them limited themselves to performing the functions of financial offices. Overall, the Russian financial system (as well as the finances of many other countries) has become subordinate to the external monetary and financial system based on the US dollar. In the domestic circulation of several countries, the dollar has not just captured individual bridgeheads, but has gained strategic dominance. In Russia, on the eve of 1998, the dollar supply accounted for about 68% of the national monetary base[37 - Abdulgamidov N., Gubanov S. Double Standards of Unipolar Globalization // Ekonomist. 2002. No. 12. P. 22.].


In his introduction to the publication of an expert report on the problems of building the institutional foundations of the market economy, the President of the World Bank, James D. Wolfensohn, has shown that countries with market transformation programs need to be creative, namely to “choose only those institutions that work and reject those that do not.” Countries, he continues, “must have the resolve to do so to abandon unsuccessful experiments in a timely manner.”[38 - World Development Report 2002. Building Institutions for Markets. Moscow: Ves Mir Publ., 2002. P. IV.]
As already noted, one of the main reasons for the insufficient effectiveness of market reforms is the poor understanding by most of the people of the ultimate goals of the reforms, and this stems from the lack of a publicly presented and consistent strategy for the country’s socio-economic development in the long term. During the reform period, the Russian government did not make the necessary efforts to create and maintain a feedback mechanism between the announced programs, their effectiveness in implementation and the perception of transformations by the people. At the same time, it is only with such feedback that it is possible to adjust the content of policies and reforms in a timely and accurate manner, while maintaining the interest of the entire society in them.
Although this principle of regulating influences on social processes has long been known from the theory of governance, in the Russian political elite such productions began to appear too late, and even then, mainly on the part of the opposition. For example, in January 2003, a group of State Duma deputies addressed the President of Russia with the following statement: “In our opinion, the main drawback of all legislative activity is that that bills are proposed for consideration by the State Duma, which, in the opinion of the government, build only a scheme of market relations, but there are no bills aimed at the active participation of the entire population of the country in these relations.”[39 - The People Will Be Saved by Deeds, Not Wishes. Open Letter of the State Duma Deputies to President Putin // Sovetskaya Rossiya. 2003. 25 January.]

Analyzing Reform to Influence Future Policies
The above set of assessments of the period of economic transformations in Russia after 1991 to the present day, in which critical motives predominate, should not be perceived by the reader as a denial of the very need for serious economic and political transformations in the country using all the advantages and opportunities of market relations and the entrepreneurial factor. By focusing on mistakes and miscalculations, we only overcome their silence (often unselfish) and would like to to promote the establishment of the practice of managing reforms according to their socio-economic results, extending to society (people) as a whole.
The management of reforms and transformations according to the criterion of achieved socio-economic results should help to overcome the influence of ideological extremes on economic policy. The deification of the ideals of Western-style market liberalism with boundless self-flagellation of the Russian past, and pride in the spirit of belief in one’s own uniqueness or in the immensity of Russia’s resources can also be dangerous.
We need to accustom ourselves to listening to such assessments, even if not very pleasant, but close to the truth, such as the one that Eric Brunat, European Executive Director of the Russian-European Center for Economic Policy, and Vice President of the University of Savoie (France), made in 2002. “Despite its potential, Russia,” he argues, “is still a country with low labor productivity and high transaction costs.”[40 - Ekspert. 2002. No. 16. P. 52.] These are indeed fundamental problems for the transformation of the Russian economy, and it is impossible to solve them without addressing the study of all human experience and trends in the world economy.
It is impossible not to agree with the following statement of Academician Oleg T. Bogomolov: “The economy cannot be healthy and efficient if consumer prices, the cost of purchasing housing is steadily approaching and even compared with the level of Western countries, and wages, due to the standards set by the state and the monopoly position of employers, sometimes lag behind by dozens of times. As in the former Soviet Union, the wages of most workers in Russia remain unacceptably low, not only in comparison with other countries with a comparable level of development, but also in relation to the achieved labor productivity. In terms of labor productivity, Russia lags the United States by the factor of 5—6, and in terms of average wages by the factor of 15—20.”[41 - Bogomolov O. What voters hope for // Rossiyskaya Federatsia segodnya. 2004. No. 7. P. 3.]
After more than a decade of reformist actions in Russian government circles, the initial neglect of the range of problems related to the impact of transformations on the rate and quality of economic growth has been overcome, thanks God. In his address to the Russian parliament on May 16, 2003, President Putin put forward the task of doubling the country’s gross domestic product over the next ten years. This production, however, caused a wave of skepticism among a significant number of experts and politicians. The task is indeed difficult, since it assumes an average annual GDP growth rate of at least 7.2%, whereas over the last five years (1999—2003), when statistics recorded economic growth after a long recession, the average annual GDP growth was less than 6%, even though the calculation here is based on the crisis year of 1998.

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notes
Примечания

1
In 1990, the World Bank began to publish a special periodical bulletin “Transition” in several languages, designed to highlight the experience and problems of radical economic reforms in countries with economies in transition.

2
Lyubimtseva S. V. Transformation of Economic Systems. Moscow, Economist Publ., 2003; Minaker P. A. Systemic transformations in the economy. Vladivostok: Dalnauka, 2001; Monakhova L. I. Transformation of the Planned Economy into the Market Economy in the Context of Globalization. Moscow, Economist Publ., 2003; Olsevich Y. Transformation of economic systems. Moscow, Institute of Economics of the Russian Academy of Sciences, 1994.

3
Toffler A. Metamorphoses of Power. Moscow, AST Publishing House, 2002. P. 16.

4
Ekspert. 2002. No. 17. P. 65.

5
World Development Report 2003: Sustainable Development in a Dynamic World – Transforming Institutions, Growth, and Quality of Life. Moscow, Ves Mir Publ., 2003. P. 2—3.

6
The use of the concept of “countries with economies in transition” in relation to the periods before 1990 is very conditional and is permissible only in view of the subsequent transformation processes in the socialist countries. According to the IMF methodology, the transition economies usually include the republics of the former USSR and Yugoslavia, Bulgaria, Hungary, Poland, Slovakia, Romania, the Czech Republic, and Mongolia.

7
Moiseyev N. N. How far until tomorrow… Free thoughts. 1917—1993. Moscow, MNEPU Publ., 1997. P. 251.

8
Toffler A. Op. cit., pp. 30—38.

9
Kuzyk B. N., Yakovets Y. V. Russia—2050: Strategy of Innovative Breakthrough. Moscow, Ekonomika Publ., 2004. P. 45.

10
Abalkin L. I. Russia. Search for Self-Determination. Moscow, Nauka Publ., 2002; Bogomolov O. T. My Chronicle of the Transition Time. Moscow, Ekonomika Publ., 2000; Lukinov I. I. Evolution of Economic Systems. Moscow, Ekonomika Publ., 2002; Medvedev V. A. Facing the Challenges of Post-Industrialism: A Look at the Past and Future of the Russian Economy. Moscow, Alpina Publisher Publ., 2003; The Way to the XXI Century: Strategic Problems and Prospects of the Russian Economy. Author. Coll. D. S. Lvov. Moscow, Ekonomika Publ., 1999; Fedorenko N. P. Russia: Lessons of the Past and Faces of the Future. Moscow, Ekonomika Publ., 2000 and others.

11
Reforms through the Eyes of American and Russian Scientists. O.T. Bogomolov. Moscow, Nauka Publ., 1996; Stiglitz J. E. Globalization and Its Discontents / Transl. from English and note. G. G. Pirogov. Moscow, Mysl Publ., 2003.

12
Silvestrov S. On the Global Modernization of the World Order (Theses) // Society and Economy. 2004. No. 3. P. 8.

13
Coase R. The Firm, the Market, and the Law. Chicago: The University of Chicago Press, 1988. Р. 115, 158.

14
Economic Issues. 2002. No. 3. Pp. 138—141.

15
Statistical data of the Committee for Assistance to the Development of the ECOS. Public Administration in Transition Economies. Open Society Institute. Spring 2002. P. 3.

16
Currency Rain Dried Up the Polish Economy // Rossiyskaya Biznes-Gazeta. 2001. 20 March.

17
The National Economy of the USSR for 70 Years. Moscow, Finance and Statistics Publ., 1987. P. 13.

18
Kushlin V. I. Scientific and Technical Revolution in the USSR: History and Modernity / History of the USSR. 1988. No. 5. Pp. 11—12.

19
Kushlin V. I. The Production Apparatus of the Future: (Problems of Efficiency). Moscow, Mysl Publ., 1981.

20
Kushlin V. I. Intensification of the Renewal of the Production Apparatus. Moscow, Mysl Publ., 1986. Pp. 72—107, 156—182.

21
The Path to the 21st Century: Strategic Problems and Prospects of the Russian Economy. Moscow, Ekonomika Publ., 1999. P. 348.

22
Kushlin V. The State in the Economy: Yesterday, Today, Tomorrow // Planned Economy. 1991. No. 6. Pp. 5—6.

23
Berdyaev N. A. The Origins and Meaning of Russian Communism. Moscow, Nauka Publ., 1990. Pp. 126, 150.

24
Ekspert. 2004. No. 1. Pp. 16—17.

25
Fedorenko N. P. Russia: Lessons of the Past and Faces of the Future. Moscow, Ekonomika Publ., 2000. P. 369.

26
The State in a Changing World: World Development Report 1997. World Bank: Prime-TASS Economic Information Agency, 1997. Pp. 172—202.

27
Lvov D. It’s Time to Show Trump Cards // Rossiyskaya Gazeta. 2003. 15 January. Scientific Newspaper Supplement. No. 1.

28
Interview of A. B. Chubais to the magazine Ekspert (2002. No. 47. P. 33).

29
Ekspert. 2003. No. 1. P. 48.

30
The report has been translated into Russian and is available on the Internet at www.ecaar-russia.org/stiglitz-ellerman_ru.htm (http://www.ecaar-russia.org/stiglitz-ellerman_ru.htm).

31
Stiglitz J. E. Globalization and Its Discontents. Translated from English and commented by G. G. Pirogov. Moscow, Mysl Publ., 2003.

32
Ekonomist. 2001. No. 8. Pp. 3—10.

33
Transformation. 2000. No. 5. Pp. 1—3.

34
Sapir J. Russia’s Economy in 2001: From the Satisfactory Present to the Unclear Future // Chinovnik. 2002. No. 2. P. 67.

35
Ibid. Pp. 69—70.

36
Ekspert. 2002. No. 16. P. 28.

37
Abdulgamidov N., Gubanov S. Double Standards of Unipolar Globalization // Ekonomist. 2002. No. 12. P. 22.

38
World Development Report 2002. Building Institutions for Markets. Moscow: Ves Mir Publ., 2002. P. IV.

39
The People Will Be Saved by Deeds, Not Wishes. Open Letter of the State Duma Deputies to President Putin // Sovetskaya Rossiya. 2003. 25 January.

40
Ekspert. 2002. No. 16. P. 52.

41
Bogomolov O. What voters hope for // Rossiyskaya Federatsia segodnya. 2004. No. 7. P. 3.