Russian Transition To Capitalism: What Would Have Made It Less Painful?

RUSSIAN TRANSITION TO CAPITALISM: WHAT WOULD HAVE MADE IT LESS PAINFUL?

CONTENTS

1. INTRODUCTION

2. POLITICAL & ECONOMIC & SOCIAL ISSUES OF POST SOVIET RUSSIA

 SOCIAL WELFARE

 HEALTH CARE

 EDUCATION SYSTEM

 TAX COLLECTION

3. TRANSITION CHALANGES: FROM PLANNED ECONOMY TO THE MARKET ECONOMY SYSTEM

 TERMS AND CONDITIONS OF THE TRANSITION TO THE MARKET ECONOMY

 PRIVATISATION

 LIBERALIZATION

 MONETARY AND FISCAL POLICY

4. KEY ECONOMIC MISTAKES

5. CONCLUSION

6. APPENDIX

7. BIBLIOGRAPHY

1. INTRODUCTION

The Russian economy experienced tremendous stress as it moved from a centrally planned economy to a free market system. In this paper we will describe the challenges Russia faced during the transition period. The challenges consisted of political battles, a series of economic and social crises, and the poor results that came with many of the reform efforts.

Russia was experiencing three revolutions all at once. First, they were attempting to fashion a new democratic politic system (and truly needed to replace the old Communist-era constitution). Second, they were trying to launch a new capitalist economy. And finally, they were coping with its postimperial status: within a few short years, Russia had lost the Cold War and its superpower position in the world, had given up its influence over Central Europe and neighboring republics that had been part its empire since the 1920s.

In the main section of the paper I will identify key economic mistakes of the Russian reform processes as they moved toward market economy. I will also incorporate the key factors that many Western economists described as being essential for the successfully functioning of the market economy. These factors included privatization, liberalization and monetary and fiscal policy. I will then look at the major mistakes made by the Russian government during the transition process. In conclusion, I will present my opinions as to the most important factors which would have made Russia's transition smoother and less painful.

2. POLITICAL & ECONOMIC & SOCIAL ISSUES OF POST SOVIET RUSSIA

The breakup of the Soviet Union in 1991, along with independence brought a lot of issues to Russia and the other fourteen republics, none of which had any experience in self-governance. All the nations were starting from a situation where there was political and economic crisis and some had total social chaos.

For Russia, the end of the Soviet Union meant facing the world without the considerable safeguard zone that the Soviet republics that had provided it in various ways since the 1920s; and the change also required complete reorganization of what had become a totally corrupt and ineffectual socialist system.

The colossal changes in Russia and all post-Soviet Union countries really started with President Gorbachev's "perestroika and glasnost" (rebuilding, publicity/ openness) policy. In August 1991 there had been an unsuccessful coup or "putsch" organized by old regime representatives, who tried to return previous administrative command system to power. One month after a failed coup all the key republics, including Russia, voted for independence. In December 1991 Gorbachev announced in that the U.S.S.R. as a nation would cease to exist.

In place of the monolithic union, there still remained the Commonwealth of Independent States (CIS) which was a loose confederation of eleven of the former Soviet republics which now were independent states with an indefinite mandate of joint cooperation. Boris N. Yeltsin, who had been elected president of the Russian Republic in June 1991, had become the leader of the new Russian Federation.

Russians hoped that Russia could make a short, painless transformation to democratic rule and free-market economy. Although events of the first five post-Soviet years provided some reasons for optimism, most observers soon realized that whatever transformation Russia was to experience would require much more time to be completed, and would yield much less predictable results than many had initially expected. At the time of independence, the Russian Federation included nineteen autonomous republics, ten autonomous regions, and one autonomous oblast; each designated for a particular ethnic group.

Throughout the 1990s, the state's social welfare system retained the bureaucratic complexities of the Soviet era, but it did not keep pace with the needs of society. The "social umbrella" of the Soviet Union's socialist system, which nominally had guaranteed to all citizens employment, health care, child care, pensions, and universal, high-quality education, also encountered problems

* Russia's health care system deteriorated substantially in the 1990s. Equipment and medicines were in increasingly short supply, old facilities were not replaced, and existing facilities became inaccessible. Medical personnel generally are not trained as rigorously as their contemporaries in the West, and constant failures to pay doctors and nurses worsened shortages in those professions.

The 1997 national budget allocated US$1.6 billion for health, an increase of US$158 million over 1996, but most of the new money was targeted for medical centers in large cities. The 1997 figure was 2.6 % of the gross domestic product (GDP), compared with the World Health Organization's recommended minimum share of 5 %.

* Pensions. Reforms such as pension indexation and differentiation of individual contributions to pension funds were only beginning to appear in the mid-1990s. By that time, the government's inability to collect taxes and other obligated funds had had a major negative impact on social programs. By the fall of 1996, an estimated US$3 billion in pension payments were overdue.