How to Make a Market

John Lloyd

  • Eternal Russia: Yeltsin, Gorbachev and the Mirage of Democracy by Jonathan Steele
    Faber, 288 pp, £17.50, March 1994, ISBN 0 571 16368 8
  • Post-Communist Societies in Transition by John Gray
    Social Market Foundation, 45 pp, £8.00, February 1994, ISBN 1 874097 30 5

A growing school of thought, especially on but not confined to the Left, holds that the reform of Russia and other post-Communist states is being carried out in such a way as to destroy rather than improve them. The villains are held to be the international financial institutions (IFIs), such as the International Monetary Fund and the World Bank, and with them the economists, consultants and advisers who flocked into these states after the Fall to inscribe their new dogmas on the ruins of the old. The IMF is thought to be especially guilty. Because it extends loans to its members on conditions which are usually onerous and nearly always require a heavy curtailment of expenditure, it can easily be represented as both parsimonious and interventionist. The money is doled out a bit at a time and the country in question is almost always required to adopt neo-liberal economic principles, including balanced budgets, low inflation and a privatised industrial and services sector.

The IFIs and the Western advisers figure large in the rhetoric of Russian and other former Soviet opposition parties. Alexander Rutskoi, the former Russian Vice-President, who is seeking to put himself at the head of the nationalist/Communist forces opposing Yeltsin, depicts the President as an agent of the IMF, furthering its mission to destroy Russian statehood and the economy in the interests of US capital. One of the legacies of the Soviet period, and perhaps of the empire as a whole, is a view of the world as a zero sum game: if the US and other major nations are up, Russia is down. And there are enough examples of foreign states reacting to Russia’s efforts to achieve some market share for its products by creating tariff and other barriers for that belief to have more than a purely pathological provenance.

As the influence of the Fund increases, the Rutskoi line will harden. Ukraine, under its new President, is inching into compliance with an IMF programme. Even impoverished Georgia, where inflation is over 100 per cent a month, is preparing for inclusion in the Fund’s intensive care unit; in mid-September, it jacked up prices by vast amounts – the price of bread has risen almost 300-fold. Eduard Shevardnadze, the head of the Georgian Parliament, went on TV to apologise but at the same time insisted that ‘the sources which will help our country should be the IMF and the donors associated with it.’ And the IMF, he continued, ‘will not give you even a dollar if you do not follow the prescription it is offering’. The faith vested in the Fund’s prescriptions, and those of Western advisers like Jeffrey Sachs and Anders Aslund, is immense. Since none of the ex-Soviet countries apart from Russia and the Balkan states has the capacity to develop and sustain an economic reform programme of its own, they must rely on the Fund and other agencies for what amounts to their economic policy.

The Fund, and to a lesser extent the other Bretton Woods institutions, tend to secrecy. In large part this is because they are dealing every day with information confided to them by member governments. But it is also a result of their hieratic mode of operation; at the IMF, in particular, criticism tends to be stilled, there has been little encouragement of debate, agreement is what’s wanted. The formal arrangement which the IFIs have with their member governments – that the former stand in a purely advisory relation to the ministers and officials who determine the latter’s policy – masks the dependence, sometimes all but complete, of these officials on a strategy which is wholly unfamiliar to them and of which, to begin with, they may understand little. For that reason, above all others, it is essential that the strategies adopted by these institutions are debated more widely and more knowledgeably.

Both Jonathan Steele’s book and John Gray’s essay sharpen a critique which has so far been fragmentary and diffuse. They articulate deeply-felt arguments against the type of reform Russia is undergoing and warn of the dangers of social upheaval if it continues in the same way. Both writers command respect for their views, although I believe them to be wrong. The position they take – in greatly condensed form – is that Western economic and social models have done more harm than good when applied to the post-Communist states. They both argue that what has been offered is a neo-liberal model of capitalist development, derived from the Reagan and Thatcher projects, which defined state ownership as de facto bad, government as suspect, private enterprise as the source not simply of wealth but of virtue, and the individual as the essential unit of polity.

I take them to be wrong, not because the neo-liberal model is always and everywhere the right approach to post-Communism, but because certain basic elements of the model are common to all presently available approaches to the creation of market societies and democracies; and it is only when these basic elements have been successfully applied that a choice can be made as to whether a society is to be ‘neo-liberal’ or ‘social democratic’ or ‘corporatist’. The pressures on the post-Communist governments dictate radical action; the evidence shows, in broad but so far unmistakable terms, that the complex of measures which have come to be known – usually inaccurately – as ‘shock therapy’ is allowing the societies that have undergone this ‘shock’ to enjoy rather more real choice as to the kind of capitalism they would prefer.

Jonathan Steele is the most experienced British reporter of the Soviet and post-Soviet Union. He has written half a dozen books in which Soviet Communism is the main, or a substantial, theme. He has visited and reported on the area since the Sixties. His last Moscow tour of duty for the Guardian lasted from 1987 to 1994, an unusually long time, and this book is at its best when Steele’s reportorial skills, insights and humour are allowed full play. He tells, for example, of being in Beijing during Gorbachev’s state visit in 1990. Late for a hastily rearranged press conference, he rode his hired bicycle down a lane reserved for ambulances and official cars, holding up a picture of Gorbachev as a talisman and passe-partout, and earning applause from the crowd and friendly assistance from the police because of the affection in which the Russian leader was then held by the Chinese. His resourcefulness and his ability to see himself as a little absurd are typically engaging.

His reports on the big set-pieces of the last years of the Soviet Union are excellent – particularly the elections to the reconstituted Supreme Soviet in 1989. During one illuminating gathering at the Red October plant in Moscow, the manager is proposed as a delegate to the Supreme Soviet. As in the old days, he is the only candidate. This time, however, he is challenged from the floor by the first few people willing to see how far they can go without being shut up.

A bald man, his tie loosened at the collar, asked to speak. He introduced himself as Viktor Oskin, an engineer. ‘Kirillov [the plant manager] has so many commitments. I don’t know how he’ll stick to them all,’ he said sceptically. ‘Anyway, if everything’s been decided in advance why are we having this meeting?’ Some people in the audience did not like that. ‘Why are you talking?’ a voice shouted. Oskin ploughed on. ‘Once again we’ve only got one candidate.’ Now the heckling grew louder. ‘Who elected you as a delegate?’ ‘What are you doing here?’ It sounded like a relic of old-style intimidation, like the barracking which Yeltsin had had to put up with at the party conferences the year before. But as I attended more of these meetings, it appeared to be something else as well, a general Russian unwillingness to listen to points of view one did not agree with – on the principle that ‘if you’re not with me, you’re against me.’ Even the so-called democrats were quick to give the slow handclap to opponents.

  Undeterred by the heckling, Oskin continued his criticisms. ‘They talk of democracy and we’ve only one candidate. When we leave here, people will ask us what we were doing.’ His speech struck a chord with some workers in the hall. ‘Of course he’s right,’ shouted a man behind me. A young delegate said his collective did not support the general manager. ‘We don’t know his programme or what he stands for. We’ll need him here as general manager more than as a deputy. Why do we have to nominate anybody? There will be candidates from other places.’ Now the man behind me was shouting, ‘Why doesn’t Kirillov speak, tell us what his programme is?’ Sensing danger, the chairman tried to head that idea off. He quickly asked for a vote on the original proposal to nominate Kirillov. A voice muttered: ‘We spend our lives just raising our hands.’

The people that this rich and subtle piece of reportage describes are in a state of confusion which you don’t find in the deliberations of citizens in settled democracies. Steele quotes people saying they believed in Gorbachev or believed in Yeltsin – then breaks off to observe that the Russian word for ‘to believe’, verit’, is more than a matter of trust. It denotes a wish for change and has the quality of faith, the submissive belief in a saviour with all the religious overtones that goes with that.’

Steele also believes that there is an eternal Russianness which, in his examples, makes people resent dissent or which disposes them to put their faith in a vozhd’, or strong leader. The gist here is that Russia has resisted change and will always do so; that, as Richard Pipes, the American historian of Russia, argues, Communism was autocracy in a new guise until Gorbachev began to alleviate its worst features and promised to give it a human, democratic face; that Yeltsin, after a brief period of showy democracy and liberalism, is once again busy restoring that autocracy; that the former prime minister Yegor Gaidar’s economic shock therapy, based on Western models and pushed by foreign advisers, was damaging and dangerous and applied in a neo-Bolshevik manner.

These beliefs are at the core of Steele’s sense of Russia; and here he can be misleading, especially when he writes about Yeltsin, whom he so clearly dislikes. He says, for example, that Yeltsin took away the official Zil limousine assigned to Rutskoi because the Vice-President criticised him: in fact, Rutskoi’s criticism was a form of direct opposition and, eventually, treason. A really astute President would have forgotten about the Zil and deprived him of his job, long before he turned the Vice-Presidential office into the base for what became an armed uprising with fascist support.

Steele writes of Yeltsin’s confrontation with the Russian Parliament that, from October 1992, he ‘started on a path of confrontation, repeatedly threatening to close Parliament and, after the referendum of April 1993, using his control of the state broadcasting media to paint Parliament in the worst possible light and advise it voluntarily to disband’. He doesn’t say that Parliament, having initially agreed to the ‘referendum of April 1993’, then tried to sabotage it; that the questions in the referendum had largely been framed by Parliament; and that Yeltsin won despite this.

These evasions are consistent with the belief that Yeltsin is simply another manifestation of the Russian autocrat – and that he can be nothing else, because Russia cannot produce a democrat. Quoting with approval the late-19th-century Russian philosopher Berdayev’s famous remark about 1917 that ‘all of the past is repeating itself and acts only behind masks,’ Steele asks: ‘Was the same conclusion feasible after August 1991? ... had the Yeltsin revolution left Russia’s fundamental problems untouched?’ ‘Russia,’ he writes, ‘was always different from the rest of Europe and remains so.’ ‘Yeltsin’s main belief,’ he claims, ‘is that Russia needs strong central rule to bring in democracy. He is not the first Russian leader to think so. Russia will be lucky if he is the last.’

It follows from this that Steele believes the efforts to introduce the market system rapidly into Russia were doomed to fail. In a central chapter, ‘Big Shock, Little Therapy’, he seeks to show that a rapid advance to market relations was impossible, that Gaidar and his team, and the Western advisers, flunked on ‘the real issue’: ‘an evolutionary transition to the market economy which would be practical in Russian terms’. Whether cynically or sincerely, Gaidar and the foreign advisers used the bogey of the return of the Communist Party to scare society into accepting their nostrums: ‘hence the premium on “irreversibility”, as if there was some discernible safe limit which could be reached, and everyone could then breathe free’. Fixated on the Polish ‘big bang’ and under ‘political, propagandistic and intellectual pressure from Western governments and much of the Western media’, Gaidar removed most price controls, unified the exchange rate, lifted many import and export restrictions and began what turned into a massive and rapid privatisation campaign.

Though Steele accepts that private ownership would be a large step towards the creation of a civil society, he is largely negative about the results of Gaidar’s reforms: he ‘succeeded in destroying the state’s ability to control prices but failed to stabilise the economy’; he failed to realise that, in conditions of freedom, the monopolistic Russian enterprises would simply keep on putting up their prices; his strategy exacted a ‘catastrophic ... economic and human cost’, as consumption fell, especially among the lower-paid. (In fact, there is strong statistical evidence that real pay has gone up in spite of large falls in production.) He does cite the optimists’ belief that, after a rough and ready start, a more skilful and honest entrepreneurial class will take over from the present, rather shady lot, but he prefers the pessimists who believe that crime and corruption will continue to flourish.

John Gray’s view, like Steele’s, is that Western attempts to ‘model the transition process of the post-Communist states in terms which imply their reconstruction on Western models and their integration into a coherent international order based on Western power and institutions’ are grounded in ‘assumptions that are anachronistic and radically flawed’. His main target is the ‘Anglo-American’ model – individualistic, opposed to corporatist devices like tripartite wage bargaining, enthusiastically de-étatist – both because it (especially the British) matured over centuries and because it failed to deliver the promises of the Reagan-Thatcher era and is now in a state of ‘predictable political wreckage’.

Gray is much keener on other models: on the relatively free capitalist order attended by a remarkably active labour-market that has prevailed in Sweden; or the corporatist and consensual social capitalism of post-war Germany; or the ‘successful government concentration of the economy’ in Japan. He also mentions, though not with approval, the Chilean model of authoritarian marketisation pushed through under Pinochet; and China, where economic liberation is conducted ‘under authoritarian political auspices’. However, all these models are dismissed as inapplicable to Russia, chiefly because all but the Chinese had a pre-existing system of private enterprise and the necessary laws to underpin it – and since the Chinese did not destroy the peasantry in the way the Soviets did, they could more easily revive private farming.

Gray does at least mention the current realities that beset these models in their countries of origin, especially Sweden. However, his distaste for the Anglo-American variant leads him to excess. ‘In the post-Communist world,’ he writes, ‘Anglo-American capitalism is widely perceived to be in rapid and precipitate decline’; it has a ‘miserable’ record; it has been ‘tested to destruction’ in both its countries of origin, where growth is at best ‘jobless’. The main international institutions of the post-war world are in crisis or even unsavable. These include the General Agreement on Tariffs and Trade (Gatt – now transforming itself into the World Trade Organisation), Nato, the European Union and US global leadership. He believes that the Anglo-American model has been pushed down the throats of the post-Communist reformers, with uniformly disastrous results. ‘Big bang,’ he writes, ‘cannot work in any post-Communist state.’

He pours withering scorn on (unnamed and uncited) Western experts still deluded enough to believe in the Anglo-American model: ‘It should now be obvious to all but the most purblind and fundamentalist ideologue of the free market that the post-Communist states will not succeed where others have failed to create a free market.’ Whoever expects Russia ‘to converge smoothly and peacefully on the Western model’ is ‘ignorant of Russian history’: it is ‘frivolous and dangerous’ not to believe that the success of Vladimir Zhirinovsky’s extreme nationalist Liberal Democrats will bring decisive changes; the Soviet collapse ‘is not an episode in Western privatisation policy’.

Gray’s pamphlet is a concise statement of what is becoming a piece of received wisdom, at least on the liberal-Left. Yet the received wisdom is wrong: a serious matter if and when a government of the Left in Britain or elsewhere attempts to act on it. First, Anglo-American capitalism is not in rapid and precipitate decline, and is certainly not seen that way in post-Communist societies, in some of which – most notably Russia – American capital is the largest investor. In the US and Britain, growth rates are both relatively high and believed by the main forecasting institutions, like the OECD, to be set to continue for some time, in part because of policy decisions taken in the Eighties. US growth is not jobless growth: on the contrary, unemployment has come down in the past year by over one percentage point, to around 6 per cent – and the relatively deregulated US labour market is now being studied intensively by Germany and Japan, among others. The incoming Clinton Administration did indeed have to confront a colossal Reagan-era hangover: a budget deficit which had flourished in Reagan’s sunny indifference to vast government expenditures and continued unchecked into the Bush Presidency, but which had no parallel in the Thatcher years in Britain. The decline of Britain and America – in different ways – is only relative to the rise of the Pacific Rim and other newly industrialising countries, a phenomenon of long duration which affects all the older capitalist countries whatever their economic and social policies.

Second, the main institutions of the post-Cold War world are facing unprecedented challenges but none can be said to be on the verge of extinction. The European Union, as Gray says, is unlikely to press its federal project in the near future and I agree with him that it would improve the prospects for the inclusion of the Central and East European countries if it did not. But the EU’s achievements over the past decade – the ending of tariffs, the opening of borders to free movement, the drive to include most of the other European countries not presently members – have been impressive and will not be reversed. As Vaclav Klaus, Prime Minister of the Czech Republic, suggested in a recent edition of the Economist, the collapse of Communism and its associated institutions has meant that ‘Europe as a whole has become more free, more democratic, more open, more integrated, more united, less ideological and more pragmatic than at any time in living memory.’

As Gray concedes, the Gatt/WTO successfully completed the Uruguay Round last year: it was less ambitious than previous rounds, but that was in part because it dealt with harder issues. Nato may have been deprived of an enemy, but it is now a pole of attraction to nearly every non-Soviet post-Communist state, while the FSU states have all joined its Partnership for Peace, despite much Russian grumbling. Once again, the problems facing these institutions are immense and have been made more complex by the collapse of a familiar bipolarity, but Gray’s manner is so sweeping and hyperbolic that he fails to identify them.

Finally, no neo-liberal model has been pushed down the throats of Russian or other reformers with disastrous results. What the main Western advisers, including the International Monetary Fund, the World Bank and the demonised Harvard economics professor, Jeffrey Sachs, proposed was a range of prescriptions which emphasised the need for monetary stabilisation, convertibility, price reform and privatisation as the building blocks of economic reform. The experiences of the Fund and the Bank in the Sixties and Seventies had convinced most of their economists that development via state investment and ownership was likely to collapse in debt and corruption. There had been successful stabilisations in a number of Latin American countries and in Israel; the privatisation wave of the Eighties and Nineties also influenced their thinking. On the other hand, as the economists repeatedly stress, the post-Communist process was unprecedented and past practice was seen as a guide, not a straitjacket.

Those post-Communist states which have really applied ‘shock therapy’, notably Poland and Estonia, have seen the most decisive success in terms of growth. Both countries made their currencies convertible instantly, Poland by setting an exchange rate for the zloty, Estonia by adopting the so-called ‘currency board’ system with the kroon pegged to the deutschmark, and always interchangeable with it. Though Poland did have a largely privatised agriculture (which was not very efficient) its economy was dominated by the requirements of the Comecon market: Estonia had lost nearly all of its business people and had a thoroughly collectivised agriculture. They now vie with each other in having the highest annual growth rates – around 5 per cent – in Europe, West or East.

Private companies now dominate the Hungarian stock exchange; the Czech Republic, though slow to privatise, has abolished price controls and kept inflation low: it is a prime location for investment, especially from Germany. The surprise has been Albania, by far the poorest of the former Communist states, which has grown strongly, largely thanks to its close adherence to an IMF programme. All these states are relatively stable politically. When Gray says that the Poles and Lithuanians elected former Communists to government he neglects to add that, in both cases, they had convincingly transformed themselves into social democrats, that, in Lithuania, the Communists had been the agents of independence and that, in both states, Communists have continued to pursue reform – in the case of the Lithuanian Government, more actively than their right-wing successors.

The problem states are those which have not had anything like a big bang, or a therapeutic shock: Romania, Ukraine, Belarus, Kazakhstan – to say nothing of the Central Asian and Caucasian states, in most of which political crisis or war have pushed reform off the map. In all these countries the population is suffering more than in the ‘Shockers’. Many are sliding down the economic scale, heading for a state in which the agencies most likely to be concerned with them are not the IMF or the World Bank but Oxfam and the UN High Commissioner for Refugees. Price and trading controls benefit organised crime and those in high office who profit from it, since much of the corruption arises from the vast sums to be made by buying at home at controlled prices and selling abroad where prices are free.

The model Gray recommends for adoption – he calls it the ‘social market’ – is based on six principles: that the market is not a spontaneous creation but evolves over centuries; that markets are only ‘justified by their contribution to individual and collective well being’ and are ‘perpetually open to revision and reform’; that they must be complemented by other institutions in the given society; that they must be supported by and mesh with cultural traditions; that they vary according to the variety of cultures; and that they will not work unless they conform to the basic, often unspoken, beliefs and traditions of these cultures (the last four appear to me to be the same point variously put). There is little here that would not meet with ready assent from any reformer I can think of in a post-Communist society or indeed from all but the loopiest Thatcherite. The social market, as defined by Gray, turns out to be a market working in a society.

Russia is of course different. It is big. It has had an empire. It had a middle and a capitalist class only briefly. It is accustomed to being a Power. It has a lot of non-Russian people in it, and a lot of Russian people are outside of it for the first time. It is the most thoroughly Sovietised of all the former Soviet states. Even those who are ‘ignorant of Russian history’ know it is a ‘different’ European country – mainly because it is, as its present-day nationalists never tire of pointing out, ‘Euro-Asiatic’, the result of its long drift to the east and south. On this view, it is a perversion of Russia’s history and tradition to submit it to the same economic treatment as other states.

When Yegor Gaidar and his team of reformers took over economic policy in 1992, they took issue with this view of Russia’s difference – not because they were ignorant of its history but because they did not believe it should any longer be an excuse. Steele quotes one of the Gaidar team, Pyotr Aven, the former Trade Minister, as saying that ‘for the economist – if economics is a science with its own laws – all countries from the point of view of stabilisation are identical’: Steele means to be critical by citing this passage, but from the point of view of stabilisation, Aven was right.

It was Gaidar and his colleagues, not the IMF or Jeffrey Sachs, who developed the Russian reform programme: the IMF, indeed, was privately shocked at its uncompromising radicalism and for some time implicitly opposed its drive to create an all-Russian currency by encouraging the other former Soviet republics to retain the rouble. Gaidar maintained and maintains that he inherited an economy dangerously near collapse, with a soaring budget deficit of nearly 30 per cent of GDP; huge suppressed inflation, manifest in vast queues; no commercial banking structure; enterprises out of state control but wholly unable to act as private companies; a management class already stripping the state of its property through the medium of ‘co-operatives’ and the Gorbachev version of ‘privatisation’; a large foreign debt; plunging investment, especially in the all-important energy sector where hard currency was largely earned; an incompetent bureaucracy; a militarised industrial infrastructure; a population at best sceptical of reform because of the failure of Gorbachev to deliver anything but cuts in living standards; and 14 other former Soviet republics, all – with the exception of the Baltics – completely dependent on Russia economically even as they proclaimed independence and mouthed anti-Russian rhetoric. These elements appear nowhere in Gray’s account.

Gaidar was not preoccupied with the neo-liberal model – he was caustic about the Gorbachev-era habit of toying with this or that model, as if Russia were a rich woman in a fashion house trying on this or that gown. He recognised, however, that the world would not tolerate a ‘special’ Russia if specialness meant an unconvertible currency, an unreformed industrial structure and a hostile investment climate. He knew, in other words, that, insofar as there was a new world order, it derived from the death not of Communism but of economic nationalism – a prior and lengthier funeral, though not unconnected with the more famous demise. The world now confers success on those states and corporations which organise, invest, produce and market internationally, negotiating the fantastically rapid changes which financial deregulation, computerised communications, memory banks and production flexibility make possible. A country like Russia is either in or out – and if out, it becomes a kind of huge Cuba, attempting autarchy without a hope of success but with every prospect of causing a social implosion.

Russia is faced with very stark alternatives: Gaidar attempted to push it into the world, and did shift it a part of the way. Should he have concentrated on the demonopolisation of industry before letting go of prices, as Grigory Yavlinsky, his main rival among the reformists, claims? Possibly, but what would then have happened to the budget had he not released price control, how much more of it would have been swallowed up in subsidies? Should he have striven to keep the other former Soviet republics together in an economic union? Possibly, but would any of them have listened, consumed as they were by nationalist projects and scornful, in many cases, of the mild version of co-operation called the Commonwealth of Independent States?

Gaidar and many of his team (not all) were neo-liberal in their inclinations, but they could be nothing like purist in their policies. They formed a tripartite, union-management-government forum of the kind Gray admires to discuss and attempt to agree wages and price rises, but since the unions had lost their raison d’être as the industrial organisers of the Communist Party and management hardly existed as a separate force, it has not had much impact.

The world in which choices are made a hundred times a day as to which economy millions or billions of dollars are invested in; the world in which commodities such as cars and computers and planes are put together in one location from parts made in a thousand; the world in which rivers of data flow to and fro across ‘borders’, bearing information that a wilderness of KGBs could not analyse, or even capture – that is the world into which the Russian reformers had to struggle to insert their country. It is a world which exists spectrally, if at all, in these two works: but it is the world into which the former Soviet Union has been pitched, for all that.