No Russian Reformers Left

The Russian parliament on Friday finally approved Sergei Kiriyenko, a 35-year-old former banker and oil company executive, as the new prime minister. The event is being widely interpreted as good news for the economy: With the political crisis out of the way, the government can get back to the job of market reforms. Mr. Kiriyenko is being counted on to do that job. The problem is, Kiriyenko is not a reformer.

It's a matter of definition. If by "reformer" you mean someone who likes the market economy, and wishes his country had one - and who has a background in business to boot - then he qualifies. But if a reformer is someone who reforms, then neither Kiriyenko nor anyone else in Russia is a reformer. Because an aggressive push to the market today would cause too much pain for too many people, and for too long, for any politician in Russia to dare do it.

The current situation contrasts with 1992, when Yegor Gaidar, another young prime minister appointed by Boris Yeltsin, launched an economic program that meant both serious reform and considerable pain for many people. Mr. Gaidar's reforms were politically viable in part because he was uncommonly bold. But most important was that the disruption in people's lives caused by price liberalization, privatization, and drastic budget cuts was counterbalanced by some very positive changes that can be summarized by the term "greater economic opportunity." In addition to new political freedoms, Russians also gained more freedom of choice in their economic lives. They had new choices in where to work, what careers to pursue, where to travel and live. Above all, they were offered an unprecedented range of new products, mainly imported, to buy.

Russians now take their freedoms for granted. This is one reason 1992 cannot be revisited. Another is that so many citizens used their freedom not so much to join the market economy as to protect themselves against it. The most important step was to produce their own food. By now, roughly half of Russia's entire agricultural output is self-produced and self-consumed by ordinary families on their garden plots. Tens of millions of families live in a near cashless world, obtaining the goods and services they need on a barter basis from family and friends.

It is not only individuals who have retreated from the market. Year after year, Russia's giant industrial companies have failed to convert themselves from Soviet-style "enterprises" into competitive, market-oriented firms. By the end of 1997, Russian industry had even fewer profits, more redundant labor, and fewer modern plants and equipment than it had in 1996.

Enterprises have survived by creating their own world, one that has been called "Russia's virtual economy." Goods are produced, prices are set, and sales are made, but no money is used. The books show losses, but companies don't go out of business. Workers go for months without wages, but they don't quit. Suppliers' bills are left unpaid, but goods are still delivered. And taxes? When they are paid at all, they are in the form of goods and services, not cash.

This huge nonmarket "virtual economy" of Russia's industrial enterprises and households will have to be reformed if the country is to succeed in today's competitive global economy. And yet it is the robustness of this nonmonetary sector that accounts for Russia's remarkable social stability.

As a result, the social and political cost of market reform is much higher now than it was six years ago. This is why it will take market, political, or social forces far stronger than Sergei Kiriyenko to enact meaningful reform.

* Clifford G. Gaddy is a scholar in the Brookings Foreign Policy Studies program and a professor at Georgetown University in Washington, D.C.

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