IMF in Russia: Who Else Will Crack the Whip?

How times have changed. Just 10 years ago Washington was, for Russians, the capital of our global arch-rival - the source of constant political tension and a possible military threat.

Today Washington is seen by many Russians - from striking miners to government ministers to millionaire bankers - as almost a divine helping hand, sometimes generous, sometimes miserly, but ultimately the only force capable of saving the Russian economy from self-annihilation.

The shift is due to the fact that Washington is the headquarters of the "mother of the Russian reforms" - the International Monetary Fund.

The IMF's decision last month to provide Russia with a $15.1 billion stabilization package - $22.6 billion if additional loans from the World Bank and Japan are included - is the latest and strongest sign of Washington's power in Russia.

I was in Russia last month and witnessed the high suspense in anticipation of the IMF decision. In Moscow, government bureaucrats and people on the street alike all seemed to be tuned in to the dramatic IMF-Russian negotiations. The media treated the visiting IMF representatives as messiahs. It seemed that almost everyone - whether they liked it or not - agreed that without the IMF rescue package the Russian economy would just fall over the cliff.

The IMF bailout has helped calm the stormy financial markets, fortified the fragile ruble, and allowed the government a crucial breathing space to implement its anti-crisis program - all presumably good things. Yet, in the West the bailout has provoked a new wave of IMF-bashing. As earlier with Southeast Asia, critics charge that the IMF is itself responsible for Russia's dire situation and that its latest move is wasteful and unproductive. This critique is largely misguided. Russia's troubles aren't the IMF's doing. Taking the IMF out of Russia would make the situation there worse.

The fundamental problem of the Russian transition is not the bad advice from the IMF, but the inconsistency of reform - a problem rooted in the controversial attitude toward capitalism of the Russian people themselves. The problem is that while Russians overwhelmingly welcomed the freedoms and the consumer abundance of capitalism, they wanted at the same time to preserve most of the "perks" of communism, such as free health care and education, subsidized housing, and guaranteed jobs.

THUS, when the IMF pushed for "shock therapy" in Russia - an abrupt end of government subsidies; market-based prices; and strict monetary policy - it was too bitter for the Russian taste. As a result, the Russian government most of the time wasn't willing or able to implement these measures, settling instead for the worst possible combination of stop-and-go policy.

For example, as Russia's need for its huge military industry evaporated, output shrank by 80 percent. This humiliating comedown for a former superpower was so unpopular and hard to digest economically that the government felt obligated to keep millions of workers on the payroll, generating wage arrears and deficit spending all at once.

While all Communist countries of the former USSR and Eastern Europe suffered deep recessions during their market transition, those that closely followed IMF advice - Poland, Hungary, and the Baltics - were able to resume economic growth after just three to four years. Those that didn't - Ukraine and Belarus - are now in worse shape even than Russia.

This is not to say that IMF policies in Russia have been faultless. Many Russian economists - including me - do not agree with some of the IMF prescriptions for Russia. The ruble exchange rate, for example, was set too high, making Russian goods too expensive for foreign importers, thus hurting Russian production and stalling recovery. It's clear now that some of the mistakes of the 1992-94 reforms could have been avoided, such as the IMF's and West's sluggishness in pushing the anti-inflation agenda and overlooking the power and influence of such Soviet-era monopolies in electricity and natural gas.

But the years of reform were not lost. During this time a lot of deadwood in the Russian economy was eliminated, and new industries were born. Even the precipitous fall of industrial output wasn't all that bad because it mainly represented products consumers didn't want anyway.

Today in spite of the Russian government's failures to ensure consistency in reforms, the IMF continues to be the most important source of economic discipline in the otherwise anarchic world of Russian policymaking. In a way, and quite ironically, the IMF has become the new incarnation of Moscow's own Communist-era Politburo - the supreme source of Soviet directives. Indeed, the way the country waited with bated breath for the IMF's decision last month was eerily like the days of waiting for Brezhnev or Gorbachev to announce from the Kremlin the latest and "wisest" shift in the Communist Party line.

Besides money and economic guidance, the IMF presence in Russia serves another useful function - education. Many in the West overlook the fact that - unlike Mexico or Korea - Russia didn't have Harvard-educated economists to manage its reforms. A university friend of mine, now a high-level officer of the Russian government, once confided that, if nothing else, the IMF provided a great school for our top government leaders, most of whom hadn't the slightest idea of the workings of market economics.

Critics are good at sniping at the IMF's mistakes, but what's the alternative? Would Russia be better off left to its own devices? Just look at Yugoslavia or Belarus.

IN Russia, the harshest critics of the IMF - the "Great Satan of the West" - are none other than Communists and extreme nationalists. Even if there were no other arguments in support of IMF policies in Russia, this alone should give pause to IMF-bashers on this side of the Atlantic.

* Alexei Izyumov, a Russian economist, is a co-director of the Center for Emerging Market Economies at the University of Louisville, Ky.

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