Russia's Collapse

WINNER TAKES ALL

Russia's economy remains precarious after the August 1998 financial collapse. Gross domestic product fell by 4.6 percent last year and may fall by another percentage point in 1999. Except for 1997, GDP has decreased every year for the past decade, with an accumulated decline since 1991 of 40 percent. Inflation rose to 84 percent in 1998 and remains high. Yet Russia may have finally passed its nadir. Industrial production will likely increase significantly this year, and the fastest-growing industries are not raw materials but machinery, forestry, textiles, food, and construction materials, suggesting a qualitative change. Western policymakers should resist the urge to just throw more money at Russia and instead rethink what the West can and should do to help.

Many argue that Russia fared badly because its "shock therapy" reforms were too fast and radical. But all measures show that Russia's economy is not very liberalized, and the financial collapse made it obvious that Russia's problems were actually caused by reforms that were too slow and partial. A small group of businessmen enriched themselves and then corrupted many of Russia's politicians and officials. They have all conspired to stymie liberal economic reforms, which would stimulate growth and help the overall population, because reform threatens their domination. Russia suffers not from too free a market but from corruption thriving on the excessive regulations erected by a large and pervasive state. Russia's tragedy is that reformers never had enough power to overrule these avaricious interests. Joel Hellman of the European Bank for Reconstruction and Development characterizes the problem of partial reform as "winners take all."

Russia is no longer a mystery; it is more open than ever. Anyone who has visited a Russian enterprise recently understands why the economy is shrinking. Tax legislation is contradictory and full of loopholes, and many collectors work beyond the law. Russia has about 200 different levies, most of which hardly reap any revenue but create red tape for businesses. The taxman collects as much as he dares, taking a lot from small enterprises without political connections and little from big, powerful companies. Although fundamental tax reform has been urgently needed for years, it has been blocked by influential businessmen who now pay little or no taxes.