Incentives and Institutions: The Transition to a Market Economy in Russia

This remarkable book by a former Russian presidential candidate and his Japan-based colleague combines formal economic analysis, historical interpretation, and shrewd observation to explain what went wrong in Russia. The Soviet collapse is often portrayed as a great historical discontinuity. In fact, the authors argue, the economy still remains deeply connected to its past. Central economic planning had long since disappeared in practice by 1990 to become a mere overlay atop a thriving "market" of lobbying, negotiation, and malfeasance. A successful market transition would have required a strong state to create the right incentives and enforce the rules. But when the state disappeared with the Soviet Union, enterprise managers continued to operate with the same institutional structures while the lack of central discipline led to accelerated corruption and asset-stripping. The authors insist that reformers must now focus on the incentives that decision-makers actually have, not on some abstract model of a well-functioning economy. Managers look after their own interests, but if incentives are not structured to make their interests congruent with economic progress, reform and growth will stall. The current oligarchic capitalism is not simply a regrettable station on the inevitable path to capitalism; it could persist indefinitely without redirection. The authors conclude that Russia must enhance its fledgling democracy as a necessary, if not sufficient, condition for creating a market economy.