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CAMPAIGN ’96: UNREFORMABLE REFORM

7 minute read
Bruce W. Nelan

WITH FOUR MONTHS TO GO until the Russian presidential vote, Boris Yeltsin is in full campaign mode and is harping on the central issue of the election: the future of economic reform. YELTSIN IS REFORMS say his banners. Reform was his theme last Friday, when he appeared before a joint session of the parliament to report on the state of the nation. The pain that the shift to a market economy has inflicted on some Russians, he said, was the fault of incompetent officials who had somehow undone his good intentions. Economic liberalization would continue, he promised, but from now on its social cost would be reduced.

That is one vision for the future of reform, reassuring those who have suffered under it but affirming that it will survive and prosper. Not everyone is so sanguine. Many Russians and Western experts are deeply concerned that regardless of what he says, Yeltsin may have lost his taste for transforming the economy and may even reverse some of the advances he has made. An even graver worry is that Communist Party chief Gennadi Zyuganov will win the election and roll the economy back to state-controlled socialism. “The people who said the reforms could never be reversed are coming up short,” says Marshall Goldman, associate director of the Harvard Russian Research Center. “At the moment, everyone’s in a race to see who can go backward the fastest.”

Will Russia go backward? The country has undergone profound changes over the past four years. Despite the understandable fears for the future, some of Russia’s reforms have become so embedded that dislodging them would be difficult. As Zyuganov himself has said, “We understand that if we start taking factories back, there’s going to be shooting from Murmansk to Vladivostok.”

To predict whether Russia will go backward, it is first necessary to recognize where it has progressed. Since 1991, when Yeltsin became President, and 1992, when the process of change began, the achievements in reforming key areas of the economy have been startling.

PRIVATIZATION. Tens of thousands of enterprises have been sold to their employees, often their former managers, and the public, with more than 40 million Russians becoming at least nominal shareholders. There are now private shareholders in 70% of Russian businesses. While corruption and insider trading have marred privatization, the end result has been that government no longer controls the operations or economic decisions of the country’s industry.

PRICES. Except in the fuel and energy sectors as well as communications and transportation, almost all prices have been decontrolled. Rapid price increases lowered the standard of living for many Russians, and some 30 million, in a nation of 147.5 million, still live at or below the official subsistence level. At the same time, shops are full of food and household goods of immense variety. Lines, once the everyday nightmare for Soviet-era consumers, now form only when crowds try to get into the Reebok store and other specialty shops.

MANUFACTURING. The enormous military-industrial complex of the Soviet Union is slowly turning to civilian production. Hundreds of factories where Russians or foreigners have invested are turning out goods–cars, processed food, Coca-Cola–for domestic consumption. Hundreds still have not made the switch. The essential ingredient is capital, and much of it will have to come from abroad.

AGRICULTURE. The farms are the strongest bastion of the collective mentality in Russia. Only a few hundred thousand private farmers have gone out on their own, and they lack storage facilities, a reliable distribution system for their products and a source for the loans they need to buy seed and equipment. This may be about to change. Yeltsin’s aides said last week he was working on a decree that would finally repeal existing laws that forbid private ownership of land, but in his address to parliament he still sounded cautious about land reform.

In 1995 the reform process accelerated. First Deputy Prime Minister Anatoli Chubais and his government colleagues pushed through legislation that reined in deficits by actually making it illegal for the state to spend money it does not have. Acting Central Bank chairman Tatiana Paramonova presided implacably over a tight money policy. Inflation fell from 18% a month in January 1994 to 3.2% last December. Careful fiscal management stabilized the ruble’s exchange rate and allowed the country’s hard-currency reserves to top $13 billion. It was, says Richard Layard of the London School of Economics, “a watershed year, and the names of Chubais and Paramonova will go down in the economic history books.”

The economy seems to be turning a corner. In some months last year, the gdp actually rose, although overall 1995 was the fourth year of decline. Last Thursday, the International Monetary Fund gave Russia a vote of confidence by giving initial approval to a loan of $10.2 billion over three years. The loan is conditional on strict adherence to the imf’s rules of fiscal responsibility and can be canceled on a month’s notice. Michel Camdessus, the imf’s managing director, said he expected the Russian economy to grow 2% to 4% this year and next, and 6% or more in 1998.

With Yeltsin wavering, the communists on the rise and the public in an angry mood, progress appears to be in danger. After the pro-government parties were soundly beaten in last December’s parliamentary elections and the communists became the biggest faction in the Duma, Yeltsin tacked sharply away from reform. He fired Chubais, as well as his liberal chief of staff and his pro-Western Foreign Minister. All three were replaced by more conservative and traditional officials. It looked as though Yeltsin was putting on the brakes, if not reversing his course.

Zyuganov, meanwhile, talks smoothly about switching to a “mixed economy,” but emphasizes familiar Soviet-style mechanisms like price controls, subsidies and nationalization of industries. As the experts see it, this is a recipe for budget-busting and hyperinflation, but Zyuganov thinks it is what Russians voted for last December and will vote for again in June.

Regardless of who comes to power, however, most analysts agree there is no peaceful way to undo privatization. Anders Aslund, a Swedish former economics adviser to the Yeltsin Administration, is convinced that “even if Zyuganov were elected, 80% of the reforms would survive.” Says Sergei Guriev, a Russian economist: “If the goal was irreversibility, they have achieved it.” All the changes since 1992 are theoretically reversible if a government were willing to use force. But how much force? While pensioners and others have suffered, many people have a stake in the new system.

Some key aspects of reforms, like unfettered prices and budget austerity, are in danger if Zyuganov wins in June. Yegor Gaidar, the original architect of Yeltsin’s policies, believes a return to a Stalinist state is impossible now, but he fears that the economy’s nascent stability might not survive a communist restoration. If Zyuganov reaches the Kremlin, he says, the result may be populism of the sort that Juan Peron tried in Argentina, marked by irresponsible government spending, high inflation, price controls and shortages.

Progress has been remarkable, but after the election, reform seems destined to lose momentum. It is not certain that Yeltsin can even make it into the second round of the election that will result if, as expected, no candidate wins a majority on the first ballot. It is also unclear whether he could beat Zyuganov one on one, saddled as he is with the weight of illness, the war in Chechnya and his identification with the pain and corruption of reform. Even if he were re-elected, who would push ahead with reform now that he has thrown its leading advocates out of his Cabinet?

Whatever hopes the West has for reform in Russia, it will have to remember that the rise of a popular democracy there is an even higher goal. If the great majority of Russians are ready to vote against reform in June, as they did last December, the rest of the world will have to live with it. The economy of Russia belongs to its worker-citizens. They have the right to prolong the agony of their emergence from socialism if that is their collective wish.

–Reported by Sally B. Donnelly and John Kohan/Moscow and Dean Fischer/Washington

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