The Triumph of Capitalism in Russia and Eastern Europe and Its Western Apologetics

Capitalism in Russia and Eastern Europe

For those who feel a pang of sadness when seeing the last tiny ray of hope for socialism in Russia and elsewhere fade away in darkness behind the western horizon, it is a trial to read most of the transition literature, which describes the return of capitalism with unaffected delight as a veritable triumphal procession. Typical is Anders Aslund, who has “never been attracted to anything socialist.”1 Also from an impartial point of view the very optimistic, even euphoric literature is hard to understand. How did authors like Aslund (2002), Fisher & Sahay (2000), Nørgaard (2000), the World Bank (2002), Krueger (2002), Paldam (2002), and Shleifer & Treisman (2004) arrive at their conclusions? And how did they succeed in persuading public opinion, e.g. The Economist which in 2002 declared that “never in living memory has Russia been so stable, respected or prosperous”?2 To answer these questions is the intention of the following analysis.In the period from 1950 to 1989 production per capita increased in the Soviet Union at approximately the same rate as in western countries (3% annually in 1950-73, and 1% annually in 1973-89), but in the 80s growth rates decreased more than in western countries, and they were far below those of some Asian countries, among them China and South Korea, which experienced growth rates close to 10% annually for prolonged periods (Table 1). With the exception of Romania and Albania, the countries in Eastern Europe and the Soviet Union had GDPs per capita in the range 25-50% of GDP per capita in the USA, and the inhabitants belonged to the richest quarter of the world’s population (see Table 2).

There are opposing voices, among them Stiglitz (1999), Hedlund (1999), Klein et al. (1996, 2000), Reddaway & Glinsky (2001), Klein & Pomer (2001), and Goldman (2003); also Tables 1 and 2 tell a different story (for details about Russia see also Tables 3 and 4 below), namely of positive although decreasing growth rates which the transition after 1989 turned into an economic depression of a duration and depth that have never before been registered in times of peace and that exceed the world crisis in the 1930s. At that time GDPs declined by 10-15% in Western Europe and by 30% in the USA, and they recovered in 5-10 years.3

Table 1: Average Annual Growth Rates in Percentage of GDP per Capita 1950-1989 in Various Countries
 
Soviet Union
USA
Denmark
Japan
China
1950-1973
3.4
2.5
3.1
8.1
2.9
1973-1989
1.0
2.0
1.7
2.9
5.0

Source: Maddison, 2001: 276, 278, 279, 304

In the beginning of the 90s production declined in all of the 27 transition countries: by 15-50% in most countries and by more than 60% in the most disastrous cases. In 2000, GDPs in the big countries of Eastern Europe had recovered to the levels of 1989 (in Poland it was even 34% higher in 2003), but in most countries production in 2003 was still smaller than in 1989, e.g., 18% smaller in Latvia as well as in Lithuania and 25% smaller in Russia (Table 2).

Simultaneously, the distribution of income and wealth has become dramatically more unequal, particularly in the former Soviet republics, which have in all respects had a more unfavourable experience than the countries of Eastern Europe. In Russia the Gini coefficient, which measures inequality on a scale from .00 to 1.00, has increased from the lowest end of the international spectrum (about .25 as in Scandinavia) to the highest (about .50 as in some countries in Latin America), and a hitherto unseen poverty has appeared, with 30% of the population living below the official poverty line of 42 USD a month.4  Mortality has increased, partly because of more alcoholism, but mostly without any other demonstrable cause than stress or rather distress and poverty, and for this reason there was an excess mortality in Russia during 1990-97 of probably about 2 million people.5 Food production and grain harvests have decreased by 30-40%. The population muddles through by means of imported foods and the potatoes and vegetables which 80% grow for family consumption on small, private allotments and plots probably the most dynamic sector of the Russian economy.6

Table 2: Economic Growth in Selected Transition Countries 1989-2003
 
Smallest GDP
GDP EBRD GDP/Capita
 
Year
1989=100
2003
1989=100
2003*
1989
USA =100
Russia
1998
55
75
2.9
31
Belarus
1995
63
97
1.8
26
Ukraine
1999
40
50
2.7
25
           
Estonia
1994
64
97
3.7
37
Latvia
1995
52
82
3.5
35
Lithuania
1994
53
82
3.5
32
           
Poland
1991
82
134
3.6
29
Czech Rep
1992
87
108
3.7
44
Hungary
1993
82
115
3.8
34

*EBRD transition index 2003

Notes: The two first columns show the year with the smallest real GDP (in constant prices) since 1989 and its size. The third column shows real GDP in 2003 as per cent of GDP in 1989, and the fourth an index of institutional reform during 1989-2003 computed by the EBRD (European Bank of Reconstruction and Development) as an unweighted average of subjective estimates, on a scale ranging from 1.0 to 4.4, for 9 types of market reforms: large and small privatisation, price liberalisation, enterprise restructuring, foreign trade liberalisation, competition policy, financial sector reform, and infrastructure reform. The last column shows GDP per capita in 1989 as per cent of GDP in the USA, but these estimates are an attempt to rank countries using different and conflicting computations of GDP in purchasing power parities. Probably the ranking of countries and the order of magnitude is a reasonable guess, but the exact numbers are highly uncertain.7

Figures for GDP as computed by the EBRD are among the most widely accepted, but they are uncertain not least because the informal sector is included on a rough estimate normally corresponding to approximately 25%. There are different estimates and they are subject to considerable revisions. Thus in 2001 the EBRD changed the level of the smallest GDP for Armenia (1993) from 31% to 44% of GDP in 1989, and for Lithuania (1994) the figure was changed from 39% to 53%. The World Bank revised its figures for Poland, so that the smallest GDP (in 1991) was increased to 94% of GDP in 1989, and GDP in 2000 was increased to 144%.

Sources: EBRD, 2001: 19, 59, 2003: 56, 122, 142, 154, 166, 170, 176, 210; World Bank, 2002: 5; Maddison, 2001: 278, 279, 337; Aage, 1998: 128.

The original cause of this deterioration is the politically decided dismantling of the planning system since 1989 and subsequent fast and radical recasting of society in all countries with few exceptions, notably Belarus and Uzbekistan. The revolutionary wave since 1989 has entailed a large-scale and ruthlessly hazardous economic adventure policy. Privatisation has taken place extensively, and in Russia 70% of GDP is privately produced; foreign trade and capital movements have been liberalised, internally prices and economic activity have been liberalised as well, and the economic functions of government have been drastically reduced (Table 4).

Are these outcomes “a cause for celebration,” a proof that production decline “was completely reversed by 2003,” so that “it is likely that Russians today are on average better off than they were in 1990”?8 Yes, if Andrei Shleifer and Daniel Treisman can be trusted, as they conclude like this in a 2004 article about Russia in Foreign Affairs, entitled “A Normal Country.” Maybe the usage appears to be surprising and the interpretation of empirical fact original, but this is far from unique. According to Anders Aslund the lessons are that

Radical reforms, involving liberalization and financial stabilization, were both economically effective and socially desirable,… [and] all major reforms have had positive impact.. The empirical evidence of the benefits of a radical and comprehensive reform is overwhelming.9

This is completely in agreement with what is indefatigably repeated by for example The Economist, which in 1996, when the Russian GDP had plummeted to 57% of its 1989 level, described the situation in the following phrases: “The economic news, on the whole, is fair to good.”10 It is a widely shared point of view that “liberalization has indeed been a good investment,”11 and that “the future is full of promise for the Russian economy,”12 which is “performing impressively.”13 Similar opinions prevail in the academic debate. Thus Martin Paldam:

The story of Russia’s transition is a fairy-tale, where the poor hero goes through many adversities and trials before the (tolerably) happy ending.14

Like Andrei Shleifer & Daniel Treisman, Paldam is convinced “that most Russians today are better off than ever before.”15 And according to Ole Nørgaard it is…

tested in practice by the following analyses… that a market economy… has proven superior to all other types of economic institutions so far invented.16

The task for the apologetics of capitalism is not that easy in the light of empirical evidence, especially with regard to Russia. The first year with negative growth in Russia was 1990, when GDP decreased by 4%. Then it accelerated, and in 1994 GDP had plummeted to 60% of its 1989 level and in 1998 further down to 55%, whereupon GDP increased to 66% in 2001 and 75% in 2003.17 It is a feat to present this as an achievement of a “long-term carefully prepared”18 Russian transition policy since 1990 and as an homage to the originators, Yegor Gaidar, Anatolii Chubais, Andrei Schleifer and other Russian and western economists.

Common to the apologetic literature is the dauntless saltomortale over the gulf between the dismal facts and the cheerful message, namely that transition is a victory, not only for western political interests, but also for western market neoliberal ideology. There are also common features in the techniques of reasoning and explaining away; these techniques are analysed and criticized below, under ten main categories.

1. Manipulating statistics

Techniques of explaining away are applied right from the outset to turn everything upside down and belittle the transition collapse, for which the former planning system is blamed despite the fact that precisely the dismantling of the planning system triggered the unheard of deep depression.

It is difficult to establish dependable and sufficient statistical figures, and for the transition period it is particularly complicated. Anders Aslund holds the opinion that statistics from the EBRD and the World Bank, which are normally considered authoritative, consistently underestimate production, for which reason he makes some summary corrections and concludes for example that GDP in Russia did not drop to 55% in 1998 as compared to 1989, but “only” to 85% and that “the great post-communist output collapse is a myth.”19 His upward revision of the 1998 figure is based on two adjustments. First, he adds informal production, i.e., production not recorded by GDP statistics or by taxation authorities. Such production is widespread in Russia, especially in consumption goods industries and in the form of food production on private allotments. Informal production contributes 15%, that is half of the difference from 55% to 85%, but Aslund forgets to tell that informal production is already included in the figures from the EBRD and the World Bank on a rough estimate as a 23% addition, i.e. 10% of the 55%. Adding Aslund’s 15%, total production amounts to 70% of which 25%, or 35% in relative terms, is informal. Under these assumptions, the informal sector supplies about 2/3 of private consumption (cf. Table 4). which like luxury cars, tourism and Russian buying up of fixed property in western countries testifies to an increase not in general prosperity, but in inequality of income and wealth.

Secondly, GDP at the starting point is reduced by subtracting “valueless” Soviet production and by using 1991 as reference whereby GDP decreases in 1990-91 are removed. These two modifications add another 8% and 7%, respectively, to GDP in 1998, so that the total revaluation of GDP in 1998 amounts to 30% (from 55% to 85% of 1989-GDP) or 55% in relative terms (the addition of 30% as per cent of the initial 55%). These two well-known techniques of explaining away, manipulation and omission, are fortified by a third one, namely frequent repetition of the assertion.

Martin Paldam obtains similar results using slightly different methods. The usual figure for GDP in 1989 is allegedly too large and is reduced by 20% to a “more reasonable estimate,” and the addition for informal production is increased from 23% to 33%. The “steady increase” of GDP in 1999-2001 is amplified without explanation, as GDP in 2001 is increased from 66% to 70% of the 1989 level.20

Omission is also applied by Andrei Shleifer & Daniel Treisman. Like Aslund they do not mention that informal production comprises 23% of the EBRD figures, which means that statistically registered economic activity is regularly augmented by 23% in order to arrive at the official GDP estimate. Nor do they mention capital flight, predominance of raw materials in Russian exports, wearing down of physical and human capital, or deterioration of healthcare, education and other types of public services. They fasten upon the level of private consumption, which is almost on a par with the level of 1989. Although they do not maintain, as does Paldam, that private consumption has been “smoothly increasing,”21 they share his delight concerning the many “big and new” motorcars and increasing tourism abroad.22 Curiously, Shleifer & Treisman omit mentioning that the number of Russian-owned English premier league football clubs has increased markedly, as the oligarch Roman Abramovich used 140 million pounds for buying Chelsea in August 2003,23

2. Blaming the Communists

Generally, it is the Soviet regime that is said to bear responsibility for the economic and social disasters of the 90s, although these are not at all so severe as most of us have been led to believe.24 There was “severe economic crisis” according to Anders Aslund, but it did not happen in the 90s; no, it was under Soviet rule that “drastic fall in output” occurred, and the “free fall” of the Soviet economy entailed its collapse on January 1, 1992.25 36 in both cases the reason is that capital input increases faster than input of labour and other factors of production, and then the productivity of capital decreases when the technology is unchanged. Thus, if a farmer applies more of the same type of tractors on a fixed area of arable land with a fixed number of workers, output will probably increase, but at a diminishing rate. Therefore, the productivity of labour, i.e. output per worker, will increase, but the productivity of capital, i.e. output per unit of capital, will decline, as has happened in western countries from time to time. In the Soviet Union capital input increased at extremely high rates; and technology (the production function) was indisputably more unchanged in the Soviet Union than it was in western countries, where technical improvements were embodied in production much faster, and in the Soviet Union capital productivity declined consistently.

There exists a time-honoured tradition for dire news about the Soviet economy. Back in the 60s many economists were aware of the problems of the Russians and “the crisis they are faced with at the moment,”26 namely that annual growth rates according to CIA estimates at that time had dropped from 5.1% during 1961-65 to 5.0% during 1966-70. According to recently revised figures, Soviet annual average growth rates were 4.8% in 1961-65 as well as in 1966-70, 2.4% in the 70s and 1.7% until 1985.27 In 1991 a Danish newspaper headline declared “the Soviet economy in shambles” because GDP had declined by 1.5%.28 Martin Paldam also subscribes to the view of the “collapse of system,” not, however, in 1992, but in a very short span of time in 1989-90. “First the economic system collapsed, then the reform process took off,”29 and furthermore “it was supposedly necessary to force the process through to the end.”30

But this is a deluding rationalization after the event, a falsification of history. The planning system did not collapse, either in 1989 or in 1992; it was dismantled while it was functioning, precisely by introducing market reforms, and the dramatic downfall of production after 1990, especially in 1992-94, was the direct consequence of this. Transition to the market economy was decided by the Supreme Soviet in the Summer of 1990, and market reforms were commenced already in 1988 with the law on cooperatives (which Aslund mentions).31 Gosplan as well as Goskomtsen, the ministerial committee for prices, were formally abolished in 1991 (which Aslund does not mention). By the way, if it is accepted as a principle that the effect cannot precede the cause in time, then the planning system cannot be blamed for not functioning after its abolition. The decline of the Russian GDP began in 1990 (by 4%) and in 1991 (by 5%) as a consequence of market reforms. Therefore, it is a misrepresentation to make 1991 the last normal year, as Aslund does.

The sequence of events was quite different. In the late 80s the planning system was working, but growth rates were decreasing, although positive, and discontent was increasing. The dismantling of the planning system was driven forward by a popular claim for prosperity and also for democracy, especially in the sense of national independence. To put it simply, what happened was that the populations of Eastern Europe and Russia watched western television and realized that the western countries were much better off than they were themselves;32 then popularly supported governments asked western advisers what had to be done, and subsequently they actually did it. But conceptions of what would happen were very general and undeveloped, as can be seeen from Yegor Gaidar’s diffuse reflections about Russia’s transition from an eastern, unstable type of society without guaranteed property rights to a western, stable type of society, where private property together with the “objective laws of the economy”34 inevitably will lead to increasing prosperity. Like Anders Aslund, and equally unsubstantiated, Gaidar maintained in 1995 that Russia had been facing collapse in 1990. But the question posed in 1990 was not how to alleviate a collapse, but how to get rich as in the West and fast and optimism was predominant and buoyant.35

Of course, the argument could be turned upside down: in a sense it is impressive that capitalism has performed so well in fifteen years time starting from scratch and that the disaster did not become much worse. But disaster was not what the populations expected or what the western advisers promised. The reformers believed in earnest that abolishing state property would solve all economic problems, exactly as Marx believed that abolishing private property would solve all social problems:

Communism is the positive transcendence of private property as human alienation… the genuine resolution of the conflict between man and nature and between man and man… It is the riddle of history resolved.

These equally utopian views have both been considerably revised, and transition to the market in the 90s was not the riddle of history resolved.

According to Aslund the “poison pills” from Soviet times explain many current hardships, including corruption and the rise of the oligarchs to economic power.37 The Soviet system before 1989, on the other hand, did not have much to boast about. Economic growth rates were “greatly exagerated” and “not very high by international comparison,” and “real socialism was no welfare state.”38 Most authors, however, agree that Soviet growth rates were approximately as in western countries (Table 1), including Martin Paldam (who is otherwise close to the views of Aslund concerning methods and conclusions) as well as Bent Jensen. Both find it hard to persuade themselves to utter anything favourable about the Soviet system, and both express the parity between Soviet and western growth rates as a failure to close the gap between GDP per capita in the Soviet Union and in western countries, so that “it was in vain that the Russians sacrificed so much for the sake of ‘progress.'”39

Bent Jensen observes that the Russian GDP amounted to 11% of the American in 1913 as well as in 1991.40 What this means is that Russian economic growth rates were on a par with American ones during these 78 years, which is probably not a very bad achievement. Comparing 1913 and 1989 it would be more reasonable to use 1917, but comparable statistics are not available shows that GDP per capita in the Soviet Union as per cent of the American increased slightly from 28% to 31%, as GDP per capita more than quadrupled in both countries, corresponding to annual average growth rates for these 76 years of 1.8% in the USA and 2.1% in the Soviet Union.41

Paldam explains the poor growth rates which were not so poor after all in the Soviet Union by the decline of productivity of capital, and adds that this manifestation of “the falling rate of profit … did not materialize in capitalist countries.”42 Well, in fact it did, although much less pronounced;43

But consumption increased at a lower rate in the Soviet Union than in western countries, precisely because of disproportionately large capital investments and also because of large military expenditures. These explain, together with initial differences, why Soviet and western growth rates can be rather similar, and nevertheless living standards can be conspicuously different. The Soviet Union can be compared to Finland, which in the 19th century was a grand duchy within the Russian empire (Table 3).

Table 3: Annual, Average Growth Rates of per Capita GDP 1913-89 in the Soviet Union and Finland
  1913-1950 1950-1973 1973-1989
1913-1989
Soviet Union
1.8
3.4
1.0
2.1
Finland
1.9
4.3
2.7
2.8

Note: The 1913 (pre-Soviet) figures for the Soviet Union refer to the territory subsequently comprised in the USSR.Source: Maddison, 2001: 265, 276, 278.

In 1913 GDP per capita was 38% higher in Finland than in the territory of the Soviet Union and in 1989 136% higher. In 1989 investment and military expenditures amounted to 20% of GDP in Finland (15% and 5% respectively), and in 1989 they amounted to 55% of GDP in the Soviet Union (30% and 25% respectively). Deducting these amounts from GDP leaves a part of GDP that could be considered a measure of living standards, and this measure was 4.2 times higher in Finland than in the Soviet Union in 1989. This corresponds fairly well to casual observation. Thus, contrary to common belief, the evident, large differences in living standards between the Soviet Union and western countries are reconcilable with rather close similarity of estimated growth rates.

3. Arguing that the reforms have not gone far enough

It is repeated again and again in the apologetic literature that capitalism induces economic growth and relieves social distress. Remaining (minor) problems are not caused by market reforms; on the contrary the cause is lack of reforms or lack of sufficiently far-reaching reforms. “Gradual reform” creates the worst of all possible worlds.44 Generally, it is hard to tell the allegedly very large differences among transition countries. All of them with few exceptions, notably Belarus and Uzbekistan, have carried out fast and very radical changes of the fabric of society. This also applies to Russia; 70% of production is private, liberalisation of prices and foreign trade is comprehensive, and so is privatisation except for land. Its transition index figure of 2.9 in Table 2 is below those of the Baltic and East European countries, but increasing. In 1997 the index stood at 3.0, but dropped to 2.3 in 2001 because of the national bankruptcy in 1998 and ensuing restrictions upon international capital movements and problems in the financial sector.

According to Anders Aslund part of the explanation of Russia’s (minor) problems is that reforms were “very gradual”; on the other hand Russia is also characterized as a “vigorous reformer.”45

The basic facts are that all countries applied very radical reforms, that they all experienced dire economic hardships, and that the relatively small differences between them are not closely related to reform scope or speed. So, there are no compelling empirical or logical reasons for making gradual reform a culprit. Indeed, two outstanding reform laggards, Uzbekistan and Belarus, with an EBRD transition index as explained in Table 2 of 2.0 and 1.8, respectively, did relatively well concerning GDP in 2003, namely at 107% and 97% of 1989-GDP, respectively, which makes them number 1 and 3 among former Soviet Republics. Number 2 at 100% is Turkmenistan with the lowest transition index of all, about 1.0. Belarus shares the third place with fast-reforming Estonia, also at 97%.

4. Blaming parasitic rent-seekers

The (minor) problems that surfaced in the 90s were not, according to Aslund, caused by the market-reforms themselves, but rather by malignant persons who sponged on the reforms. Although the meaning is the same, they are not called “saboteurs and parasites” as in Stalin’s time, but “rent-seekers,” who are doing harm, as opposed to “profit-seekers” who are useful. As rent-seeking is a form of profit-seeking, a more accurate term is “directly unproductive profit-seeking” (DUP, pronounced as the verb to dupe). The term denotes activities that create profit, but no production. They constitute a social waste in a capitalist economic system and in all other systems as well: for example, activities aimed at creating a monopoly or at exploiting the economic power of government for personal gain via subsidies, tax-exemptions, favourable import- and export licences etc.

These rent-seekers are the main villains, and they appear on almost every one of Anders Aslund’s many pages. According to Aslund they have particularly favourable business conditions when reforms are not sufficiently far-reaching and consistent. Hence the dangers of gradual reform. Aslund describes in great detail how these rent-seekers have enriched themselves at the expense of society.

If the distribution of incomes has become much more unequal, then this applies to an extreme extent for the distribution of wealth. The re-creation of class society happened very, very fast, concurrently with the transfer of the assets of society to a small economic elite, the so-called oligarchs, who have close connections to the political and criminal elite. This began with simple but lucrative arbitrage transactions in the wake of the liberalisation of movement of goods and capital across the Russian borders. During the high inflation period in the first years of transition, enormous profits could be made from borrowing rubles, exchanging them for dollars and later paying back the loan in strongly devalued rubles. After the stabilisation of the ruble profits could be made from borrowing dollars at low interest in order to buy high-interest government bonds. Completely risk-free was the buying up of Russian energy and other raw materials at low internal prices in Russia with the purpose of selling them abroad at much higher world market prices.46

Further immense transfers of wealth were a consequence of privatisations. In Russia large government assets were converted into private fortunes through the notorious “loan for shares” programme in 1995-97, when president Yeltsin bought political support from the oligarchs by raising government loans which were later redeemed with large amounts of government shares in the telecommunications, metal, oil and other industries at very favourable prices.

It should be kept in mind that these are not necessarily criminal activities. Privatisation has given rise to extensive capital flight, about 20 billion USD a year since 1994. Total capital flight since 1992 probably amounts to 200-300 billion USD. Thus (private) Russian assets abroad exceed total (government) foreign debt, which amounts to about 160 billion USD.47

Of course, it is subject to dispute whether it is beneficial for Russia to invest in a British football club rather than investing productively in Russia. But there is no doubt that under the conditions prevailing in Russia it is perfectly legal and above all rational to take assets abroad if possible. Even if investments in Russia are intended, there are tax advantages to be reaped by transforming the money into foreign capital, for example by transferring them to Cyprus, where large Russian fortunes are located and from where a large amount of direct foreign investment originates.48

Another question related to international capital movements is that foreigners have acquired ownership rights to large parts of national capital, first of all in Eastern Germany where capital has been bought by fellow countrymen from Western Germany, but also in Eastern Europe, as in Poland and Hungary, where about 70% of banks and industry is owned by foreigners.49

5. Blaming government regulation

Unproductive profit-seeking is not easy to eliminate, but Anders Aslund has a simple solution: abolish the last remnants of government economic regulation; then unproductive profit-seeking will be blown away by the brisk winds of competition. Aslund’s suspicion of government policy is so penetrating that he prefers private to public monopolies.50 On the contrary, there are compelling arguments in favour of public ownership of natural resources, especially in Russia because of her heavy dependence upon oil, gas and raw materials, which constitute about 3/4 of her exports. Competition is not essential from the Russian point of view, and it makes little sense to give away resource monopolies to private capitalists. Part of the income from natural resources is a pure resource rent that does not derive from any productive activity, but simply from ownership of the resource. Taxing the resource rent is known among economists as one of the few examples of a non-distortionary tax, i.e. a tax that does not influence economic avtivity at all. Most other taxes, like an income tax or an alcohol tax, inflict distortions upon economic activity, in these particular cases a distortion of the supply of labour and a (beneficial) distortion of alcohol consumption. Thus, taxation of resource rent is an alternative to public ownership, but the difference between them is negligible.

Privatisation is also, if sufficiently thorough, considered a remedy against corruption,51 even if privatisation in most countries early stages of privatisation in the Czech Republic is a possible exception has given rise to immense corruption and has endowed the former power elite with a degree of control of the assets of society, of which it could not even dream under the old regime. The nomenklatura has transmuted itself into a kleptoklatura, as most of the assets, in Russia presumably about 70%, was simply given away to employees and particularly the old directors, who seized control in competition or cooperation with an extensive and extremely violent economic criminal elite.

The result is a tangle of political and economic power and ensuing rivalry, e.g. the politically decided imprisonment in October 2003 of Michail Khodorkovsky, owner of the oil company Yukos.52 The Russian gas monopoly Gazprom one of the world’s largest agglomerations of capital with about 40% of the world’s natural gas reserves at an estimated value of 700 billion USD in 1995 illustrates the tangle of political and private economic power. Gazprom accounts for about 10% of Russia’s GDP with considerable activities in banking and the media industry. It was partly privatised, in that 1-5% of shares were allotted to the directors to share, among them the then prime minister Viktor Chernomyrdin. The government owned 38% of shares, but has recently gained majority control as part of president Putin’s efforts to channel resource rents back to public budgets. (For years tax collection was lenient, partly because missing tax payments were counterbalanced by withholding government subsidies to ailing enterprises.53)

It has proved extremely difficult to effectuate large-scale transfers of capital in a well-regulated way. History offers monumental precedents, such as the “colossal spoliation of church property” in England, which was “given away to rapacious royal favourites” following the Reformation. “Theft of state lands” after the Glorious Revolution in 1688 is another example, as was “the Parliamentary form of the robbery … in other words decrees by which the landowners grant themselves the people’s land as private property,” when the enclosure of the commons was put on the Statute Book in the eighteenth century.54

The possible deterioration of the moral fabric of society as a consequence of transition has been noted in the transition literature including the apologetic literature, and a fourth type of capital, social capital, has been invoked in order to introduce mutual trust and the strength of social norms as a missing link for understanding transition developments.55 The concept of social capital is a supplement to physical, human and natural capital, but how it should be apprehended as a form of capital is of course obscure. Is it a factor of production? Can it be accumulated and how? Is it depreciated when used sensibly? Can it be substituted for other types of capital? Unfortunately, it is better known how to demolish it than how to accumulate it. Again the Soviet past is the main villain in the apologetic literature. It occurs neither to Martin Paldam nor to Anders Aslund that the Russian prikhvatizatsiya (from the Russian prikhvatit’, to snatch), with all its corruption and favouring of friends, could tear down social capital and that “the rapid increase in the number of cars,” many of which are imported as well as “big and new,”56 could act as an everyday and visible menace to ordinary people’s inclination to work hard for a modest wage, which is the well-known precondition for economic growth. With the haphazard, lottery-type and corrupt redistribution of the values of society, privatisation and measureless inequality generate a mood of decay and lawlessness and a temptation to go all the way and disregard even those norms and rules which do still exist amidst the general chaos.

The apologetic literature ignores the fact that rent-seeking is an inevitable concomitant of turbulent upheavals and that restoration of the state¾rather its than further demolition¾could be a practicable approach to reconstructing society, possibly the only one. On the contrary: “Ironically, this dysfunction of the market turns out to be an argument for the state to do less, not more.”57 The ideology is aptly labeled by Joseph Stiglitz as a widespread western “folk theorem,” namely that “anything the government can do the private sector can do as well or better.”58 The apologetic logic is that without government regulation there will be no corruption, and similarly without laws there will be no criminality.

An interesting trend among some western economists is to evaluate mafia-criminality somehow positively, because it privately and spontaneously provides a service, which the government is unable to deliver, namely enforcement of contracts, although the methods undeniably are alternative to law and order.59 Also, it is argued that improvements of legislation and law enforcement in order to be efficient must be “incentive compatible,” i.e. it must be profitable for the business world to be law-abiding. “Legal reform should begin with the adoption of legal rules that the courts find usable and that private parties find cheaper to rely on than other methods of resolving disputes.”60 This trend is just another expression of a widespread view of society as driven by economic incentives which are considered the only possible ones, even the only permissible. The theoretical predilection for narrow, particularly economic incentives has a growing impact upon the social sciences, also outside economics. Inside economics there is also a remarkable tendency in the opposite direction, which has discovered that profit maximization and economic incentives do not explain everything, although they are important, and that intrinsic motivation, social norms and social capital, even altruism are important too.

Even if the apologetic view is predominant, dissenting opinions have been voiced in between. There are strong arguments for an active role of government, not only as a guardian of economic freedom, but also as agent of active economic policy. In two remarkable proclamations to the public in the Russian newspaper Nezavisimaya Gazeta, a number of distinguished Russian and American economists, including three Nobel Laureates, called for a much more active government policy, including government control of natural resources, capital movements and tax collection, which is the crank of economic policy in any economic system. They criticize the IMF and the World Bank for “tying the government’s hands concerning action to overcome depression and capital flight” in return for relatively small amounts of finance.61 This is brushed aside by Aslund as an attempt to bring the communists back into power.62

Large government budgets are the precondition for sustaining public education, judicial systems, health care and social safety nets. Therefore, they express the viability of social institutions, and furthermore they contribute directly in terms of the public share of investments. The economically most succesful countries in Eastern Europe have preserved relatively large government expenditures. Government budgets are presumably much more important for the economy than the speed of economic reform.63

Because tax collection is very difficult in Russia, and because resource rent is an attractive object for taxation, it is not at all obvious that the ownership of natural resources “is most efficient, if it is private,”64 or that “private and privatized enterprises outperformed public enterprises all over the world.”65

6. Crediting capitalism for democracy

Most of the transition literature maintains the view that the power of the state should be reduced, but also that it should be democratized, partly because democracy is an end in itself, partly because the transparency of democracy is an efficient deterrent to rent-seeking and corruption. Martin Paldam and Anders Aslund both make the incontestable observation that no examples are known of planned economies which have also been democracies. But it is probably an unwarranted extrapolation of this observation to conclude that any utopian endeavour necessarily will end up in terror,66 and it is definitely not the case that all capitalist economies have been democracies.

In transition countries there is a clear, positive relationship between democratic progress and extensive and fast market reforms.67 But generally, there is no effect of democracy upon economic growth, and this also applies to transition countries. When all countries of the world are considered, the overall effect is weakly negative but not statistically different from zero.68 This is also the case in transition countries when corrections are made for different initial conditions.69 There is, however, a correlation between the level of prosperity and democracy. Probably the causal relation has the opposite direction, namely that prosperity causes democracy rather than the other way round. This is subject to extensive debate.70

In this as in other respects it is difficult for the apologetic literature to accept the message of the figures. It typically holds very heavy-handed views concerning explanations and policies of economic growth. Unfortunately, the declaration of IMF vice director Stanley Fischer concerning transition countries, that “the policies to ensure growth are well known,”71 was and is undocumented. The general empirical literature on economic growth is inconclusive despite immense empirical and theoretical research efforts during recent decades. Economic growth is not correlated with democracy, nor for example with inequality, and among the more robust determinants for growth is absolute latitude, i.e. distance from the equator with Singapore as a conspicuous exception.72 There is no pronounced correlation between economic growth and economic system,73 although it is always gratis to castigate the “inherent deficiencies and malfunctions”74 of the planned economies without documentation. In the late 80’s two outstanding American textbooks in comparative economics concluded that the

…dynamic efficiency of the two systems appears similar. The important differences in growth rates appear not between the systems but rather among the nations within the same economic system.75

…the growth rates of capitalism and planned socialism have been quite similar over the entire postwar period.76

It may appear to the reader, however, that the restoration of capitalism has become the overall purpose, to which all other objectives like democracy and economic prosperity must be subordinated. Thus Martin Paldam shows little understanding of the functions of government, except that a firm hand is needed in economic policy. He trusts Putin as “a popular president, who goes about his work,” and he empathizes with his “provisions to bring the most critical parts of the press under control.”77 Andrei Shleifer & Daniel Treisman portray Putin as “a young, disciplined president.”78 However, Putin’s perception of democracy is becoming still more unorthodox.79

And Anders Aslund never gets tired of praising the Kyrgyz Republic and its leader Askar Akaev, “a prominent liberal physicist,” for the country’s “truly radical marketization” and “substantial economic growth.” The political system is characterized as “a tentative democracy” with “party elections” in February 2000.80 Ole Nørgaard also cherishes great expectations for the Kyrgyz Republic as “an island of democracy” and “a relative success.”81 The reality is that before the presidential (re-)election in November 2000 most rival candidates were excluded because of language requirements, while the rest of them were offered 10% of total TV election coverage to share; the election was scathingly criticized by the OSCE.82 Nor is the Kyrgyz republic an unconditional economic success. Unemployment ranges about 50%, its poverty rate of 75% is a record among all transition countries, and despite high growth rates since 1996 production in 2003 was still 26% below the 1989 GDP.83

7. Blaming lack of international support

Anders Aslund convincingly argues that economic support and investments from abroad together with prospects for EU membership have been vital for the relative success of the East European countries, and he blames the West for deserting Russia.84 Many factors are responsible, among them that Russia is in the peculiar situation of having continuing large balance of payments surpluses and simultaneously receiving financial support from the IMF and other international financial institutions. Balance of payments surpluses have been substantial, in the range of 5-10% of GDP, and in the high growth year 2000 no less than 20%. The explanation is that private “extraction capitalists” have abstained from investing in domestic productive activity, because privatisation together with liberalisation of international movements of goods and money allowed export of natural resources and capital flight abroad. Oil, gas and raw materials now account for 70-80% of exports, and thus they are even more dominant than in Soviet times.85A glance at Table 4 must prompt big smiles in the West, from ear to ear. It is a total victory for western political interests (if not for western economic theory and advice). The Soviet empire is dissolved without a single Western shot being fired, the Russian government is paralysed, the economy is in shambles, the military almost eliminated and preoccupied with internal armed conflict; politically Russia has become more free and democratic, but also apathetic and divided by conflicts of interest. There is no risk of a popular backlash, as nobody has visions of an organized way to counteract hardships. In a planned economic system somebody is responsible, and the population can complain. For example complaints about high consumer prices could be directed to the ministerial price committee, Goskomtsen. In a market economy lacking effective regulation, there is nowhere to direct one’s complaints.

Table 4: Principal Items of Demand and Supply of Russian National Accounts in 1989, 2000 and 2002; Figures in Real Terms as Percent of GDP in 1989
 
1989
2000
2002
Private Consumption
30
30
36
Military Expenditure
25
3
6
Other Public Consumption
20
7
8
Investments
30
10
12
Imports
(12)
(16)
(24)
Exports
7
29
33
GDP
100
63
71

Notes: The table summarizes the basic balance of the national account, where total supply (domestic production [GDP] plus imports) equals total final demand (public and private consumption, including military expenditure, plus investments and exports).
All figures in the table are in real terms and directly comparable; but they are all subject to considerable uncertainty. Figures for 2000 correspond to those of the EIU (2001:54), which, however, provides no estimates for military expenditures; these are added according to prevailing estimates, namely 5% of GDP or an 88% reduction from 1989 to 2000 (IISS, 1999:110), and figures for private and public consumption are reduced correspondingly; military expenditures have increased in recent years (Economist, 10 July 2004, p. 22). Remaining figures for 1989 are based upon Marer et al. (1993:200-205), who do not estimate military expenditures. The table represents an attempt to link together various, very uncertain estimates. The figures for GDP in the ‘90s as provided by the EBRD and others include a 23% addition for the conjectured increase in the unregistered, informal economy.

Sources: EBRD, 2001:59; EBRD, 2003:187; EUI, 2001:54, 56; Marer et al., 1993:200-205.

8. “It will not help unless it hurts.”

Anders Aslund mentions the social distress in transition countries, but holds the opinion that “a maximum of discontinuity without violence is desirable”, as “nothing shakes people up like a rampant crisis.” Indeed, “these words may sound harsh.”86 But, as is well-known, it is easier to turn a Ph.D. in physics into a hawker than the other way round.

Thus, there are “many benefits of bancruptcy” for the Russians,87 but is it “reasonable to expect that they will converge to our standards of living,” as Martin Paldam does?88 One can hope for the best, but looking into concrete details it is not evident. Since the state bankruptcy in 1998, substantial growth rates of 5-10% annually have increased GDP from 55% of the 1989 GDP in 1998 to 75% in 2003. The recovery was induced by a 75% devaluation and oil price increases. Whether growth can be sustained depends upon capital equipment and investments, labour, structure of production, and economic policy.

Table 4 shows spectacular changes in Russia. Despite recent growth, GDP declined by 29% from 1989 to 2002. Simultaneously exports have increased significantly, by 400% (now amounting to almost half of GDP); 70-80% of exports are largely privatised energy and raw materials. In 2000 there was an export surplus of 20% of GDP, in 2002 about 10%, as compared to an export deficit of 5% in 1989. For other items of final demand (see Table 4), there were declines, most massive for investments (60%) and military expenditures (75%); other types of public consumption have declined by 60%, while private consumption is higher than in 1989, but GDP includes an estimated 23% of informal production corresponding to more than half of private consumption.

If Paldam is right, that private consumption increased by 14% from 1989 to 2000 “along a smoothly increasing trend,” then public consumption and investments declined even more, as it is hard to believe that military expenditures plummeted by more than 90%. In fact this would imply that other types of public consumption were virtually zero. That public consumption has declined drastically, that education and health care are privatised and deteriorate, and that health care and higher education are now available only for those who are able to pay, is mentioned only in passing.89 Aslund denies that health care has deteriorated at all.90

An active government policy might have mitigated this decline and ensuing social and economic damage. Continuing very low levels of investment have harmful long-term effects, which are difficult to remedy. During the last fifteen years Russian real capital has been wearing down, because investments, private as well as public, have more or less disappeared as a direct consequence of privatisation and stabilisation policies. During the ’90s annual, real gross investments plummeted to 30-33% of the 1989 level, and the investment share of GDP was reduced from a very high 33% in 1989 to a more usual 22% in 2000.91 Large parts of infrastructure are wearing out and approaching the end of their useful life. Thus 32% of power station capacity is expected to become inapplicable in 2005, and there are many predictions of this type.92

Continuing low levels of production and investment erode physical capital due to wear and lack of maintenance. Natural capital is used up for export, even if this is partly offset by lower domestic consumption of raw materials as well as less pollution because of reduced production. Human capital disintegrates, not by being used, but on the contrary by laying idle. The Russian aircraft industry produced a total of 4 aircraft in 2000, as compared to 400 aircraft annually in the ’80s;93 in this way, much hard-earned human capital is lost. Concurrently, education deteriorates, and many highly educated technicians and scientists emigrate or are forced into services and trade, for example consultancy work for foreign enterprises.94 Many visitors are delighted, because there are now “5000 restaurants of every type” in Moscow as well as a booming retail and street trade.95

9. Even if it’s not true, keep repeating it.

That fast and radical reform spurs economic growth is repeated by Anders Aslund innumerable times.96 But is it true? Aslund mentions several times as proof that radical reform and growth are “correlated,”97 which is true, but he forgets to mention that the correlation is spurious and that it does not express any causal relationship.Ole Nørgaard claims a general relationship between economic growth, rule of law, democracy and market economy:

A classic example of spurious correlation is this one: When counting the number of childbirths and the number of nesting storks in Danish municipalities in the early 20th century, a clear and positive numerical correlation emerges. This is not proof of a causal relation between the number of storks and the number of babies; witness the fact that unlike the babies all the storks are gone by now. Rather, the correlation is spurious, as the two numbers have a common cause, namely the degree of urbanization.

Martin Paldam uses exactly the same trick, as he writes that “when growth rates and reform index are considered together, it appears that the countries which implemented reforms early and strongly, are also the countries with the most successful transition.”98 This is true; the formulation is careful, and of course the intention is that readers should infer that fast and radical reforms cause fast economic recovery. But the inference is wrong, as Paldam almost and covertly admits, as he sticks strictly to the word “correlation” and omits the word “causation.”99

It has been a basic observation that countries that have been able to sustain economic liberalization with institutional reforms and the rule of law have been the most successful, both in terms of economic growth and democratic consolidation.100

This is not true. What the figures of Ole Nørgaard and others demonstrate is merely some degree of numerical positive correlations for transition countries between:

– market reforms (speed and scope) and economic growth
– market reforms and democracy
– economic growth and democracy.101Nevertheless, the apologetic wishful thinking is repeated again and again, also in an often quoted review article by Stanley Fisher and Ratna Sahay:

There is some rather weak indication that economic growth causes democracy, and that democracy causes fast reforms in transition countries. But the link between democracy and market reforms is not a very close one; the room for variations is wide, as policies in the Putin era demonstrate. And to postulate that fast market reforms cause fast economic recovery and democracy is nothing but apologetic wishful thinking and applause to the prevailing neoliberal market ideology. As Shleifer & Treisman honestly admit: “there is no obvious relationship between speed of reform and change in official output.”102 The correlation between fast market reforms and fast economic recovery is spurious; they are like storks and babies, but in this case the common causal factor is primarily the initial conditions, which heavily influence speed and scope of reform as well as economic performance.

Aslund and Paldam both abstain from detailed discussion of statistical correlations between market reform, growth, democracy, initial conditions, etc., and limit themselves to verbal explanations with simple graphs and plain conclusions. The empirical literature on transition generally shows a number of more or less marked numerical correlations between successful reforms, relatively high economic growth rates, stabilisation, and well functioning government institutions and budgets. Besides the obvious importance of well functioning government institutions, it is of course possible that fast and radical reform is the reason why the depression reached its low point relatively early in Eastern Europe as compared to the former Soviet republics.

But closer scrutiny reveals that the correlation is spurious. There is no causal link between fast reforms and economic growth; instead, they have several common causes. Introducing initial conditions like degree of macroeconomic imbalances and dependence upon Comecon trade explains 60% of the variation in GDP changes 1989-98, while the impact of reforms vanishes. Aslund notices this, but he rejects it without justification.103 Generally, the countries in Eastern Europe had more favourable conditions for radical reform than the former Soviet republics. Most of them had some previous experience with market reforms; their macroeconomic situation was less imbalanced, and they were less intertwined in the Comecon network. If furthermore government budgets as percent of GDP is introduced as an additional explanatory variable, 70% of the variation can be explained; substantial government budgets and government demand could mitigate the economic collapse. The danger, of course, is that they may entail runaway inflation, as in many former Soviet republics including Russia, where inflation in some periods turned into hyperinflation of over 50% per month. Unfortunately, the former Soviet Republics experienced shrinking government budgets as well as rampant inflation at the same time. But inflation in itself exerts a damaging effect upon the economy, and adding inflation as an explanatory variable increases the degree of explanation to 80%. The explanatory power of initial conditions vanished gradually during the 90’s, when conscious policies became more decisive for relative speed of economic recovery.104

The experience accumulated in the past decade, whether viewed informally or with the help of data, charts, and regressions, provides support for the view that the most successful transition economies are those that have both stabilized and undertaken comprehensive reforms, and that more and faster reform is better than less and slower reform.105 This correlation is spurious, because inside Eastern Europe and the former Soviet Union considered separately, the correlation between differences in scope and speed of reforms and differences in GDP is negligible just as there is no correlation between numbers of storks and numbers of babies inside the groups of rural and urban municipalities when the two groups of municipalities are considered separately. By the way, one should not forget to have a look at the numbers themselves, i.e. at Table 2. The statistical correlations discussed here are not glaring. When it is necessary to call upon statisticians in order to prove something, the reason very often is that it is not possible to prove anything at all.

In their eagerness to demonstrate the beneficial effects of economic market reforms, in which they have invested much prestige, they unfortunately forget to check whether the correlation is spurious. First Fischer & Sahay demonstrate that initial conditions are decisive for the vertical dive of GDP after 1990, arguing that they account for about half of the GDP performance during the period 1990-98.106 Then initial condiditons are simply omitted from the regression equations! The reason given is that the ensuing analysis only considers how GDP grows after having reached the bottom; then the regression coefficients of initial condition are considerably smaller, and in some cases they even change their sign.107 Government budget surplus is introduced instead of size of total budget, but it is well known that the surplus influences inflation rather than production and employment.108 This is how the conclusion quoted above is produced.

When the purpose is to evaluate the economic effects of fast economic reforms, such an argument is not very meaningful. First, the GDP decline is blamed on initial conditions (the Soviet legacy), even though the original efficacious agent was that all transition countries embarked upon very similar and very radical reforms and “rapid adjustment,”109 namely sweeping and instant disruptions of the total structure of society. Hence the economic disaster. Secondly, the first years of reform, namely the period of decline, is completely ignored; attention is focused upon how gradual recovery took place, and during these years it is possible to discern a tiny differential effect, so that differences in cumulative reform seem to have exerted some positive effect upon growth rates. But so have other types of policy, especially a general reconstruction of government and law and order after the chaos caused by ruthless reforms. Thirdly, it is proclaimed that “more and faster reform is better than less and slower reform,” but if the whole reform period is considered, these minor differences in performance after reaching the bottom are small and are completely overshadowed by the basic observations [above, section 3] that 1) all transition countries reformed radically, 2) all suffered from economic hardships, and 3) differences between them over the whole reform period are not caused by differences in scope and speed of reform.

The correlation in the first years of transition between speed and scope of reform and relative economic success (all countries experienced economic depressions) is spurious and largely caused by different initial conditions. Later, in the late 90’s, gradual recovery was stimulated by political stabilization and reconstruction of law and order; probably related to this, there is also a slight connection between the cumulative reform index (see Table 2) and recovery. Economic recovery was influenced by conscious policies, but it was also influenced by external agents, particularly pressure from international financial institutions and EU expectations. These explanatory variables can be expressed in terms of the geographical distance between Brussels and the capitals of the respective countries: the further east the country, the worse has been the performance in economic growth as well as market reforms. In Eastern Europe reforms went on average further, faster and better; privatization was less corrupt, and liberalization was less captured by rent-seeking monopolists. But the better reforms were not what caused the better economic results. Both largely reflect differences in initial conditions and also the influence of external agents, between the countries of Eastern Europe on the one hand and the former Soviet republics on the other. The pattern does not reflect a causative impact of scope and speed of reform upon economic growth.110

10. “Don’t worry, it is quite normal.”

When all other techniques of explaining away fail, there still remains a last line of defense, namely that it is not as bad as we all believe, because it is quite normal. For Shleifer & Treisman this is the main line of defense too, as indicated by the title of their article, and normality relieves a multitude of afflictions: corruption, political law-courts, press restrictions, inequality, economic instability “In all these regards, Russia is quite normal”111 — and it also applies to currency disturbances, oligarchs, suspect business practices, bribery, and authoritarian rule.112 However, Shleifer & Treisman do not claim that the Russian mortality rates are normal. They do not mention them at all. As Marx wrote:

Likewise, Aslund applies the concept of normality, particularly in the term “a normal market economy,” but also concerning political parties, democracy and private property, military expenditure, inequality, and economic ideology.113 Paldam likewise fancies the concept “normal” in relation to anything: “normal country,” “normal investments,” “normal corruption,” “normal taxes,” “normal political controversies,” “normal parties,” “normal, rich, democratic, mixed economies.”114

Implicit in this thesis of normality is some measure of comfort, but also a warning. There are no reasons to interfere with the market economy, and it would be dangerous to do so. Is the market economy governed by natural laws, or is it rather a divine institution? The latter assertion was made by Edmund Burke, who in 1795 in dead earnest declared that “the laws of commerce are the laws of Nature, and therefore the laws of God”.115

Economists have a singular method of procedure. There are only two kinds of institutions for them, abnormal and normal. The institutions of feudalism are abnormal institutions, those of the bourgeoisie are normal institutions. In this they resemple the theologians, who likewise establish two kinds of religion. Every religion which is not theirs is an invention of men, while their own religion is an emanation from God. When they say that present-day relations the relations of bourgeois production are normal, the economists imply that these are the relations in which wealth is created and productive forces developed in conformity with the laws of nature. Thus these relations are themselves natural laws independent of the influence of time. They are eternal laws which must always govern society. Thus there has been history, but there is no longer any.116

Marx uses the term “natural,” which I have replaced by “normal”; the interpretation is the same. Marx had no respect for “sycophants in the pay of the English oligarchy,”117 or for “all the apologetic tricks of vulgar economics”:118

In vulgar economics, the well-meaning good intention of finding the bourgeois world to be the best of all possible worlds makes any desire for truth and any impulse towards scientific investigation unnecessary.119

Russia has developed into a quite normal middle-income country like Brazil, Mexico, Argentina, Malaysia and Croatia.120 This is not a fulfillment of Russian ambitions in 1989, but it is “an admirable achievement,” a richly coloured and normal country with many wealthy citizens and considerably more poor, which no longer meddles in the hegemony of the USA on the international scene.121

Conclusion

In the social sciences it is not unusual that empirical fact is neglected, retouched or explained away, while obviously erroneous interpretations and theories are met with general approval and can cause immense damage. They are transformed into ideologies, and the apologetic literature retails the prevailing ideology, namely a blind, hard-and-fast confidence in market liberalism combined with a disgraceful cynicism towards the social misery it has created in the transition countries. Particularly the myth of the lack of growth in the planned economies is repeated in chorus again and again as an obvious truth, and the perpetual repetition does not elicit wonder or doubt (as to why it has to be repeated so much if it is so obvious), but more and more steadfast confidence and belief.

According to the prevailing view the planned economies failed in all important respects: they could not foster economic growth and prosperity, they wasted resources and provoked an environmental catastrophe, their agriculture was inefficient and could not supply them with bread,122 and their leaders were kleptocrats who were preoccupied with enriching themselves at the expense of the population.

Reality was different, and the miseries commonly ascribed to the planned economies poverty, environmental disaster, agricultural crisis, kleptocracy are all more pronounced in the transition economies in the 90s, except for environmental disaster; environmental problems were not very different from those of western countries, and they diminished concurrently with the decline of production. It is mistaken to describe the Soviet leaders as kleptocrats;123 they had no bank accounts abroad, and their privileges were limited to traveling abroad, a datcha, a three-room apartment and other examples of western middle-class consumption goods. The honour of being kleptocracies must be entirely left to capitalism, the tsarist as well as the present.

It is incomprehensible how the apologetic authors like Andrei Shleifer, Daniel Treisman, Anders Aslund, Bent Jensen and Martin Paldam fell so totally in love with the new Russian class society, which takes so much after the tsarist, where the upper class was composed of vulgar plutocrats and landed proprietors who merrily exploited the labour of workers and peasants and expected their maids to feel honoured when they exloited them sexually.

The apologetic conclusions that production collapse and social disaster is a myth, that market reforms are beneficial everywhere, that any reduction of government power is an improvement are an extreme view, but not an uncommon one. In 1989, on the eve of the period of transition, this view was shared by large parts of the economics profession; the planned economy was considered a perversion of economic life, the elimination of which was not only a necessary, but also a sufficient condition for returning to the natural state of economic life, namely a well-functioning, democratic market economy.

Subsequent events have modified this complacent and simplistic view, and a broader geographic and historical perspective revealed that the well-functioning market economy is, maybe, an exception rather than the rule. It is not an original, natural state of economic life, but requires a complex system of legal, political and social structures which are not easy or quick to establish. Thus, from the tender years in thirteenth century Northern Italy, it took 500 years for western European capitalism to develop, and it required another 200 years to become a civilized, socially acceptable system, as described in the institutional approach to economic history.

The prevailing view among the economics profession concerning the decisive question of the proper balance between market and government in the economy has changed through history. Perhaps the current change of mind is best understood as an ideological surge. Of course, the perception of the real world is always structured through a theoretical filter, but theory transgresses the borderline between science and ideology when it no longer helps to understand reality, when it no longer tries to draw a distinction between 1) what we know, 2) what we believe, and 3) what we wish and hope for.

The current faith in liberalism and private activity is not new in the history of economic thought. About 1870 the strongly liberalistic and ahistorical Manchester School of economics was dominant. Government should restrict itself to establishing the legal framework for certain institutions, notably private property (even the usage of language gives strong contemporary impressions of déjà-vu). During the following decades the extreme liberalism lost momentum, e.g. in Germany where the government had an active role in industrialization and in social policy. But it became strong once more about 1930, and once again after a prolonged Keynesian spell after 1990. It is embarrassing for a social science that it is, on a fundamental question, subject to oscillations of fashion with a period of approximately 60 years and an amplitude that apparently increases explosively.

When the faith in market liberalism is combined with cynicism towards social disaster and this is not at all alien to human nature, as La Rochefoucauld observed: we are all strong enough to endure the sufferings of our friends then there is only a small step to the thesis of normality and to acceptance of the normality of those features of transition and capitalism, which Marx described as “dripping from head to toe, from every pore with blood and dirt.”124 The apologetic literature can be perceived as a powerful argument in favour of a post-modern, social-constructivist analysis of transition: the distinction between subjective preferences and objective knowledge is so intricate that it should better be left aside, and reality well, it is best understood and a social construction.

Notes:

1. Aslund, 2002:xii
2. The Economist, 20 April 2002, p 32.
3. Maddison, 1991:87,212-15.
4. EIU, 2001:31.
5. cf. Ellman, 1994; The Economist, 2 October 2004, p 28.
6. The Economist, 3 October 1998, p 42; 21 July 2001, survey p 15.
7. Thus, for the Russian GDP per capita in 1989 as percent of the US figure, a variety of numbers have been proposed ranging from more than 50% according to the CIA to as little as 10% according to one IMF-estimate; but most estimates are in the interval 30-40%; for further details cf. Aage, 1993:343.
8. Shleifer & Treisman, 2004:20,26; Martin Paldam says almost literally the same (Paldam, 2002:24,137).
9. Aslund, 2002:140,444,445.
10. The Economist, 16 November 1996, pp 37-38.
11. World Bank, 1996:29.
12. The Danish newspaper Politiken, 27. marts 2002.
13. Krueger, 2002.
14. Paldam, 2002:137.
15. Paldam, 2002:24.
16. Nørgaard, 2000:3.
17. EBRD, 2001:59.
18. Paldam, 2002:124.
19. Aslund, 2002:113,135,136,139,222.
20. Paldam, 2002:20, but the figure on p 90 is not increased; cf. pp 54,96,111,114,169,174.
21. Paldam, 2002:111-113.
22. Shleifer & Treisman, 2004:24; Paldam, 2002:20,196.
23. The Economist, 23 August 2003, p 27.
24. This assertion of a long-term effect of the planning system carries on a time-honoured Soviet tradition, as new leaders always ascribed all troubles to their predecessors; they seldom succeeded in doing so for more than a year or two.
25. Aslund, 2002:46,50,59,114.
26. G. Warren Nutter in Bergson et.al., 1966:233, 235-238.
27. Maddison, 2001:274.
28. Politiken, 21. oktober 1991. According to later, revised figures the decline of GDP was 4% in 1990 and 5% in 1991 (EBRD, 2001:59).
29. Paldam, 2002:103, cf. pp 108,113,165.
30. Paldam, 2002:125.
31. Aslund, 2002:68,95,446.
32. Fischer & Sahay, 2000:20.
33. Reddaway & Glinski, 2001:236-241.
34. Gaidar, 1995:155 (a good old slogan which dates back to Stalin’s Economic Problems of Socialism [1952]).
35. as admitted by Paldam, 2002:21,51-53.
36. Marx, 1844:135.
37. Aslund, 2002:379,380-81,446.
38. Aslund, 2002:34,38.
39. Paldam, 2002:46-47.
40. Jensen, 2002:78; Paldam, 2002:46.
41. Maddison, 2001:186,278,279.
42. Paldam, 2002:46-47.
43. Gregory & Stuart, 2001:213.
44. Aslund, 2002:82,312,410.
45. Aslund, 2002:102,116,164.
46. The Economist, 12 September 1998, p 83, 23 November 2002, p 61; Aslund, 2002:109-12,195-96.
47. Buiter, 2000:608,618; EIU, 2001:30,44-46; EBRD, 2003:187.
48. The Economist, 2 February 2002, p 58; EIU, 2001:30.
49. Poznanski in Journal of Economic Literature 40 (June 2003, No. 2):620.
50. Aslund, 2002:293.
51. Aslund, 2002:265.
52 The Economist, 8 November 2003, pp 29,74, 19 June 2004, p 35.
53. Hedlund, 1999:131-32; Goldman, 2003:105-116; EBRD, 2001:187; The Economist, 6 March 2004, p 29, 18 September 2004, p 77.
54. Marx, 1867:881,884,885.
55. Paldam, 2002:243-68; Aslund, 2002:391-92,445.
56. Paldam, 2002:20,196; Aslund, 2002:274, 309-10,389.
57. Aslund, 1992:20, cf. also pp 12, 21-22.
58. Stiglitz, 1995:31; cf. World Bank, 1996:110.
59. cf. Nuti, 1996:12.
60. Hay et.al., 1996:562.
61. Klein et.al., 1996; Klein et.al., 2000.
62. Aslund, 2002:86.
63. Stiglitz, 1999:27; Popov, 2000:28-42; Kolodko, 2000:259.
64. Paldam, 2002:34,178.
65. Aslund, 2002:260.
66. Paldam, 2002:65,66,91,296.
67. Nørgaard, 2000:135,141-44.
68. Barro, 1996:6.
69. Popov, 2000:42-43; jf. EBRD, 2000:18-20.
70. Barro, 1996:1-12, 1997:49-87; Rodrik, 1996, 1997; Brunetti, 1997. Barro (1997:49) mentions, for example, that democratisation can result in government redistribution and increases in taxation which may impede economic growth.
71. Fischer & Sahay, 2000:21; cf. Gomulka, 2000:83; Paldam, 2002:201-12; Aslund, 2002:75,360.
72. Sala-i-Martin, 1997; Barro, 1997; Stiglitz, 1999:2.
73. Hall & Jones, 1997:176.
74. Nørgaard, 2000:6,29.
75. Pryor, 1985:101.
76. Gregory & Stuart, 1989:414.
77. Paldam, 2002:136-37.
78. Shleifer & Treisman, 2004:21.
79. The Economist, 13 December 2003, pp 22-24; 1 November 2003, pp 13,29; 6 December 2003, p 23; 18 September 2004, p 37.
80. Aslund, 2002:65,164,377,392.
81. Nørgaard, 2000:179-181.
82. The Economist, 4 November 2000, p 83; 17 February 2001, p 65.
83. EBRD, 2003:56.
84. Aslund, 2002:396-440.
85. EBRD, 2001:59; Aage, 2002:208.
86. Aslund, 2002:451,453.
87. Aslund, 2002:277.
88. Paldam, 2002:51.
89. Paldam, 2002: 20,56,61; EIU, 2001:16; Reddaway, 2001:15,19; The Economist, 21 July 2001, survey pp 16-17.
90. Aslund, 2001.
91. EIU, 2001:54. According to the ECE (2000:161) real gross investments plummeted even more, namely to less than 20% of the level in 1989.
92. EIU, 2001:21; The Economist, 21 July 2001, survey pp 14-15.
93. EIU, 2001:17.
94. Reddaway, 2001:17. Several examples are described by Puffer et al. (2000). It really requires optimism to believe that “a temporary rise of unemployment can be thought of as a form of investment” (Gomulka, 2000:74).
95. Paldam, 2002:126.
96. Aslund,2002:4,5,138,151,157,395,444.
97. Aslund, 2002:144.
98. Paldam, 2002:189.
99. Paldam, 2002:193.
100. Nørgaard, 2000:216, cf. pp 6,128,211.
101. Nørgaard, 2001:135,141-144; cf. Popov, 2000:6,42.
102. Shleifer & Treisman, 21004:25-26.
103. Aslund, 2002:138,151.
104. Popov, 2000:23-27,30; cf. Campos & Coricelli, 2002.
105. Fischer & Sahay, 2000:17; cf. Gomulka, 2000:74, 78.
106. Fischer & Sahay, 2000:10, 15-16, 21-22; cf. EBRD, 1999:28-30, 62-65.
107. cf. Popov, 2000:36; Gomulka, 2000:78.
108. cf. Gomulka, 2000:74.
109. Gomulka, 2000:70.
110. Fischer & Sahay (2000:10,22) use distance to Düsseldorf, but they do not communicate any regression results; Popov, 2000:6; Gomulka, 2000:79.
111. Shleifer & Treisman, 2004:22.
112. Shleifer & Treisman, 2004:26,28,29,31,32,34-38.
113. Aslund, 2002:4,52,60,70,131,311,419.
114. Paldam, 2002:12,53,124,137,152,295.
115. quoted by Marx, 1867:926.
116. Marx, 1847:102 (Chap. II, Seventh and Last Observation).
117. Marx, 1867:925.
118. Marx, 1867:680.
119. Marx, 1894:983.
120. Shleifer & Treisman, 2004:22,28,38.
121. Shleifer & Treisman, 2004:38.
122. This popular wording is a myth, which still surfaces. The fact is that growing import of grain to the Soviet Union was necessitated by increasing wealth and increasing consumption of meat, which increased the demand for grain for fodder.
123. cf. Aslund, 2002:8,32,83,348.
124. Marx, 1867:926Aage, H.: “Sustainable transition. Chap. 19, pp 340-362 in Somogyi, L. (ed.): The Political Economy of the Transition Process in Eastern Europe. Aldershot: Edward Elgar 1993.

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