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«Hard Choice, First Results, New Targets by Alexander Radygin Egor Gaidar Preface by London: Centre for Research into Communist Economies (CRCE), New ...»

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PRIVATISATION IN RUSSIA:

Hard Choice, First Results, New Targets

by

Alexander Radygin

Egor Gaidar

Preface by

London:

Centre for Research into Communist Economies (CRCE),

New Series 12, June 1995

© All rights reserved

ISBN 0 948027 24 X

For references: CRCE, 2 Lord Nord Street, London SW1P 3LB

Or British Library catalogues

ABOUT THE AUTHOR

Alexander Radygin was born on 17 September 1962 in Moscow.

Having graduated (1984) from the Department of Economics of Moscow Lomonosov State University, he pursued his interest in issues of West European integration, structural and industrial policies, the public sector and privatisation in the countries of the West, and also taught political economy. He received his PhD in 1987 from Lomonosov University.

Since the foundation of the Institute for the Economy in Transition (IET) by Egor Gaider in Moscow in January 1991, Alexander Radygin has been working for the IET, where he is in charge of research on the problems of reforms in the field of ownership relations. He runs the Laboratory of Privatisation and Ownership Structure.

He was a member of the Working Group on drawing up a Russian Law on privatisation (1991), a member of the Working Group under the Government of the Russian Federation on Economic Reform (November 1991-December 1992) and an adviser to the First Deputy Chairman of the Government of the Russian Federation (September 1993-January 1994), as well as co-author of some government programmes on economic reforms, and a member of the Government Commission on working out a post-voucher privatisation model.

From 1991 to the present he has been an adviser to the State Committee of the Russian Federation for the Management of State Property (GKI). In 1993 he worked as an independent expert for Russia on the UNCTAD Working Group on Privatisation.

He is the author of over 100 articles published in Russia and abroad.

PREFACE

Privatisation is a great historical development; it is a peaceful and civilised equivalent of a revolution. Previously in the history of Russia, as we know, it was not vouchers but Brownings that were used to bring about change.

The split that occurred in the state and corporate property and the destruction of the structure power within which the nomenklatura existed in principle implies an end to the nomenklatura itself as a stable and viable (and sometimes even hereditary) political and economic elite.

For bureaucracy the ideal formula is to add property to power!

The idea is to achieve a restorationof property to private ownership in such a way that ultimately the production (production costs and risks) remains social but the appropriation private; to conduct privatisation - as was the case with Eastern despotic regimes - without creating a fullfledged market, so that power would be free, independent of the administrative machinery, and in effect private property.

It was not done immediately, but gradually; we reached that kind of situation somewhere in 1990. But the path thus travelled was a sweet one for bureaucrats. The landmarks are probably the law on cooperation and the election of directors and reduction of their responsibility to ministries (and the parallel total reduction of the so-called `party discipline' which was the backbone of everything the state had), and the change in rules which made it possible for enterprises to `whip up' the salaries as much as they wished and secretly jack up the prices of their products though on the official level prices were not `freed'.

–  –  –

It may be described as a certain `irony of history'. If the way leading to the market had not been paved with honey, with dollars for the nomenklatura to grab (and there is no element of surprise there, they themselves `controlled' the process), they would not have followed that path voluntarily and the nation would hardly have travelled the path peaceably, without blood shed. It was exactly the fact that capitalism was being built by the nomenklatura `for themselves' that made it possible for the country to reach capitalism peacefully. But one has to pay for everything.

–  –  –

That was the situation when `fire-fighting reforms' started and a `suicide team' of leaders was formed. We were called when a choice was made.

Prior to our coming to office, the so-called nomenklatura privatisation that had been in progress for as long as three years was following a classic scenario of privatisation under the `asiatic mode of production'. The privatisation we had was reduced to the looting of satrapies by their satraps. Such privatisation, which guaranteed maximum gains and minimum risks for the oligarchy which retained full administrative power in its hands and, moreover, added unearned wealth to it, would always end up (at least in Eastern societies) in one and the same way : with an explosion and a new dictatorship. The

general cycle of development these societies follow is this :

dictatorship - disintegration (privatisation) - explosion - a new dictatorship. The first stage has split into two parts : a latent period (1953-1988) and an open period of disintegration in society (1988-1991). That period was coming to its end. One could see an explosion on the horizon. And the paradox is as follows : at the time when psychologically trust was in the democrats, and it was almost complete trust at that time, we came as close as possible to the dangerous edge of `impending catastrophe' and the period of fighting it using the already tried methods.





Being aware of the acute and tense nature of that situation, we also realised that we could change track and go in a different direction. From the nomenklatura deadlock, where we were, there are two ways out : an explosion (a new dictatorship) and the `unstitching' of the social space, i.e. going to an open market, absorbing its mechanisms, moving away from the nomenklatura-type privatisation toward a democratic privatisation. And these were the things that were done at that time.

Without resorting to violent measures, without putting the economy into `extreme circumstances', it became possible to change the catastrophic system of property relations that existed at the end of 1991. On the whole the course that was started at that time (and it was not possible to lead the government of the country astray, though there were quite a number of attempts of that kind), it seems to me, brought about vast changes and not only market-oriented changes, or changes toward capitalism but also changes toward a non-nomenklatura market, non-nomenklatura capitalism. Naturally, what we have today is an intermediate version that can develop in different directions but the general trend remains with all its inconsistencies, it is a non-nomenklatura trend. Today a nonbureaucratic market predominates. That kind of approach was made realistic (though not everything is done yet) in 1992-1993.

How did it become possible?

The main reason it became possible is that the political power of the nomenklatura was destroyed. Trying to achieve the privatisation they needed, the representatives of the party oligarchy went too far in the process of `democratisation', that process became unruly, and democracy was already in place. And having lost their monopoly on power, the nomenklatura was no longer capable of keeping the process of privatisation under their complete control. The nomenklatura-type privatisation was

being replaced with a democratic, market privatisation.

Nomenklatura privatisation is not determined by questioning a new owner (for instance, by asking `what were you doing prior to 19 August 1991?). For what it needs is not people but the system. If the system of state (semi-state) control is retained, i.e. bureaucratic-nomenklatura control over the economy, state capitalism, nomenklatura privatisation, is there to stay whoever is the owner.

Once the system is destroyed, the owners will bear financial responsibility on the market, which may spell bankruptcy, and that means that objectively it is an `anti-nomenklatura' privatisation that has been implemented.

And it is precisely for the destruction of the old system of government, the old property relations, that privatisation with all its faults - have done an irreversible thing. It may not have created a middle class itself, but it did destroy the nomenklatura. In other words, there is an environment where the middle class may spring up.

So if the insolvency (bankruptcy) orders at the second stage of privatisation (when a considerable portion of state shares in enterprises are sold for money) are effective, then the market mechanism to change the owners (at least in general) may be thought to have been prepared. And only then one can evaluate the essence of privatisation.

Change in the forms of property, change in the roles and not just the performers acting on the stage - this is a real economic revolution, a social and economic revolution which has occurred (which has been effected!) by means of evolution, but quite rapidly!

And now a few words about the author of the book. Alexander Radygin is my close colleague and collaborator who came to the Institute at the time of its creation. As is well known, the November 1991 government was formed to a certain extent on the basis of the Institute. It was my wish to have Alexander Radygin in the government but he was resolute in rejecting all kinds of administrative posts. The only post that he would agree on, by mutual consent, was that of adviser. And, maybe, it was all to the best for this way he could maintain an unbiased view on what was happening, and yet participate in the preparation of all decisions on privatisation. Without doubt he played a serious role in drawing up practical measures in the field of privatisation.

As to the book itself, in my view, it is the best we have today.

It is practically the first systematic monograph devoted entirely to privatisation and reform of ownership relations in Russia.

–  –  –

INTRODUCTION

The privatisation wave that spread all over the world in the 1980s at last reached the shores of Russia in the 1990s /1/ and near the bastions of the administrative system it came to rest in a rather indecisive way. If in the 1980s the issue of privatisation was of real interest only for a narrow circle of academics, and again only as it was applicable to the nations of the West and the developing nations, the autumn of 1990 in Russia was a starting point for extremely vigorous deliberations over an acceptable model of privatisation for domestic needs.

The term privatisation itself becomes one of the most popular and necessary features of most economic programmes and discussions. Practically every economist, however little known, thought it was his duty to present his personal conception of privatisation or at least show his attitude towards the subject.

Not only economists but also experts in some other fields, not always closely related, hastened to advance their own views and boasted of foreign experience.

If one can portray 1985-1989 as a period of cosmetic changes in the economic system when any alternative forms of property were considered only in the context of a `diversified socialist economy', with the state sector remaining dominant, 1990-1991 already represents a period of more systematic reforms or, more accurately, a period of more systematic conceptions of promarket transformation. A marked change can be observed in the ideological approach towards property as such and towards reforms of the corresponding relations in particular. The element of reforms could also be observed in the contents of the programmes considered, and in the laws that were passed during that period. At the same time - against the background of continued debates on the possibility of alternative forms of ownership and methods of privatisation - one could clearly observe the development of a spontaneous privatisation process.

If 1992 enters the history of Russia as a year when a largescale reform in the sphere of property relations on the basis of the privatisation legislation just developed began, 1993 was first of all a year of intensive build-up of `critical mass' of the corresponding quantitative transformations, while 1994 must become a year of change-over towards a new privatisation model designed primarily to stimulate structural change and the investment component of the privatisation and post-privatisation process. It is clear that any drastic changes in the privatisation patterns and orientations must rest on the results of the path travelled, especially if such a highly politicised and populist path as that of voucher privatisation has been taken.

It is sufficient to imagine all the variety and the specific nature of the economic, legal, political, social, historical and national conditions in which reforms develop in Russia to lose any illusions about the degree of complexity of the issue. At the same time it should be stated that such illusions existed and still exist both in government circles and among MPs, as well as among various intellectual economists. The spread of positions on this issue is quite broad, reflecting practically the entire political range of Russian life.

It is absolutely clear that in this range of positions and opinions, hidden interests and open political ambitions, there is practically no room for any unanimous interpretations (definitions) of the concept and the processes of privatisation in Russia /2/. The purpose of this book is to present, as far as possible, an integral picture of privatisation issues and processes in Russia by September 1994, both on the conceptual and legislative levels as well as reflecting the real economic progress, and to attempt to evaluate the results of the voucher model of privatisation and the prospects of reforms in the area of ownership.

–  –  –



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