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Russia has embarked upon a difficult process of systemic transformation and economic opening up. While the initial strong GDP decline seemed to have ended in 1997, the real development was facing even more difficult problems as output declined sharply after the Ruble and banking crisis of August 1998: inflation started to increase again, exports and imports were falling, capital flight increasing and unemployment rising. There is broad disappointment in Russia regarding the transformation failure in 1998 since so many people had hoped that the end of the Soviet command economy would bring democracy, prosperity and international integration. While Poland has been able to double per capita income in the 1990s it has fallen by 50% in Russia and this despite considerable IMF involvement and some (modest) support from other international organizations. What were the reasons for transformation failure in the 1990s? What are the ingredients for long term sustainable transformation? What are the internal and international requirements to avoid a second - possibly tragic - failure of transformation in Russia? An international group of researchers has focussed on these problems during a two-year research project financed by the Alfried Krupp von Bohlen und Halbach Foundation. A series of papers were presented at workshops in Potsdam, Bonn and Moscow in 1999 where this book is devoted to four important issues: the Russian transformation crisis, the topic of restructuring, the need for stabilizing Russia and the requirements for modernizing Russia.

Inhaltsverzeichnis

Frontmatter

Introduction

Introduction

Abstract
Russia has embarked upon a difficult process of systemic transformation and economic opening up. While the initial strong GDP decline seemed to have ended in 1997, the real development was facing even more difficult problems as output declined sharply after the Ruble and banking crisis of August 1998: inflation started to increase again, exports and imports were falling, capital flight increasing and unemployment rising. There is broad disappointment in Russia regarding the transformation failure in 1998 since so many people had hoped that the end of the Soviet command economy would bring democracy, prosperity and international integration. While Poland has been able to double per capita income in the 1990s it has fallen by 50% in Russia and this despite considerable IMF involvement and some (modest) support from other international organizations. What were the reasons for transformation failure in the 1990s? What are the ingredients for long term sustainable transformation? What are the internal and international requirements to avoid a second — possibly tragic — failure of transformation in Russia? An international group of researchers has focussed on these problems during a two-year research project financed by the Alfried Krupp von Bohlen and Halbach Foundation.
Paul J. J. Welfens, Evgeny Gavrilenkov

The Russian Transformation Crisis

Frontmatter

A. The EU and Russia: Strategic Aspects of Transformation and Integration

Abstract
Russia’s first transformation attempt largely has failed as the country achieved neither sustained growth nor continuously rising trade with other market economies. Without long-term growth it is almost impossible to convince a majority of the population that a market economy has major benefits. Facing a long-term economic decline or stagnation with rising inequalities, distributional conflicts could tend to dominate the allocation issues. A rising income gap between Russia and eastern Europe and the EU, respectively, is likely to contribute to long-term outmigration and to political tensions between Russia and the West — not least because stagnation will make servicing foreign debt impossible as soon as oil prices fall again.
Paul J. J. Welfens

B. Currency Crisis Theories — Some Explanations for the Russian Case

Abstract
Financial crises are painful for people, but interesting for economists. Thus, they have inspired in history many academic studies and this study as well (KINDLEBERGER 1978). Currency or balance of payment crises during the last two decades can be divided into four waves:
1)
The collapse of the Bretton Woods system started the first wave in 1976.
 
2)
The debt crisis in Latin America explored the second in 1982.
 
3)
The third was the EMS-crisis in 1992.
 
4)
And the recent one started in Asia in 1997.
 
Tuomas Komulainen

C. Banking Sector and Financial Intermediation in the Russian Transformation Process

Abstract
The actual financial crisis in Russia is probably the most visible sign for a preliminary default of Russia’s transition from a centrally planned socialist to a market economy. The crisis was mainly triggered by the sudden decision of the central bank to allow for a more or less floating exchange rate of the ruble and the default of the central government on its current liabilities, most importantly its short term bondsi. Many strategic mistakes including far-reaching measures concerning internal and external liberalization aspects without taking care of necessary adjustment processes, a single-minded attention referring to stability factors as indicators for transition success and a extreme loss of credibility on behalf of the public authorities led to this economic and social disaster (WELFENS, 1998; RECEP, 1998; IMF, 1999). After nearly ten years of rather chaotic transition, it is now necessary to adopt a true strategic economic concept that tries to achieve not only monetary stability but also create stable political and legal conditions and to improve the functioning of the states’ democratic institutions.
Ralf Wiegert

D.. Institutional Failures of Market Transformation of the Russian Economy

Abstract
In assessing the outcome of the eight years of systemic transformation in Russia neither advocates nor opponents of the current reforms can ignore a number of their negative consequences. The continuing decline in living standards, chronic non-payments, the threat of new waves of inflation, the deep gap between the financial and real sectors, growing income inequalities and unemployment, accumulating shortcomings of the system of state finances and banking are among the most evident and destructive consequences of the previous path of social-economic reform.
Ruslan Grinberg

E.. Russian Crisis: Causes, Developments, Contagion and Prospects

Abstract
The 1998 Russian crisis could have been predicted.i Though there were conflicting opinions about the speed and the depth of the Russian transformation, there was no doubt that public support for the policies pursued had been eroding and that political and economic disequilibria had been developing that could hardly have been resolved without an economic and political crisis erupting. Not only was the crisis predictable, but the immediate outcome could also have been anticipated. What was and is still more difficult to assess are the prospects that Russia is facing. This is because the crisis has opened up a whole series of difficult and fundamental questions that present a serious challenge to the Russian government and to the outside world as well. The timing of the crisis has been most unfortunate, because it came at the time of the Asian crisis and amidst worsening financial and economic prospects in the world as a whole. The policy decisions taken in mid-August 1998, especially the default on ruble denominated government debt and the ensuing de facto,i.e., non-declared but creeping, default on a large part of external debt, were very damaging. Thus, though the Russian economy is not very large (Russia’s GDP was 1.9% of the world’s GDP in 1997) and is not very integrated into the global economy (though, Russia is quite an open economy for a country of its size, exports plus imports being about one third of Russia’s GDP in 1997), the collapse in Russia has had a much more serious effect on the global economy than it might have had otherwise, under more stable international circumstances.
Vladimir Gligorov, Niclas Sundstrom

Restructuring in Transition Economies

Frontmatter

F.. Foreign Direct Investment in Russia — An Engine of Structural Adjustment?

Abstract
The formerly centrally planned economies in Eastern Europe have to undergo processes of substantial structural adjustments since they have started their transition to a market economy. In the late 1980s, these economies had been shaped by an oversized industry sector whereas the service sector was poorly developed (DÖHRN/HEILEMANN 1996); foreign trade was mainly directed towards the other members of the Council for Mutual Economic Assistance (CMEA), with little respect to economic, cultural or geographical factors that influence trade flows of market economies; at the same time the sectoral structure of CMEA trade was above all a result of specialisation agreements and did not necessarily reflect comparative advantages. These distortions from “normal” structures, were common to all of the today’s transforming economies. However, the term “normal” should be used with some caution in this context. Subsequently, it is not understood as an optimal structure these countries should try to achieve but more in the sense of structure, mainly derived from developed market economies, that may serve as a yardstick and hint at directions and magnitudes of change the transition economies have to undergo.
Roland Döhrn

G. Russian Economy: Structural Change and Econometric Prospective

Abstract
Eight years have passed since the beginning of radical political and economic reforms in Russia. Deep and severe economic and social crises have taken place during the period we observed. Apart from the importance of discussing political and economic problems it is always desirable to have appropriate instruments for analyzing the past and forecasting the future. Mathematical economic models are the very instruments to accomplish the task. Moreover the process of model making itself helps significantly in understanding and clarifying economic realities. Therefore, first we present a short description of the models we have and problems that we encountered while modeling, and then proceed to some economic results.
Georgiy Serebryakov

H. Economic Opening-Up, Policy Reforms and Relations with International Organizations: A Parallel between Hungary and Russia — Some Major Differences and Similarities

Abstract
The processes of opening-up and liberalization are key fields of transition. According to many analysts the direction and nature of measures aimed at reforming foreign trade systems are the main indicators of the whole reform process. Both Hungary and Russia had recognized the significance and necessity of economic opening-up and started to liberalize the foreign trade system from the beginning of the transition period, or in the case of Hungary even before the 90’s. The Hungarian liberalization process was relatively quick and consequently painful, it was a real shock for a considerable part of Hungarian companies. As a result by now the average level of tariffs is below 5%.
Zsuzsa Ludvig

Stabilizing Russia

Frontmatter

I.. Towards Credible Monetary and Fiscal Policies in Russia

Abstract
Since Russia moved close to parliamentary and presidential elections political issues began to dominate the country. It is a common phenomenon that substantial changes in economic policy can scarcely take place until the results of presidential elections of 2000 appear and the new government is appointed. It is expected that economic policy in the next century will be shaped and conducted by the new government, which hopefully will benefit from a higher credibility than previous governments in the 1990s. It is believed that not only a number of failed attempts to stabilize the economy, but also permanent cabinet reshufflings and political tensions negatively affected the country’s economic situation in the 1990s. These factors generated permanent instability, contributing to higher risks of investing in Russia and uncertainty about the country’s future.
Evgeny Gavrilenkov

J.. Russian Capital Markets and International Financial Flows

Abstract
In a early stage of the transformation process Russia opened its capital markets to international portfolio capital. It was hoped that an inflow of portfolio capital would lead to similar beneficial effects much like direct investment. Indeed, from a theoretical point of view net capital imports can help, in the case of a relatively low savings ratio, to reach a higher investment propensity and to finance higher growth.
Michael Vogelsang

K.. Consumer Prices in Russia and Transforming Official Statistics

Abstract
Official statistics supply the government and the economy with indispensable information for political and business solutions. A functional infrastructure of information constitutes the fundamental base for proper decisions. The output cannot be better than the informational base. In Russia, the state statistics measure the development of the country, but it has been subject to changes itself.
Cathleen Faber, Hans Gerhard Strohe

L.. The Rationale for Seigniorage in Russia — A Model-Theoretic Approach

Abstract
The August 1998 debt crisis revealed the fragility of the Russian transformation process. In particular, it showed that the budget squeeze is one of Russia’s major problems. In fact, in 1998 the total federal budget in Russia (in dollar terms) has shrunk in magnitude to the government budget of the Irish Republic.
Frank Bohn

M.. Overcoming the Russian Banking Crisis: Theory, Some Empirical Findings and Policy Options

Abstract
There have been many and recent experiences with banking crises in industrial countries, occurring in some cases even without a prior or concomitant strong adverse shock such as a considerable recession, and despite extensive prudential oversight. They triggered substantial and in some cases also very costly (in terms of taxpayers money) government interventions. Hence, even in the most developed countries achieving sustained smooth and efficient financial intermediation is still difficult, suggesting how much more difficult it must be during transition.
Ulrich Thießen

Modernizing Russia

Frontmatter

N.. Institutions and Transition: On the Way to a Market Economy — Theory and Application to Russia

Abstract
Established market economies typically generate sustained growth of new output and facilitate the long-term accumulation of wealth. A functional market economy therefore will not only need a framework which stimulates efficient production - including innovation activities - but also an institutional framework which stimulates savings, investment and reinvestment in real capital and human capital. The whole set of institutions defining the frame for private economic activity is called the formal economic system. If we include actual behavioral patterns and the typical relations between actors we have the actual economic system. In an open economy the national economic system is linked to partner countries and to distinct international organizations which define an international framework for private agents and - in some fields - for government action. In the following we develop some new ideas on the nature of institution-building, where special emphasis is given to network issues and the potential role for importing institutions or rules via membership in international organizations.
Paul J. J. Welfens

O.. Overcoming the Transformation Crisis — Selected Issues and Policy Options in Russia

Abstract
During the last fifteen years Russia has changed profoundly. It is no longer a dictatorship ruled by a single party. It has neither an official ideology nor censorship. The society has opened up to the rest of the world and a pluralism of views and ways of life prevails. All of this was unthinkable during Soviet socialism. The Russian economy has also changed. It has transformed from central management to something that might be called a market economy. But this is a very peculiar market economy. The economic stagnation which became visible a quarter of a century ago had changed into s steep production decline which still continues. At the same time inequality has increased, and mass poverty has become a fact. Russia’s economic decline is - if one abstracts from the other, even more unfortunate former Soviet republics - almost unprecedented in recent economic history. More surprisingly, it has taken place in a country that is best endowed with natural resources, and also has a relatively well educated labor force and rich industrial and technological traditions. Russia’s twentieth century is indeed packed with unique developments: the collapse of an empire, revolution and civil war, famine, forced industrialization, collectivization, establishment of dictatorship and mass terror, another devastating war, collapse of the system and now economic decline. For Russia, it seems, it is entirely normal to be abnormal, and one should ask whether the future also has unexpected surprises in store.
Pekka Sutela

P.. Nurturing Entrepreneurship and the Role of Co-operatives

Abstract
For quite a long time, especially during the first years of the transition process, entrepreneurship was not very much of an issue in “mainstream transition econnomics”; microeconomics was not at stake (since exceptions prove the rule, I would like to draw the reader’s attention to SVEJNAR 1991 and SEREGHYOVA 1993): liberalization, stabilization and privatization were the questions whole libraries of books and papers were published on. It seemed as if most economists firmly believed in a thing I would like to call “microeconomic adjustment-automatism” (BROCKMEIER 1998 the message being: get the prices right, cut off the monetary overhang, establish a two-tiered banking system, privatize state-owned enterprises - and eventually (and as a matter of course…) you will have a market economy!
Thomas Brockmeier

Q.. Foreign Direct Investment and Growth in Russia, Poland and the Ukraine

Abstract
The transformational period from command to market economy shows the necessity of the systematic transformation in all spheres of economy. The search for a way out of the unstable situation in Russia and the Ukraine, the detection of the basic reasons for the economic recession and substantiation of means for overcoming it, and the determination of the basic premises of economic stabilization and growth are the fundamental tasks of transition. This paper aims to explain the paradox of low flows of capital and goods under the influence of comparative advantage and better capital return as well as to study the impact of foreign trade promotion and foreign direct investment (FDI) on the stabilization process in Russia and the Ukraine. The following economic hypotheses will be examined: favorable economic policy influences increased FDI and foreign trade in transition countries; FDI and foreign trade play a major role in the process of stabilization and create a premises of economic growth in Russia and the Ukraine.
Olga Nosova

R.. Reforming the Natural Monopoly — the Case of Railroad Transport

Abstract
Railroads have traditionally been a system-forming factor in any nation’s economy; they were structured as monopolies with strong vertical integration and were either owned or regulated by the state. The development of railroad networks at the end of the 19th and the beginning of the 20th century brought down transportation costs and led to the concentration of production. However, uprooting monopolies in limited local markets brought giant enterprises to life with potential monopolistic power at first in the national, and then in the international markets. Railroads themselves became centers of monopoly power as well (Golts G., Filina V.,1997 p.154).
Nina Oding

Economic Roundtable: Internal and External Russian Transition Problems

Frontmatter

S.. Permanent Crisis in Russia: Selected Problems of Macroeconomic Performance

Abstract
The Russian experience of reforming the economy in the 1990s gives an instructive example of mishandling macroeconomic policy which led to the August 1998 crisis, collapse of the financial markets, devaluation of national currency and shattered the myth of stabilization that had appeared in 1997.
Evgeny Gavrilenkov

T.. Systemic Transformation in Russia: Outcomes, Causes, New Imperatives

Abstract
The years of the reforms in the Russian economy has changed it beyond recognition. Thrown into the cold waters of market economy people are quickly overcoming dependency sentiments. The resurrection of private business as well as the spirit of free entrepreneurial initiative so important for economic progress is in full swing.
Ruslan Grinberg

U.. Official Statistics in Russia and the Measurement of the Crisis — Some Remarks on Russian Price Statistics

Abstract
Every solution in economic policies needs a functional informational infrastructure. The base for the economic policies is supplied by official statistics. Nowadays there is very little literature about the institutional transformation of state statistics in Russia. The project connected with the statistical analysis of the Russian Federation deals with three subjects:
  • The conversion of official statistics from a state instrument of planning and controlling into an independent and neutral instrument of information.
  • The development of sensitive and sensible methods for the measurement of prices, being relatively robust against the transformation of other subjects.
  • The measurement of prices as one important indicator of the transformation from a centrally planned to a market economy.
Hans Gerhard Strohe, Cathleen Faber

V.. Rent-seeking as a Source of Macroeconomic Instability in Russia

Abstract
The main goal of economic reform is putting in place a market economy whose agents shall be independent, responsible owners efficiently using their material, human, and financial resources.
N. Oding, A. Zaostrovzev

W.. Foreign Trade and Foreign Direct Investment in Transformation Crisis in Russia and Ukraine

Abstract
The transition period to a market economy shows the necessity for solutions to a variety of problems in all spheres. The most significant spheres in the process of systematic transformation to market economy of East European countries are Economics, Politics, Science, and Culture. Successful realization of economic reforms toward market is closely connected with the process of economic reforming. Privatization and economic opening up were fully and effectively realized in Central European countries. Successful implementation of economic reforms became the basis for foreign trade development and the attraction foreign capital into the countries. These processes stipulated production of competitive products, effective foreign specialization development, and the change of export structure, where prevalence has been given to finished products.
Olga Nosova

X.. Appendix: Selected Macroeconomic Data on Russia and Eastern Europe

Without Abstract
Paul J. J. Welfens, Evgeny Gavrilenkov

Y.. Selection of Links and Internet Pages of Research Institutions Related to Russia

Without Abstract
Paul J. J. Welfens, Evgeny Gavrilenkov

Z.. About the Project: Real and Monetary Transformation Crisis in Russia: Developments, Analysis and Sustainable Transformation

Abstract
Systemic transformation has faced a serious backlash after the August-1998 crisis in Russia. This project wants to develop a clear understanding as to the reasons for the slow progress in transformation and to analyze options for sustainable transition and growth plus international integration in the future. The economic analysis focuses both on theoretical/institutional and empirical issues. Major aims of the project are:
  • to deepen the scientific analysis of the transformation dynamics in Russia
  • to stimulate the discussions about economic aspects of sustainable transformation in Russia, namely via a special website: http://​www.​progressinfo.​net
  • to help improve conditions for private entrepreneurship and international research
  • to present new policy proposals and policy tools for overcoming the crisis
  • to generate a broader discussion between political decision-makers, business people and experts from Russia and the OECD countries
  • to reinforce scientific and political cooperation between the EU and Russia
  • to raise the efficiency of support from international organizations and to promote international economic cooperation.
Paul J. J. Welfens, Evgeny Gavrilenkov

Backmatter

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