International Commission on Peace and Food
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Transition in Eastern Europe
The post-second Wworld Wwar II experience of Third World countries supports the conventional wisdom that the development of a new economic system is necessarily a long, drawn out process spanning several decades. Yet efforts are now underway in Eastern and Central Europe to radically abridge and accelerate the process of establishing new economic and political systems within a single decade, or even less. The question of how far and how fast societies can develop is equally relevant to Western industrial nations trying to adapt and adjust to changing domestic social conditions, rapidly unfolding global trends, and the blinding speed of technological innovations. The demands on all nations and on the international community for rapid adaptation will continue to accelerate. Humankindity needs a new perspective of development as a process and new strategies for accelerating social transformation.
The countries of Eastern Europe and the former Soviet Union are in the midst of rapid and radical multidimensional social transition, the first ever peaceful revolution of this speed and magnitude. This change is often characterized in economic terms but it embraces virtually every activity and institution in the society. It involves a shift from authoritarian to democratic government, from centrally planned and controlled command economies to market driven systems, from defense-oriented to consumer-oriented production, from highly centralized to decentralized administration, from closed and isolated to open and internationally integrated societies, from state ownership to multiple forms of ownership in all spheres, from almost exclusive emphasis on values of equity and collective security to strong emphasis on the values of freedom and individual responsibility.
The complexity, difficulties and dangers of radical transition are dramatically illustrated in Russia, which embarked on a 'shock therapy' program for rapid restructuring to a market economy based on a democratic constitution and new legal framework. The strategy for the transition focused on deregulation of prices, privatization of farms and industry, introduction of a convertible currency, and balancing the budget to reduce the high fiscal deficits, primarily by reducing military expenditure and subsidies to producers and consumers. The assumption was that a program with these elements would result in a significant increase in production, efficiency and the availability of consumer products within a short time.
Rather than bringing about the desired results, the program led to severe devaluation of the rouble to less than one-thousandth of its former value, an inflationary price spiral that approached hyper-inflationary levels, a precipitous fall in total national income of more than 20 percent and a shocking decline in personal incomes. The real failure of the transition program arose from an inadequate understanding both within and outside the country of the stages and process and essential conditions for an effective transition under the circumstances prevalent in Russia at the time. Understanding of this failure holds the key not only to the rapid revitalization of the former Soviet republics, but also for meeting the challenges of present and future transitions in other East European nations, Africa, Asia and the West.
The Russian experience demonstrates that the economic dimension of transition cannot be viewed and acted upon in isolation from its political and social dimensions: the understanding and support of political groups and the general public, not on government decrees, is the essential instrument for constructive change and the ultimate determinant of success or failure. Power has shifted to the people. A market economy cannot be introduced in a fragmentary or piecemeal manner. Freeing of prices under conditions of shortages, in the absence of competition and free flow of information, with high barriers to entry and exit from industry, lack of legal basis for private property, and constraints on transport and distribution has led to soaring prices, falling investment and exploitation by organized crime. Efforts for reform at the macro level must be complemented by corresponding steps to establish essential institutions at the micro level for marketing and distribution, finance and credit, training, dissemination of information and promotion of small businesses. The Government failed to understand the essential role of regulation and control for effective functioning of a market economy. This is especially true in the agriculture sector, which as every developed nation already knows--even when they preach to the contrary--is too important and too vulnerable to be left solely at the mercy of the market and must be accorded special status. Macro economic stability is also vital for progress in this sector.
The report presents specific recommendations to facilitate the transition in Russia and general recommendations of relevance to rapid transitions in other contexts. A strategy is presented for eliminating Russian food grain imports by utilizing capacity in the defense industries to produce equipment dramatically to dramatically reduce crop losses within two to three years. Disillusionment with government everywhere and a significant shift of power and influence from governments to non-governmental agencies and the general public require that government take on a new role as catalyst rather than prime mover and public education and information be given a central place in transition strategy.
The pace of human progress is accelerating exponentially. The world has moved further during the present century than in the previous nineteen centuries combined--economically, socially, politically, scientifically and technologically. In recent decades, humankindity has been buffeted by a bewildering array and intensity of transforming powers--democratization, decolonization, demilitarization, globalization, universal education, scientific advances, information, the successive technological revolutions brought about by the automobile, telephone, radio, television, jet aircraft, computers, satellite communications, and genetic engineering. Coping with such rapid change has not been easy. Theseis unprecedented phenomena haves brought with themit a variety of new problems--a widening gap between the most advanced and least developed sections of humanity both within and between nations, a disequilibrium between growth of population and economic growth, rising unemployment, alienated youth, increasing violence and crime, depletion of natural resources and degradation of the environment, overcrowded cities, mass migrations of talent from South to North, displacement of millions asof political and economic refugees, and the breakdown of the family and traditional social institutions.
Although much has been learned about the various stages of social and economic development, much less is known about the actual process by which societies movetransit from one stage or level or form to another. As a result, the process of transition is often prolonged, complicated and fraught with difficulty. Today, former colonial nations such aslike India and more recently Zimbabwe, struggle to catch up with countries that have never been subject to foreign rule. The tribal nations of central Africa struggle at great cost to transform themselves into modern Sstates. Even within the prosperous West, this struggle expresses itself as the emergence of 'developing countries' within developed nations, as poverty-stricken families in inner cities with rates of chronic unemployment as high as 50 percent or more. The tremendous economic progress of Japan during the post-war period, which has been followed by other Asian economic powers and most recently China suggests that the time required for transition can be substantially abridged.
Transition in Eastern Europe
The challenges posed by extremely rapid transition are no where more graphically depicted than in the current transition of East European countries after the collapse of the Berlin Wall, the end of the Cold War and the breakup of the USSR. Although this transition is often described in political and economic terms, it is far broader and deeper in its implications. These nations, and especially the republics of the former Soviet Union, are in the process of a simultaneous multidimensional transformation--politically, from authoritarian to democratic forms of government; economically, from a centrally-planned, command system to free market economies; industrially, from defense-oriented to consumer-oriented production; administratively, from highly centralized to decentralized systems; structurally, from state ownership of property to multiple forms of ownership in all spheres; socially, from closed and isolated to open and internationally integrated societies; culturally, from almost exclusive emphasis on values of equity and collective security to strong emphasis on the values of freedom and individual responsibility.
Thise transformation of Eastern Europe and especially of the former Soviet Union areis of vital concern to the whole world. The beginnings of that process initiated by Gorbachev's opening up to the West have already brought to the world a degree of peace and security almost inconceivable five years ago. Never before in human history has such massive change been carried out as an essentially peaceful revolution. But tThis has been followed by events that have de-stabilized the political and economic systems of the entire region, led to the breakup of the USSR, war in Yugoslavia, the collapse of the Warsaw Pact and the Comecom trade system, a massive brain drain and the threat of huge waves of economic refugees. These changes have had implications for all nations within the region and beyond--severely aeffecting trade with Sri Lankan and Indian tea estates, Czechoslovakian and German machine tool manufacturers, Australian and American wheat farmers.
So too, Tthe further course of this transition will have a profound impact on all nations, both developed and developing. The future of world peace, the world political system and the world economy hang in the balance. A successful rapid transition will open up new markets to stimulate a new round of growth for the sluggish economies of the West, much as the Marshall Plan stimulated American prosperity in the 1950s. It will equally present economic opportunities for developing countries, unable as yet to meet the quality requirements of highly competitive Western markets. Failure of the transition holds the danger of economic collapse and political instability, which could even lead to renewed political tensions and another economically devastating arms race. The whole world has a great stake in the successful outcome of the transition in Eastern Europe.
Reform in Russia
The complexities, difficulties and dangers of radical transition are dramatically illustrated in Russia, which jumped headlong into radical reform after the breakup of the Soviet Union. Personal liberty and human rights were the crowning achievements of Gorbachev's 'glasnost'. But economic growth for the nation and better standards of living for the people, of which availability of food became the symbol, were powerful motives underlying and compelling the reform movement. In December 1991, Russia embarked on an ambitious program to establish democracy and a market economy based on a new constitution and new legal framework. The strategy for the transition focused on deregulation of prices, privatization of farms and industry, introduction of a convertible currency, and balancing the budget to reduce the high fiscal deficits, primarily by reducing military expenditure and subsidies to producers and consumers.
The assumption was that a program with these elements would result in a significant increase in production, efficiency and the availability of consumer products within a short time. Contrary to expectations, the first two years of reform in Russia resulted in a 30 percent fall in GDP, severe devaluation of the rouble to less than one six-hundredth of its former value, inflation of 2500 percent in 1992 and 20-25 percent per month in 1993, sharply rising unemployment and a precipitous decline in living standards by 50 percent or more. The failure of this program to produce the anticipated results has given rise to extreme hardship, growing anxiety, frustration and anger within the country. Internationally, it has generated intense debate about the reasons for its failure, the efficacy of shock therapy, and the appropriateness and adequacy of Western assistance.
Thise failure of the transition program reflects an inadequate understanding, both within and outside the country, of the stages and process and essential conditions for an effective transition under the circumstances prevalent in Russia at the time. Understanding of this failure holds the key not only to the rapid revitalization of the former Soviet republics, but also for meeting the challenges of present and future transitions in other East European nations, Africa, Asia and the West. The most important thing now is to find the best way forward for the republics of the former Soviet Union and other countries of Eastern Europe, which have followed similar strategies and obtained similar results.
Lessons from the Russian Reform
The real failure of the transition program arose from an inadequate understanding both within and outside the country of the stages and process and essential conditions for an effective transition under the circumstances prevalent in Russia at the time. Understanding of this failure holds the key not only to the rapid revitalization of the former Soviet republics, but also for meeting the challenges of present and future transitions in other East European nations, Africa, Asia and the West.
The experience of the 1992 transition period in Russia can be summarized in the form of several lessons with wider application. The first lesson is that the economic dimension of transition cannot be viewed and acted upon in isolation from its political and social dimensions. The reform program was developed and guided by Russian and foreign economists who viewed the transition as a change of clothing, the casting off of one set of economic principles and the adoption of another, ignoring the critical importance of social and political factors. Their view could be summed up in the often expressed attitude, 'Good economics makes good politics!'
This proved not to be the case. Economic policy recommendations failed to adequately anticipate to either the impact of the program on the people or their reaction to it. The public exhibited an incredible degree of patience, tolerance and endurance under conditions of growing hardship. Personal living standards declined by as much as 50 percent during the year. Public resentment and personal suffering, especially among the aged, children and new entrants to the work force, became so severe that no government could have sustained the program without facing political upheaval or violent revolution. The program also led to the crystallization of formidable political forces within the country representing the interests of large and powerful groups that were adversely effected by the reforms, such as the managers of state-owned enterprises and farms which were severely threatened by the reforms. In this way the program quickly destroyed the sense of social unity and encouraged further fragmentation and polarization into opposing groups within the country. The government stuck to the line that shock therapy alone could generate stable conditions. As time went on it became increasingly difficult to carry conviction and generate the necessary public support for a shock program. Thus, the government pushed forward and back tracked over and over again.
It is evident that no economic solution, no matter how sound, could be effectively implemented unless the requisite political and social support were forthcoming. The only possible remedy is to win the understanding, support and endorsement of the population for an alternative program, which all major parties and social groups can back. This requires educating the public to understand both the costs and benefits involved in any reform strategy, the trade-offs between immediate advantages and immediate sacrifices required to establish a new and stable equilibrium.
The second lesson of recent Russian experience is that a market economy can be introduced gradually or step-wise, but it cannot be introduced in a fragmentary or piecemeal manner. Rising prices as a result of deregulation became the most prominent feature of the 1992 transition period. The structure of industry in the former Soviet Union was highly concentrated in huge monopolistic enterprises. Freeing of prices under conditions of shortages and in the absence of competition permitted these monopolies to raise prices and even to reduce production in order to maximize profits. Instead of free market prices, the program encouraged monopolistic prices and spiraling inflation.
A market flourishes only when several essential conditions are met--freedom of pricing, freedom of entry and exit from industry, free flow of information, unrestricted movement of goods and services, competition between enterprises and control of monopolies, and private ownership of property. The entire package of free market practices must go together, otherwise they do not work. Freeing pricing without first regulating or dismantling monopolies, promoting privatization of land and enterprises, ensuring free flow of goods, and establishing wholesale markets and multiple distribution outlets leads to speculation, soaring prices, hoarding and falling production. Progress on all these fronts must proceed hand in hand.
Historically, the free market evolved over centuries in conditions of surplus production and stable currency--neither of which exist in Russia today. Efforts to accelerate the development of the market will have to first of all to meet the political, legal, social and economic conditions historically required for its creation. And these conditions must be met simultaneously.
Public Support for Free Enterprise
The third lesson of the Russian reform program is that in a democratic society, the market cannot be instituted by decrees or authoritarian methods which belong to the old system. In the new political climate, reforms will be successful only in the measure they are understood and accepted by the population. The vitality of the market depends on releasing the initiative of people to act in their own perceived best interests by producing and distributing goods and services for consumption by others. This initiative cannot be ordered, it can only be encouraged. Ultimately the success of the reform measures will be determined by one factor--the extent to which the people understand, accept and are motivated to act under the new system. Before introducing any new measure, maximum effort should be made to communicate its purpose and nature to the people and win their understanding and approval. Public education is the most powerful policy instrument.
Macro- level Policy and Micro level Change
The fourth lesson is that putting in place the right macro level policies may be necessary, but it is far from sufficient to truly to create a functioning market. The nation has been so preoccupied with "re-engineering" its economic and political system, and with meeting the conditions to attract foreign aid and investment, that it has overlooked the many essential and practical steps needed to implement the reforms on the ground. Even if the Government were able to get all the laws and economic policies 'right' the first time, there is no assurance that the actual impact on the people would have been less harsh than it has been.
The so-called 'shock therapy' strategy pursued by Russia and other Eastern European countries has been widely criticized for its severity and seeming indifference to social costs. But debates regarding the appropriate speed and social cost of reforms divert attention from a more fundamental problem with this approach. The essence of shock therapy was a reliance on macro-economic factors to bring about a radical restructuring of the economy and a radical change in the behavior of individuals and enterprises. While monetary policy may have proved useful for dealing with short term adjustment problems within a relatively stable environment, there is no evidence to support its use as the principle instrument for social transition. Monetary variables are indicators of the functioning of an economy, but the essential factors which determine the strength and health of an economy are the productivity of its enterprises and its workforce and the material resources of the country. Monetary variables are powerful forces which can generate intense short term pressure for change in behavior, but this pressure is applied indiscriminately and often with unexpected and unanticipated results. The primary result of premature liberalization of prices in Russia was to encourage trade and speculation, while discouraging production and investment. It distracted attention from fundamental changes in institutions and social attitudes needed for the transition to be successful.
While macro level policy measures are necessary conditions for reform, they are not sufficient to spur economic growth. They have to be complemented and supported by parallel efforts at the micro level to educate the population about the new economic system, to generate a free flow of information--not just freedom for information, but the actual exchange, which is still severely limited in this country Russia--to develop new distribution systems, to impart appropriate business and managerial skills, to provide access to credit, to build up new social institutions and to encourage and promote new enterprises. In the entire city of Moscow there is not a single wholesale market for food. There is no system for consumer credit, no agency in charge of promoting small business development. In the absence of these and countless other essential micro level conditions, even the right macro strategy will not evoke the anticipated response.
The gap between macro-economic policy and micro-level performance was particularly obvious in the case of Russian exports. Economists assumed that devaluation of the rouble would lead to significant increases in exports that would generate the hard currency needed for critical food items and for imports of machinery to re-equip ageing Russian factories. However, the drastic decline in the value of the rouble did not have the anticipated effect. The overseas demand for export of raw materials, such as petrochemicals, timber, and minerals did in fact increase. But demand for most manufactured goods remained low because demand from other republics and East European countries had collapsed, and Russian goods did not meet Western design or quality specifications. The restructuring of industry to meet international requirements for manufactured goods is an extremely complex task requiring years to accomplish, and involving changes in product design, production technology, technical training, management, marketing, and work culture--changes that could be expected only at the end of the transition process, not during its early stages.
Role of Government Regulation
The fifth lesson is that a free market does not mean an unregulated one. The Russian program was based on the implicit assumption that the market is a self-regulating mechanism which can substitute for regulation by government. This notion, which is deeply appealing to many free market theoreticians in the West, is contradicted by the experience and practice of every major capitalist economy in the world. Government plays a critically important role in defining and protecting property rights, ensuring competitive conditions and controlling monopolies, regulating foreign trade, establishing and enforcing quality standards, safeguarding the rights of investors and consumers, preserving the environment from over-exploitation and pollution, encouraging investment, and upholding the rights of employees to minimum wages, safe working conditions and social security in the case of layoffs.
The policies which have supported the most successful recent development initiatives of nations around the world, especially in Japan and the newly industrialized nations of the Pacific Rim, do not support the argument for unregulated free market forces. It is not the wisdom of the free market that enabled these nations to grow so rapidly. They combined freedom for entrepreneurial initiative, private property and market prices with carefully crafted industrial policies and tightly controlled foreign trade and investment practices to nurture and protect nascent industries and restrict foreign investment. At the same time, they organized massive import of foreign technology. They utilized import tariffs, export incentives, tax relief and other mechanisms to guide develop of their domestic economies.
The Russian program involved the dismantling of most of the administrative mechanisms by which the economy could be monitored and controlled by government. In place of free market conditions, organized crime and corruption became rampant. The fFarmers transporting produce from rural to urban areas were routinely stopped by Mafia squads in control of urban markets, who extorted money or refused transit to the cargo in order to limit food supplies to the cities. Bankers demanded bribes in order to open bank accounts for new firms. Crime and violence soared across the country. The property of Sstate enterprises was increasingly being sold on the black market by managers or employees of the enterprises. The break down in law and order led political figures to cry out for restoration of government authority, which was widely interpreted in the West as a retreat from democracy to totalitarianism.
This situation underlies the confusion between strong and repressive government. In seeking to reject thoroughly reject the authoritarian form of government that had suppressed the rights of the people for seven decades, the country allowed the power and authority of its central government to decline to the point where it could not longer enforce conditions needed for operation of either a command or free market economic system. The power of government in the West is veiled by the fact that its laws are usually obeyed without the need for exercise of force. But the threat of enforcement is as real for tax evaders in North America as it was for free marketeers under the old communist regime in the USSR. Regardless of the system, strong government is a prerequisite for a strong economy.
Special Status of Agriculture
The State has an especially important role in the regulation of agriculture. After the collapse of communism in Eastern Europe, the rise of free market and free trade polemics generated considerable confusion regarding the necessity and legitimacy of Sstate regulation and intervention in protecting and preserving agriculture, which is the beneficiary of innumerable subsidies and supports in virtually every Western nation. It is ironic that advice coming from overseas almost invariably recommended eliminating supports to this critical sector of the economy.
Special status is accorded by most nations to their agricultural sector for several reasons. Continuous steady supplies of food are absolutely essential to the welfare of the population, so that few governments are willing to entirely trust food production to the vagaries of a market system. Buffer stocks, subsidies and incentives are used to protect agriculture from sharp fluctuations. Food prices are extremely sensitive to changes in the supply of foodstuffs. Even a small increase or decrease in supply leads to a very wide fluctuation in prices. A bumper harvest can depress prices to the point of bankrupting large numbers of farmers. A poor harvest can send food prices soaring beyond the means of large numbers of people. Although the principles of free trade argue that a country's should produce only those items in which it they possesses a competitive advantage and procure the rest from overseas, few countries are willing to entrust their food supply entirely to foreign parties. Therefore, Japan erects trade barriers to maintain the price of rice at more than six times the international level in order to protect and preserve domestic rice producers. The US government exports subsidized American wheat and the European Community sells subsidized milk powder and butter internationally at prices up to one-third below the domestic level.
The Russian government was advised and proceeded on the assumption that all types of support for agriculture should be eliminated as soon as possible. Consumer subsidies for milk, bread and meat were withdrawn and then later reintroduced as the impact of rising prices on the population became evident.
Due to the harsh climate and inefficient forms of mechanization, Russian agriculture is extremely energy intensive. This sector consumes 40 percent of all fuel in the former Soviet Union and nearly five times as much energy per unit of output as in Western nations. Under intense pressure froorm international lending institutions, the Government allowed fuel prices to rise toward market levels in the Spring of 1992. The deleterious effect on agriculture, which threatened to cause a drastic reduction in food production, forced the government to introduce a 50 percent subsidy on fuel for this sector. Even so, instances were reported of farmers dumping milk 500 miles from Moscow due to the prohibitive cost of transporting it.
The sharp devaluation of the rouble further complicated matters by making the domestic price of Russian fertilizers less than 50 percent of the international price. As a result, fertilizer producers exported as much production as they could, while domestic farm consumption dropped by 50 percent, further endangering agricultural production at a time when there was the threat of food shortages loomed large.
Growing international pressure and friction over the issue(ignore strikethrough here, sentence ok) of liberalization of foreign trade and reduction of tariff barriers for agricultural commodities has been a major obstacle to conclusion of the seventh round of GATT negotiations. The debate over the legitimate role of government in protection of the economy is partially a question of timing. Market institutions and competitive strengths are normally built up over decades. Advanced nations with highly mechanized and efficient agricultural sectors are much better prepared to withstand the impact of foreign competition than countries in an earlier stage of development. In the midst of a radical economic revolution, the Russian economy and especially Russian agriculture were in no position to adapt simultaneously to the duel stresses of internal reorganization and external competition.
Perhaps the most critical error with respective to agriculture was the belief that food production and availability could be significantly increased in a context of general macro-economic instability and hyper-inflation. The rapidly falling value of the rouble minimized its utility as a medium of exchange. Agricultural, as well as industrial enterprises seeking a stable medium in which to hold their wealth increasingly resorted to hoarding marketable, non-perishable commodities such as foodgrains or converting roubles into dollars wherever possible.
The breakdown of the rouble as an effective medium of exchange was accompanied by an unfavorable shift in the terms of trade between agriculture and industry resulting from the near monopolistic position both of the suppliers of farm inputs, especially fertilizers and farm machinery, and the processing units that purchased farm produce, such as dairies and meat processing plants. Together, these factors precipitated a rapid fall in farm production and food availability. There could be no solution to the country's food problem without first establishing a stable medium of exchange. Yet every initiative to resolve the currency problem ended in failure or retreat by the government due to pressure from political parties and interest groups, or extreme hardship on the population.
The complexity of the transition in Russia and other republics of the former Soviet Union has been a major factor behind the poor response of Russian agriculture to the reform program. An in-depth examination of this sector not only explains the reasons for this poor response but also reveals important aspects of the underlying social process taking place.
Transition is the process by which society moves from one form or level of activities to another. While social scientists conveniently divide social activity into several categories--political, economic, social, educational, religious, cultural, recreational, etc.--in practice these distinctions are at best only partially true. As religious activities must have strong social and cultural foundations as well as economic and political support for their sustenance, so too economic activities in any society take place on the foundation of the political system, social values and customs, and the psychological aspirations and attitudes of the people.
During normal periods of slow and gradual change, the impact or role of other dimensions operates below the surface and appears minimal. Economists studying the results of economic variables tend to overlook the influence of factors from other fields. For instance, they measure the impact of a rise in interest rates on investment, consumption and house construction, or the impact of an increase in minimum wage on new job creation in the economy. Principles of economics, as withlike the other social sciences, are largely built on the assumption that non-economic factors are constant. Under relatively stable and static conditions, these principles in economics can be employed to predict changes in economic variables to a considerable extent. But under circumstances in which underlying economic, social and political conditions are undergoing radical change, the relevance and predictive capacity of purely economic concepts is quite limited. This was the situation confronting the Sstates of the former USSR immediately after dissolution of the union.
Transition in Russian Agriculture
Several factors are commonly cited to explain the failure of the agrarian reform in Russia during 1992. These factors include--the huge size and inefficiency of state owned farms; the poor quality of Russian farm machinery and the fact that it is suitable only for very large- scale agricultural operations; lack of motivated workers; and huge losses during harvesting and transport. But, in reality, these deficiencies were compounded by a host of non-economic factors that severely complicated efforts to improve performance of the agrarian sector.
Politically, the assertion of independence by the constituent republics, which led to the breakup of the USSR and decentralization of power to the republican level, was followed by a parallel movement for greater political autonomy at the regional level within the republics. Faced with problems and pressures on all sides, the new central government of the Russian Federation ceded authority over many issues to its 75 regional governments. Among these, production, procurement and distribution of food was one of the most significant. For the political instability of the country had been closely connected with the inability of the Soviet government to assure adequate food supplies to large urban centers. Under the new Federal treaty, power over food passed from the center to the regions, thereby further weakening the government's ability to control this critical item. In one fell swoop, the old system of centralized procurement and distribution was dismantled and replaced by an informal arrangement that largely depended on decisions by local bureaucrats around the country who were not responsible to 70 percent of the population living in urban areas. Local authorities were free to permit or prevent food exports from the region, to determine for themselves the level of food subsidies to consumers and producers in the region, and to regulate local food prices if they so chose.
The intention was that the old centralized system of procurement would be immediately replaced by multiple alternative distribution systems in the Sstate, cooperative and private sectors based on the free market model. However, the structure of storage and processing facilities did not lend itself to a decentralized approach. In contrast to the pattern in the industrialized West, little or no storage capacity existed at farm level. Traditionally, produce was moved from the farms immediately after harvest and transported long distances to huge Sstate-owned, storage facilities located near the centers of population. Devolution of control to the regional level, which often lacked sufficient storage capacity, led to increases in losses and diversion of crops for less appropriate purposes, such as using high quality wheat as animal feed. Private trade did develop and step in to fill the vacuum, but for the most part the scale was too small. Food distribution became a natural attraction for smugglers and other criminal elements. In the chaotic environment of 1992, even the Sstate-owned grain import and distribution organizations, like many other state-owned agencies, were subjected to frequent allegations of corruption and accused of working in competition or at cross-purposes for their own benefit to the detriment of the state and the people.
The Role of Institutions and Attitudes in Transitions
Russia's recent experience forces us to reconsider our basic conception of transitions. TransitionsThese involve far more than simply a change of systems or the laws and rules which govern activity within the system. They involve complex changes in the institutions and attitudes which determine and support social activity. The effort to promote privatization in agriculture illustrates this complex interaction.
Privatization was a principle element of the government's strategy to revive Russian agriculture. The objective was to convert farm workers into owners so that they would have maximum incentive to improve output and efficiency. Within two weeks after the declaration of Russian independence, President Yeltsin signed a decree authorizing the restructuring of all 32,000 state and collective farms in Russia into privately held corporations, cooperatives or independent family farms. At the same time legislation was introduced to legalize private ownership of land and to provide incentives and supports for the creation of private farms. As a result, in 1992 the number of private farms in the country rose from 6000 to 180,000.
This process of restructuring met fromwith heavy resistance from unexpected quarters--the rural population. The social attitudes and expectations of the people proved to be a formidable obstacle. Accustomed as it was to order and to dictate, the Government failed to educate or win over the populationpeople to an initiative they must consciously endorse and support in order for it to succeed and bear fruit. Very few farm employees were willing to risk leaving the collectives, which provided a strong element of economy and social security and community support, to strike out on their own. Many resisted even the restructuring of their enterprises as share-holding corporations, forcing the government to modify its original decree and permit farms to re-register in their existing form. By year's end, some 11,000 farms re-registered, out of which roughly 50 percent chose to retain their present status. Despite considerable pressure from Western governments which saw communists lurking behind every bush, the parliament and large sections of the people retained strong reservations about privatization and sale of land, which they feared would favor massive acquisitions by speculators and corrupt officials. A mid-1992 survey showed that 61 percent of the rural population opposed land sales.
The establishment of family-owned, private farms posed additional problems due to the lack of institutions to support small-scale agricultural activities. Banks and banking staff were very limited in rural areas. A typical district with a population of 50,000 people had one bank branch and only one loan officer, who was accustomed to working with 20 or 30 enterprises in the district. Privatization created hundreds of small farms and hundreds of other private enterprises seeking financial assistance, but finding the banking system grossly inadequate and ill-prepared to support them. Bank officials found it difficult to change their mentality from the old system in which almost everything was considered confidential--including even the interest rate on loans offered by the bank! Efforts to introduce a law legalizing mortgage of agricultural property met with resistance, since it implied the right to sell land. This prevented farmers from mortgaging their lands to obtain bank credit for investment.
The establishment of a free market system for agriculture was further complicated by the absence of several critical ingredients required for enterprise to thrive. State farm managers, who had little or no experience with marketing under the old command system, found it difficult to understand and operate within a system which required them to seek actively seek customers and continuously search for a better sale price. In the absence of either a private or public wholesale distribution system, large collectives managing tens of thousands of hectares discovered that they had to establish new departments for this purpose. Instead of complying with Sstate orders and contracts, they were compelled to estimate market demand, identify potential customers and seek them out.
Small, private farmers were particularly handicapped in their efforts to develop marketing outlets for their produce. The control of the food producing industries by local monopolies kept the farm-gate prices of milk and meat below the cost of production. Even privatization did not eliminate the problem, because in most cases factory employees were given a majority of the shares and they continued with monopolistic pricing practices. Many efforts were made to resolve these problems by establishmenting of small-farmers' producer cooperatives. However, lack of knowledge and experience in organization proved major impediments in practice. Although 50 percent of private farmers belong to at least one cooperative organization, their impact has been nominal. Little of their produce is yet processed by or marketed through the cooperatives.
Trade is retarded by the absence of many basic commercial institutions and simple systems. Privately operated commodity exchanges sprang up all over the country to handle wholesales transactions. But, unfamiliarity with such an institution and the lack of a firm legal basis for enforcement of contracts and a system for grading and inspection to guarantee the quality of produce traded, kept most buyers and seller away. The system of warehouse receipts used in the USA enables a buyer to verify the quantity and quality of agricultural commodities offered by a seller, without ever going for on-site inspection. Without such a system, purchases over long distances are made difficult.
Hoarding, speculation by traders, regional shortages and price variations have been aggravated by the absence of some alternative system for national distribution to replace the old centralized procurement system. A mechanism is needed to einsure distribution of food to deficit areas, to guarantee farmers an indexed floor price for foodgrains under conditions of unstable, soaring prices, and to establishment and maintain a national buffer stock against emergencies. The Indian Food Corporation and National Dairy Development Board, the autonomous marketing boards in the UK, and the US commodity credit corporation are model institutions from which the Russians need to borrow, adapt and innovate to suit the conditions of a vast food-deficit nation.
The very concept of price and peoples' attitude towards it changed radically due to the reform program. Most of the population had expected the market economy to quickly to fill the store shelves with attractive products. Very few anticipated that the first result of the market was to increase the price for the same old, substandard goods by several fold in real terms. Under the old system, prices were set by government to fulfill its social objectives of encouraging production or supporting consumption. Under the new system, the only objective was to maximize profits for business, which meant that every producer raised prices as high as possible. Only slowly did producers begin to realize that when prices exceeded the purchasing power of the population, total demand would fall dramatically. As a result, the country was faced with the anomaly of severe food shortages, coupled with huge accumulation of unsold stocks in wholesale warehouses. In one instance, large quantities of beef were imported and sold by one government agency at 33 percent less than domestically produced beef purchased at much higher prices from Russian farmers and overflowing government storage facilities. A new understanding and a new attitude, foreign to the experience of both producers and consumers was needed to make the new system work.
Information as a Stimulant and Fuel for Transition
Information proved to be one of the most critical and most scarce ingredients needed for establishment of the market. Under the old system, information meant the power to control people by maximum secrecy and minimum disclosure. Accuracy depended very much on who and for what purpose the information was intended. Credibility was usually suspect. Even the senior officials of the Politburo were victims of distorted information presented by lower level bureaucrats afraid to report factually report the consequences of earlier Politburo decisions. The USSR had maintained a very comprehensive system for collection, transmission and analysis of statistics on farm production and prices. But this system, which was soon dismantled, was designed to serve the information needs of central planners and administrators, rather than those of thousands of independent farm managers.
In a command economy, a few people at the top receive most of the information and take most of the decisions, while the rest of the population carries them out. In contrast, the market is based on millions of decisions taken every day by millions of individuals in fields, factories and retail stores around the country. Information plays a critical role in the function of the market. All these decision-makers require timely access to reliable sources of information. The shortage of reliable information and of institutions to disseminate it is another major constraint to the development of the market in Russia.
Under the new system, information has become an essential instrument for stimulating millions of independent decision-makers to make efficient decisions. Easy access, maximum dissemination, full disclosure, precise accuracy and credibility became imperative. Information needed to make sound business decisions was difficult to obtain, such as the production or demand for different commodities or variations in price by region or over time. Whereas American farmers can read in a daily newspaper about the extent of land planted with corn during the previous week, Russian farmers operated with little or now knowledge of what their counterparts were doing or planning. Most farm managers were ignorant even regarding current laws, which were changing with extreme speed--over 40 new laws regarding agriculture were passed during the year. Employees of retailed food shops in Moscow, when suddenly informed by their manager that they were now shareholders in the enterprise, blinked in baffled surprise and then went back to work wondering what it really meant, if it really did mean anything. No one had ever explained how privatization works. During the process of restructuring state and collective farms, a mid-year survey of farm employees revealed that more than 90 percent of the rural population said they were ignorant about the contents or significance of the Presidential decree. After another six months of intensive public debate and discussion, 60 percent said they support the agrarian reforms.
There were other impediments to improved communication as well. The media had been designed to represent the government's views and control or package information according to government policy. It had to be privatized and diversified and learn to represent multiple perspectives, points of view and interests. As a result of the head start given by glasnost, the press was among the first institutions to transformed and adapt itself to the new environment. The communication infrastructure was designed to insulate rather than connect the population with the outside world, producing a system incapable of handling the large volume of telephone, fax, telex and computerized messages needed for commercial linkages with other countries.
Technical support to agriculture was another weak point. Under the old system, agricultural research institutes had little direct contact with producers. Each Sstate and collective farm possessed its own highly competent technical staff. Research scientists reported their findings and recommendations to officials in the Ministry of Agriculture, and based on this information instructions were passed down to farm managers for implementation. The creation of many independent farm enterprises destroyed the old system of indirect linkage between research and field practice, but left nothing in its place. Research institutes faced drastically reduced budgets and had no direct customers for their findings. In the absence of an agricultural extension service, small farmers operating without the scientific resources of the large farms found it difficult to obtain the technical information which they required.
Under the old system, emphasis was placed on education and training in technical subjects with little attention to marketing, organizational, commercial and interpersonal skills, which are essential for competition in the global market. Education reflected this bias with its emphasis on technical competence, cooperation and obedience rather than creative thinking, a capacity to motivate oneself and others, independent initiative and entrepreneurship. The highly publicized appearance of smiling Russian servers at the Moscow MacDonalds restaurant underscored the difference in attitudes toward customer service and satisfaction under the old and new systems. As a corollary of the communist orthodoxy, employees had come to consider the enterprises they worked in as existing primarily to meet their needs and only secondarily to serve the needs of society or customers. A reversal of this attitude has been extremely slow and difficult to achieve.
Lack of legal and public support for private land sales, lack of information on markets and prices, lack of systems and skills in marketing, an inadequate rural banking system, lack of an agricultural extension system--these and a host of other institutional requirements slowed or prevented the transition in Russian agriculture. Outdated and inappropriate attitudes regarding land sales, private ownership, prices, profits, risk, enterprise, quality, customer service--these and many other basic social attitudes impeded the progress of the transition. Even if the macro level legal and economic reform had proceeded far more smoothly and swiftly than it did--it was, in fact, made far more difficult by the lack of preparation at the micro level--these institutional and attitudinal inadequacies would have prevented the new macro policy from generating the anticipated results. One of the most important lessons of the Russian experience is the necessity to give equal, if not greater, importance and priority to creating favorable conditions for transition at the level of social institutions, individual attitudes and skills.
Planning and Coordinating Transition Strategy
Quite understandably, seventy years of totalitarian government had generated such powerful resentment against strong government, that by way of reaction the society sought for solutions which did not require government to take a highly visible, leading role. In fact, the market had in some sense come to be regarded as an alternative to government intervention that could make all the necessary decisions needed to generate the transition, establish a viable new system and then guide its functioning. We have already argued that this is not the case, that government plays a very active role in all successful, rapid transitions.
The absence of strong government has severely complicated the task of effecting a successful transition in Russian agriculture, because in addition to making a shift to private enterprise, important sectors of Russian agriculture need to be restructured. A basic principle of action under the old system was to locate livestock and crop production in all major regions of the country, regardless of climatic and economic suitability. As a result, large livestock herds are situated in high cost regions due to the need for heating fuel and for transport of animal feeds over long distances. Under the old system, the differences in cost of production were offset by different rates of government subsidy, enabling all farms to compete on an equal footing.
Under the new market system, the subsidies were removed and livestock production in many regions became unprofitable. As a result, there was a substantial reduction in the size of livestock herds during 1992 and a consequent decline in availability of meat. A planned initiative by the government could have relocated these herds over time, without detriment to the food supply or the livelihood of the rural population. Whereas the sudden readjustment precipitated by price liberalization resulted in avoidable hardship and loss of productive assets. Some foreign economists have argued dispassionately that such a realignment was necessary and that meat consumption in the country was in any case excessive in comparison to GDP. But these arguments ignore the principle fact that transitions are first of all social changes that require the continuous support of the population. Drastic initiatives that generate high levels of anxiety and are widely misunderstood by the people raise serious obstacles to the entire process of reform, no matter how much they can be justified by statistical analysis. Only a very well-conceived program of public education could hope to change these expectations and convince the public that the earlier pattern was an anomaly, which cannot be supported by the present economic strength of the economy.
Restructuring is also needed to address the problem of animal feeds in the country. Production of high protein crops likesuch as soybean is quite low in the country. The widespread use of high grade foodgrains as animal feed necessitates massive imports of wheat to supplement domestic production. This situation arises from the fact that farm managers prefer to rely on the grain they grow as feed material, rather than depend on state deliveries of imported protein feed supplements. Although market forces will eventually rectify this imbalance, a concerted effort by the Sstate to increase domestic production of soya and leguminous grasses combined with a major shift in food import policy could correct it much sooner and at much lower cost. The dismantling of state organizations and inadequate policy coordination among still functioning agencies makes this difficult under present circumstances.
Like any chemical reaction, Ssocial change is facilitated and accelerated by initiatives to introduce or demonstrate new patterns of activity and behavior appropriate to the goals of the transition. This was the principle behind the 100,000 field demonstration plots which ushered in the Green Revolution in India in the mid-1960s. The Government of India established these plots on farmers' lands to demonstrate the higher productivity and profitability of hybrid varieties of wheat. Belying the great skepticism that uneducated Indian farmers would accept the newnovel intensive and expensive cultivation technology, it took less than five years for the new varieties be become widely accepted, compared with ten years in North America. At a time when experts from the FAO projected a mere 2 percent annual growth in foodgrain production in the country, India achieved a fifty percent increase within five years.
Private enterprise was absent in the USSR for seven decades, so few people had any exposure or realistic idea of what it entailed. In the early days of glasnost, at a time when private enterprise and land ownership were still unlawful, President Gorbachev personally supported the establishment of a pilot program to demonstrate the feasibility and economic benefits of private agriculture in one Russian district. The limited success of this model won numerous supporters for the idea of privatization. But, formidable obstacles prevented rapid development of small-scale agriculture, including the absence of small farm machinery, on farm storage facilities, local wholesale markets for purchase of inputs and sale of produce, and local farm service centers for equipment repairs.
Far greater results were generated by another catalytic initiative in agriculture introduced during the last years of the Soviet Union, whichIt has received relatively little attention and recognition outside the country,. This initiative, whichbut it possessed all the essential characteristics of a successful social catalyst., It was the distribution of small private agricultural plots to urban and rural households. Since food shortages in the urban areas was the most pressing problem and greatest source of anxiety for the population, the government took steps to distribute small private plots so that highly vulnerable urban families could produce at least a portion of their own food requirements. In 1991 and 1992, the number of rural garden and house plots owned by urban families increased from 13 million to 29 million. Although these plots averaged only .05 hectares in size, they accounted for approximately 20 percent of the potatoes, 22 percent of the vegetables and 30 percent of the fruits produced in Russia in 1992. The private land allocated to rural households, most of whom already farmed small private plots in addition to their work on the collective farms, was also expanded significantly. By the end of 1992 there were over 18 million of these plots, averaging 0.40 hectares and covering a total of 5 million hectares. These rural subsidiary plots, as they are called, accounted for 66 percent of the potatoes, 30 percent of the vegetables, 50 percent of the fruits, as well as 25-30 percent of total meat, milk, wool and egg production in the country.
The expansion of tiny farm plots has gone largely unnoticed, because it seems incongruously incompatible with the move toward an efficient, modern market economy. Yet it has been perhaps the single most successful initiative of the reform program and should be considered a model for catalytic initiatives. Transitions require changes in behavior, and it was very difficult for the population to respond in any positive way to most of the reform initiatives, because few opportunities were apparent or seemed accessible to most people. The private plots were an exception. In a country where the population had learned to be highly dependent on government for just about everything, virtually every citizen was given an opportunity to improve his own standard of living as an auxiliary activity. Moscow and other large cities have a deserted appearance on weekends during the growing season, because so many residents have fled to the countryside to work or relax on their lands. The plots also gave people their first experience with private ownership and private enterprise and helped generate much greater support for privatization in agriculture. This initiative also fulfilled the intense aspiration of the urban population for prestigious country dachas, enabling them to build small summer houses on the land alongside their garden plots. While only 7 percent of the rural population said they had plans to establish private farms, nearly 80 percent wanted more land for small private garden plots.
In sum, this successful catalyst touched a vital pulse of the people and encouraged people to take positive initiative to solve their own problems and fulfill their own social aspirations. It gave them a first experience of the market system and helped generate supportive social attitudes toward privatization. It also helped deal with the most pressing problem of the transition period by augmenting food supplies to the urban population at a time when food distribution systems were in disarray.
The huge crop losses incurred by Soviet agriculture have been widely publicized around the world. These losses vary by crop and region but average between 25 to 50 percent of total field production for major crops. Out Oof Russia's production of over 100 million tons of foodgrain, 30 to 40 million tons is written off annually as crop loss. Losses of potato losses range from 30 to 50 percent of the harvest and of vegetables from 30 to 40 percent. The country's annual imports average 30 million tons at a cost in excess of $3.5 billion. A reduction in crop losses could completely eliminate grain imports, which represent a severe drain on the country's foreign exchange reserves.
The reasons commonly cited to explain such enormous losses include: poor quality of seeds and planting material, the lack of sufficient local storage capacity, inefficient and inappropriate equipment for planting, harvesting, storage and processing, poorly motivated farm workers and shortage of labor at harvest time. Demonstration projects established by Dutch agri-business companies proved that losses on potato could be reduced from 35 percent to under 5 percent in one year. There has been much discussion and frequent announcements about plans for conversion of defense plants to produce the necessary type and quality of equipment for crop production, storage and processing to deal with this problem. But there is little evidence to indicate that the losses have declined.
The problem of crop losses arises, and is perpetuated by the structure of Soviet agriculture and can be efficiently dealt with only by changing that structure. That is why a remedy was elusive under the old system. But the shift to a market system has not improved the situation This failure arises from the fact that a viable solution requires concerted and coordinated activity by government, industry and agriculture at a time when each is now operating in isolation from the others. Industry, including defense plants looking for conversion opportunities, refused to take the risks involved with producing new equipment without first having assured orders from government, which it was accustomed to rely on as its primary customer. Government was in the process of relinquishing responsibility and control over economic activity and refused to directly to support the program. Agriculture was fragmented into thousands of independent enterprises without any organizational means for concerted action. High rates of inflation and soaring prices for farm inputs had also eliminated the savings of farm enterprises and placed the cost of new equipment far beyond their capacity.
The main elements of a viable plan to reduce losses for foodgrains, vegetables and potatoes has been put forth by the Dutch cooperative agri-business firm, Cebeco, and the plan has been endorsed by a national conference on agricultural transition. The aim of the plan is to reduce food imports to zero and eliminate food shortages within 3 to 5 years. The plan requires acquisition of foreign production and storage technology, but depends only marginally on import of equipment, most of which can be manufactured domestically. The hard currency requirement is minimal. But the plan does require a leading role by government and financial assistance to farms.
The plan contains specific recommendations for major field crops. For foodgrains, development of specially designed, on-farm storage silos to handle 25-30 percent of production can result in an equal savings of crop, and thereby solvinge the entire problem of grain shortages. For vegetables, the plan calls for domestic seed multiplication of foreign hybrids, production of wooden storage containers for filling at the field level to eliminate crop damage, and establishment of small, intensive Dutch-style vegetable farms in the private sector. Losses of potatoes, which are a staple of the Russian diet, can be brought down to under 5 percent by large scale production of improved varieties of seed potatoes with imported chemicals and machinery, distribution of healthy seed potatoes to private garden plots, and gradual replacement of existing potato planting and harvesting equipment with new domestically produced models based on imported design. In order to be effective, the plan needs to be supported by a massive public education campaign on use of new technology to eradicate losses combined with demonstration plots on both large scale and small private farms throughout the country.
Transition in Russian Industry
The problems of transition for Soviet industry closely resemble those of Soviet agriculture in most respects and effective solutions must follow similar lines. But the pattern of Soviet industry presents an additional problem which is very difficult to resolve, especially by reliance solely on market forces. The pattern of industry is based on a very high level of interdependence among different factories in different regions and republics. Typically, manufacture of any single product or component was concentrated in one or a few production facilities in the country. Often the suppliers and customers were situated in different republics and in some cases in other Comecom countries. Giant equipment manufacturers had to rely on other giant component manufacturers for critical inputs. Textile mills near Moscow depended heavily on supplies of cotton from Central Asia and sold their cloth to garment factories in Bylerussia, Ukraine or Czechoslovakia.
The breakup of the Soviet Union and the failure of the Commonwealth of Independent States that replaced it to preserve a common currency, common tariff union, and the increasing demand for hard currency trade between the republics broke the close ties between enterprises, leaving suppliers without customers in some cases and customers without suppliers in others. This was a major factor in the decline in industrial production that afflicted all of the republics in 1992, whichit was 19 percent in Russia and averaged 17 percent for the whole CIS, reaching a high of 34 percent in Armenia and Tadjikistan. The problem of industrial integration was, of course, well known, but the magnitude of the losses that would result from breakup of the unified economic zone was never accurately quantified and employed to influence policy-makers. Economic transition became a major casualty of political fragmentation.
The industrial transition was complicated by another non-economic factor, which took economists by surprise and severely undermined efforts to control monetary expansion. Under strong pressure from the international lending community, in the first half of 1992 the Russian government deregulated almost all industrial prices, withdrew subsidies and budgetary support to Sstate-owned enterprises, and put a tight clamp on central bank credits in an effort to reduce the fiscal deficit and stop monetary expansion. It was widely anticipated that Sstate enterprises would be forced by these circumstances to cut production and lay-off large numbers of surplus workers, perhaps as many as 10 million before year end, in order to avoid bankruptcy.
The plan failed to achieve the anticipated results. In response, industrial production dropped rapidly during the year. Mounting inflation generated increasing pressure for printing more and larger denominations of money, which government refused to do. But the tight fiscal and monetary discipline could not be sustained. The plan failed to take sufficiently take into account social and political realities within the country. The strong social tradition of guaranteed employment in the country made enterprises far more reluctant to fire excess staff that their counterparts in the West. The plan also overlooked the close cooperative ties between state-owned enterprises, which had been accustomed to supporting one another as though they were divisions of a single company, rather than independent companies or competitors. Rather thanNot wishing to curtail production and discharge workers, enterprises responded to the sudden constriction of credit by issuing credits to each other, so that suppliers could continue to produce and their industrial customers could continue to purchase inputs for their own production.
As a result, inter-enterprise credits grew phenomenally within a few months to over one trillion roubles. Mounting pressure from industry, which galvanized into a powerful political lobby in response to this situation, finally forced government to back track on its policy and release new credits and currency notes. Inflation soared in response and monetary instability was further aggravated.
Institutional Needs for Industrial Transition
Efforts to accelerate the course of transition should be based on a clear vision of the end goal of the process, and a minute detailed perception of the component changes needed to bring it about. Otherwise, only major policy changes can be introduced and the rest left to the 'wisdom' of the market. There is no evidence to suggest that 'wisdom' will arrive at anything like the shortest, least cost or most effective solutions. Rather the experience of other countries suggests that comprehensive and detailed industrial or growth strategy is far wiser than the market. How, for example, are huge monolithic Russian enterprises, including high cost defense plants, employing out-dated technology expected to restructure themselves overnight into efficient, modern corporations producing new types of products with new technology and equipment and competing both domestically and internationally with far more sophisticated Western enterprises? Tight credit, falling demand and the declining value of the ruble certainly exert pressure on these enterprises for change. But without the knowledge, skills, resources and a clear vision of the alternative, that change can only be based on a haphazard, clumsy, wasteful and painful process of trial and error.
A more gradual, planned restructuring, like the privatization efforts of many other countries, with appropriate micro-level institutional support, would have far higher chances of rapid success. In a country where public information is limited, it is difficult for new businesses to access market demand needed to make decisions on what and how much to produce. Simple commercial systems need to be created--even such basic systems as telephone listings of sources of products and services that are found in every telephone directory in the West. If trade is to develop between private enterprises, credit checking agencies and collection agencies need to be established. For enterprises which do not qualify or cannot compete for limited bank resources, financial institutions offering hire purchase or leasing of industrial and consumer goods are necessary.
The market reforms were expected to lead to a rapid proliferation of new small enterprises. This has happened to some extent. One district near Moscow recorded establishment of 400 new enterprises within a six- month period. But, to the disappointment of district officials, most of these were small shops, construction firms and trading companies, not manufacturing firms. Small business development centers, business incubators, industrial estates, and venture capital funds are needed to encourage entrepreneurship. Some large industrial enterprises have begun leasing portions of their space and equipment to groups of employees, who form small businesses for production of equipment and components. This practice should be encouraged and popularized as a natural step toward privatization.
Transportation is a major bottleneck to development of a market economy in the former USSR. Under the centrally planned system, most freight was hauled by trains over main routes to large cities for distribution in bulk by huge government procurement agencies. Under the market, millions of small producers and consumers must be free to buy or sell wherever the price is most attractive. This requires a vast proliferation of small goods transporters in the private sector, which are rare in the country today. The large freight transport monopolies have to be replaced by entrepreneurial companies with small fleets competing for freight business. Privatization of transport vehicles to small business can be expedited through a massive leasing program. There is also need for continuing public investment in roads.
Changing Skills and Attitudes
The very concept of finding a need and filling it is foreign to the mentality of the country. In a country where private entrepreneurship was extinguished seventy years ago, managerial, financial and marketing knowledge and skills are extremely limited. The example of a Russian sweater manufacturer who wanted to export his product for five times the domestic price, because he knew that sweaters sold in American stores for that much indicates the magnitude of the change in mentality required to adjust to the new system.
Experience in former colonial nations, where entrepreneurship was also stifled for a long period, indicates that a profound change in attitude is necessary before people will risk leaving or seeking salaried and pensioned jobs in favor of self-employment, even when the salaried jobs are scarce or unavailable. Such a basic change of attitude, which normally requires a change of generation, will not happen by itself. Greater economic hardship brought about by the pressure of market forces is more likely to result in political and social upheaval than in economic development, which, in fact, it has in parts of the CIS. Changes in social attitudes can only be accelerated by a massive program of public information, education and demonstration spanning several years.
The USSR possessed one of the most extensive and sophisticated scientific research establishments in the world. It operated a vast array of institutions peopled by highly educated and competent scientists, who lead the world in many fields of technology. These institutions proved more adept at inventing new processes than the leviathan enterprises of the Soviet economy were in commercializing them, so that much of their work was never utilized.
Soviet science has been one of the greatest casualties of the reform program. Severe fiscal constraints forced government to drastically to reduce budgetary allocations to research institutions, leaving most of them with little or no source of revenues to support their activities. Unlike in the West, the links between research institutes and industry have been relatively weak and the severe financial pressure on enterprises prevents them from becoming an alternative source of support for science. Some institutes have closed. Most have been forced to make deep cuts in staff. Many have lost their most talented people to foreign universities and corporations. State-of-the-art research has been suspended in mid-stream and much of it may be lost to the world, because its authors have sought employment in other fields. This problem has assumed such great proportions that a national committee of the country's scientific leaders has been formed to propose remedies.
The highest priority must be given to preserving the scientific infrastructure during the transition period. This can only be done through greater government support, at least in the short term. Simultaneously, efforts are needed to systematically to foster linkages between science and industry so that research focuses on areas with the greatest commercial potential. With the very low value of the rouble, the salary of a Russian nuclear physicist today is less than $350 per year, roughly equivalent to the average per capita income in India. The drain of scientific talents can be mitigated through a concerted effort to organize and market the country's research capabilities overseas. The economics of carrying out sophisticated research in Russia in fields such as computer science, biotechnology and genetic engineering will be highly attractive in comparison with costs in the West and permit much faster progress in fields which are limited by scarcity of financial resources. At the same time, Soviet science offers vast potentials for commercial applications in developing countries. A study done several years ago identified over 600 Russian technologies with commercial potential for India. Systematic efforts should be taken to promote research tie-ups and technology transfers between the CIS and the Third World.
Social Change in Russia
The changes leading to the establishment of a democratic government and the movement to a market economy in the former USSR are the result of factors and conditions which developed over several decades. The people of the Soviet Union have endured greater cumulative hardships during this century than any other nation. More than 60, and perhaps as many as 80 million have died in the two world wars--the 35 million casualties incurred defending the country during World War II was more than all other nations combined--the Russian Revolution and the purges that took place during Stalin's collectivization of Soviet society. After the second wWorld Wwar II, the country rebuilt itself without access to the generous external assistance that enabled Western Europe, including the axis powers, to recover rapidly and achieve high levels of prosperity
During the 1950s, the Soviet economy grew by exploiting more of its vast natural resources--its land, minerals, forests and the energies of its talented people. For the older generations that had survived two world wars and acquired education and social security under communism, this was the beginning of the fulfillment of their dream of peace and prosperity. But for a younger generation, the stifling limitations and confinement of the authoritarian system were already becoming oppressive. Nikita Khrushchev voiced the first call for reform in 1956 following the death of Stalin, but was later removed from power. The reform movement had to await until a new generation of leaders, which had been idealistic youth during the 1950s, came to positions of power in Soviet society during the 1980s. By then the younger generation, which was educated up to the highest Western standards, were becoming increasingly disenchanted with their economic and social prospects. It was these people who rejoiced at Gorbachev's call for glasnost and perestroika and who most enthusiastically embraced the movement to democracy and a market economy.
For most of themse people, the last two years have brought more political and social freedom than they ever bargained for and less economic opportunity than they possessed under the old system. Their eagerness for a better future has been frustrated by a lack of understanding, skills and concrete opportunities to improve their standard of living. Those who can, including some of the finest talents in all fields, are going overseas in search of opportunity. Those who cannot or will not leave are learning to cope and some to succeed grandly. Scientists are converting research labs into factories. Farm workers are becoming agri-businessmen. Those who speak foreign languages are selling their translation skills for premium prices. One group of former defense researchers isare now operating the largest private pharmaceutical company in Russia producing genetically engineered drugs for domestic and export markets.
Levers for Development
Thus far we have been examining the essential enabling conditions--political, economic and social--for rapid transition. But economic development does not occur unless along with opportunity there is also an aspiration, an urge, a motivating desire that can be fulfilled by a change in economic behavior. In spite of copious evidence from both developing and developed countries, it is widely assumed in economics that opportunity for greater income is a sufficient incentive for greater economic activity, both for individuals and organizations.
Prior to its breakup, the Soviet Union presented a clear case in which this assumption did not hold true. Throughout the 1980s, government had employed many different types of economic incentives in order to spur greater production and productivity in Russian factories and farms. The net result was a tremendous rise in individual incomes but only marginal improvements in productivity. The rise in nominal incomes generated increasing demand for consumer goods which were in short supply. Since prices were held constant, the shortages became worse until the shop shelves were empty. There was nothing on which the Russian people could spend their accumulated earnings, so savings increased. By late 1990, the savings being held by the population, what economists termed the 'rouble overhang', exceeded 500 billion roubles. Since there were no goods or services that could be purchased in exchange, the people came to regard their savings as value-less and ceased to be motivated by the lure of higher incomes.
The market reforms of 1992 changed this situation quite suddenly. Literally overnight, the freeing of retail prices led to a ten-fold increase in the cost living and in comingsucceeding months the increase reached fifty-fold. All the people's savings were suddenly needed just to maintain their former standard of living. Earning more roubles became essential for survival. Economists anticipated that this situation would provide a genuine economic incentive to motivate the work-force, and it did. People became less insistent on their prestige and convenience in order to earn additional income. Aerospace engineers began driving taxis in their spare time. Economists became consultants to business. Agricultural scientists offered to help farmers raise productivity. Research institutes began leasing scarce office space in the cities to private entrepreneurs and foreign companies.
But it is not just economic insecurity and physical need that is driving change in Russia during the transition. More powerful social forces are at work. Muscovites and foreigners are often baffled by the rapid proliferation of luxurious shops in the city offering world class clothes and cosmetics at sky-high prices. They express irritation at the number of advertisements by Western consumer goods companies on Russian TV, offering products far beyond the purchasing power of the people. It is widely assumed that these shops and ads cater only to the small percentage of newly rich in the country. Therefore they are looked upon as symbols of vulgar Western consumerism.
But, in reality, there are many ordinary Russians standing in line to buy French lipstick or Italian boots. These products do not meet a material need of the population, but they do satisfy a social aspiration for greater enjoyment, luxury and prestige. Comparative examples are Indian villages straining to purchase fancy clothes, wrist watches and motor scooters, or middle -income Americans exceeding their economic means to buy prestige cars, time-share resorts and exotic vacations.
The authoritarian system in the USSR did not give much room for individual initiative or a sense of responsibility. Everyone was dependent on the state and on the higher levels of the government, communist party and organizational hierarchy. Today's youth crave not only political and social freedom, but also an opportunity to assume responsibility for their own lives. This too strongly motivates them.
The lure and love of travel is common to all levels of society in all countries. It is an expression of freedom, a means of education, a form of adventure and discovery that is as appealing to the uneducated villager on an outing to the big city as it is to the educated visiting foreign lands for the first time. It may be that for a population cut off and isolated from the outside world--many parts of the USSR were off-limits even to Russians and permission for foreign travel was tightly regulated and difficult to obtain--travel, and particularly foreign travel, may be the ultimate attraction and the most powerful stimulus for economic development.
Enjoyment, recreation and prestige can be more powerful motivators for economic activity than mere physical need. The creation of new opportunities for fulfilling these higher social aspirations in societies where such opportunities are limited can act as a powerful catalyst to stimulate development and accelerate transition.
Specific Recommendations for Russia and other former Soviet Republics
1. Generating Consensus for the Transition Program: The transition should be an expression of the will of the society for change and it should help generate greater unity and harmony within the society. Thus far, the reform program in Russia has had the opposite effect, dividing interests and creating increasing resistance. Contrary to outside perceptions, most of the differences are not ideological, but practical. There are genuine doubts about the strategy being employed for the transition, even among the vast majority who now support the ultimate goal of creating a market economy. The population, with limited understanding and high expectations of what the market system will bring, is ambivalent over a program that has already generated great hardships and threatens even more severe and unimagined consequences.
Further attempts to put through any macro economic reform package will meet with strong political and social resistance unless a national consensus on the strategy is arrived at beforehand. Any program involves a set of choices over which are the most acceptable costs and important benefits. We propose that before launching a new initiative, the government conduct a public inquiry and debate over alternative packages of policies and practices. The inquiry should realistically access the expected costs and benefits of each package. After educating the public about the need for choice and the necessary costs involved, the final selection of the most acceptable package should be made by the people themselves through a national referendum.
2. Need for Macro Economic Stability: The errors in earlier efforts at adjustment and stabilization have led some to argue for a series of compromise programs that do not seriously address the imminent dangers of hyper-inflation and economic collapse. No transition strategy can be successful without first creating stable conditions for economic growth. No effort to improve agricultural production or the availability of food will be successful as long as the rouble is not accepted as a stable means of exchange. This is the ultimate justification for the insistence of the international lending community on harsh measures to stabilize the economy. If market mechanisms are not acceptable or adequate for stabilization, it may be necessary to temporarily reintroduce controls on wages and prices as an interim measure to stop the free fall of the ruble.
3. Elimination of Crop Losses: The highest priority in agriculture must be given to efforts that will increase the availability of food and reduce the need for food imports by achieving a large reduction in crop losses. The Commission recommends immediate implementation of the Cebeco Plan with the objective of completely eliminating food imports within 3 to 5 years.
4. Study Benefits Of Economic Union: Of the estimated 50 percent fall in GDP among the republics of CIS republics, approximately 50 percent can be attributed to the breakup of the economic union. Restoration of a common economic space could immediately restore most of that lost output. The advantages of cooperation between republics need to be carefully examined. A study should be conducted by a credible organization to estimate the economic losses incurred by the breakup of the common economic space between the former Soviet republics and to assess the benefits of restoring an economic union in some form. It should estimate overall economic growth and living standards for each republic over the next five years operating within and outside the economic union. This study can serve as a powerful argument for closer cooperation among the republics. The studyIt can be undertaken at very low cost by a consortium of researchers from different research institutes within the CIS.
5. Privatization of Road Transport: Transportation is an essential requirement and powerful catalyst for the development of the market system. Immediate steps are needed to expand capacity and introduce competition in this vital sector by promoting the development of private road transport companies at the national, regional and local levels. Special loan and leasing programs should be established to enable small firms and individuals to purchase vehicles and pay for them out of the revenues generated from use.
6. Development Banks: Development of private agricultural and industrial enterprises needs the support of a development banking system providing loans to small businesses in priority sectors.
7. Regional Models and Pilot Programs: Pioneering initiatives need to be encouraged to act as demonstrations and catalysts for new types of activities in the country. In a country as vast and diverse as Russia, no single model or pattern will be widely applicable. Therefore, several regions in different parts of the country, representing different economic and social conditions, should be selected for establishment of model transition programs. A study should be conducted in each region of its resources and economic potentials, existing institutions and infrastructure, current levels of skill and social attitudes regarding the market system. Detailed strategies should be devised to educate the public about untapped opportunities, strengthen the institutional infrastructure, impart needed skills, establish catalytic demonstrations and encourage multiplication of successful new activities.
8. Plan for Institutional Development: An assessment of the type and functioning of existing institutions and economic systems should be compiled to identify missing links that need to be provided to support transition to the market. Based on this study, a master plan should be drawn up for establishing the necessary institutions and systems.
9. Skills Inventory: An analysis should be undertaken of the types and levels of skills needed for transition to the market, covering areas such as entrepreneurship, management, national and international marketing, strategic business planning, finance, quality control, product development, production technology, design, and human resource development.
10. Scientific Resources: High priority must be given to developing a detailed plan for preservation of the country's scientific research infrastructure during the difficult transition period and for restructuring it so that it can be effectively integrated into the emerging market system. The drain of national talents must be stopped by a concerted national effort to exploit the country's competitive advantage in science, by marketing these capabilities internationally and, particularly, by linking up with developing countries that can most benefit and appreciate the value of Russian science and technology.
11. Study Benefits of Russian Economic Recovery on World Trade: Recessionary trends are effecting most of the world today. The prognosis in the West, especially in the European Community, is for slow growth during the 1990s. The development of Third World countries is impeded by slow growth in the industrialized nations and the collapse of Eastern Europe. What would be the impact on the world economy of a rapid recovery and economic expansion in Russia and other countries of the region? What would be the result elsewhere of further decline in Eastern Europe? These questions are of vital relevance to the entire world. A detailed study should be undertaken under the auspices of the United Nations, OECD or the European Commission to quantify the potential gains or losses to the global economy of rapid or slow progress of the transition in Eastern Europe.
Wider perspective on Transitions
The outcome of all great social transformations--of which the Soviet experience ranks in magnitude and importance with that of the French Revolution and the movement which freed India from imperialism, colonial rule, economic and cultural domination--depend on the degree to which individuals and institutions within the society have been prepared to understand, accept and respond to the new environment ushered in by the transition. Two hundred years ago the people of France were ready to overthrow the old order, but ill-prepared to create anything new, with the result that the old soon re-established itself and lived on for another century. It took India's leaders more than four decades to prepare their people for freedom, and it has taken another four to overcome the vestiges of colonial rule that prevent the country from releasing its energies for prosperity. Long after the foreign conquerors had left, colonialism lived on in the institutions of government and in the attitudes of the population. Decades of freedom and education were needed for the country to outgrow a sense of inferiority, a seeking for security, a feeling of submissiveness and complacency and to acquire a sense of pride, ambition, high aspirations and expectations, a seeking for achievement, and a spirit of risk and enterprise--and still the task is not complete.
With the knowledge the world possesses today, with the example of countless nations over the last four decades, and with its highly educated and motivated population, surely the republics of the former Soviet Union can abridge the time required and the hardship of lessons learned by trial and error to a few years. But this cannot be accomplished by sweeping remedies or hastened by overeagerness or impatience. It will require application of a profound understanding of the process of development and transition.
Development is like a chemical reaction that is determined by the variety and quantity of elements present and the conditions under which they are put together. If one essential element or condition is missing, a social transition like a chemical reaction may not take place at all. The absence of peace in war-torn Africa or freedom in the former colonial nations, the absence of social stability or an entrepreneurial class, the absence of a functioning banking or education system, the absence of the minimum necessary infrastructure for transportation and communication--any one of these may be enough to prevent transition until the deficit is made up. If even an inessential element or condition is missing, the process of transition may be require many times longer than would otherwise be necessary. Lack of information, lack of education, lack of necessary skills, lack of supportive laws or incentives or protection against losses--insufficiency in any of these areas may be enough to slow or delay the process of change by years or even decades.
Transitions in Western Society
Society is undergoing a continuous process of multi-dimensional transition that changes both the operation and results of economic forces. Changes in social attitude to women in the USA hasve had a profound economic impact on the American economy. It resulted in a large-scale influx of women into the workforce between 1960 and 1980. Today, 56 percent of American women are in the workforce compared with 46 percent in 1960. An unemployment rate of 7 percent today is equivalent to an employment rate 10 percent higher than the same 7 percent figure two decades ago. An essentially non-economic attitude has changed the face of employment in America.
Transitions in Developing Countries
Another social phenomena, the rising social aspirations and expectations of the common man in developing countries, has been a little understood but important cause of inflation around the world. Increasing demand by the working class for the comforts and benefits of modern life has forced up wages faster than productivity, and forced governments in virtually every nation to support higher living standards through welfare measures, subsidies and deficit spending, all of which contribute to higher prices and inflation.
Finally, the prospect or lure of foreign aid has itself become an impediment to successful transition. In the 1950s, the Soviet Union managed to recover from the horrendous destruction it suffered during World War II and to embark on a period of rapid industrial growth without any external assistance. But, today, without having passed through the ravages of war, the country desperately seeks foreign support and feels helpless without it. It is right that the world community generously support successful completion of the reform process in Russia, the country which has ushered the world into a new era of peace. But, it is also right for the country to recognize the enormous untapped potentials which it possesses--human, natural and productive--rather than be distracted by the prospect of a large influx of foreign capital. Experience elsewhere shows that foreign aid rarely comes when it is really needed and never comes unconditionally. Countries that help themselves find others eager to help them after the fact. No country on earth possesses greater natural or human endowments than Russia. This is enough to guarantee the ultimate success of the transition.
Power of Social Organization
The past half century has witnessed unprecedented improvements in standards of living for most of humankindity. These improvements are widely attributed to the continuous development of new technologies and inventions resulting from the scientific and industrial revolutions of the past few centuries. Technology--in agriculture, industry, medicine, communication, transport, education and countless other fields--has certainly been a powerful driving force for human progress. Today we look forward in anticipation to further discoveries that will solve many of the problems that still oppress humankindity at the present time--methods to produce sufficient food for a still rapidly expanding population, to manufacture essential and luxury goods without further damage to the earth's environment, to eradicate AIDS and cancer and other maladies, to improve education and communication and recreational opportunities for all.
But this is not the whole story, either of our past or our future. Technology alone does not explain how we got to where we are. Nor does it cover all the untapped potentials awaiting discovery. Side by side with constantly growing scientific knowledge and constantly improving technology, recent history has also witnessed an unprecedented growth in the systems and institutions which humankindity utilizes for government, production, distribution, transportation, communication, recreation, health, and education. and virtually every other human activity.
The great social transitions of history are not just movements from one set of social systems to another. They are movements from one level of social institutions and systems to another level that is more efficient and effective in supporting human activities. The great discoveries of the future like those of the past will include new and better ways to organize people and activities for the common good. All the institutions of the market economy--stock and commodity exchanges, systems for mass production and just-in-time inventory management, industrial bench-marking, corporate research laboratories, commercial insurance, franchises, mail order catalogs, courier services, feeder airlines, private long distance telephone carriers, producers and consumers cooperatives, marketing boards and export promotion agencies, leasing, venture capital and mutual funds, credit and collection agencies, small claims courts, commodity brokers and real estate agents, international chambers of commerce, regional and international development banks, trade unions, industrial associations, industrial estates and exclusive export processing zones, common economic spaces and countless others--have contributed to the growth and development of national and global economic activity as much as improvements in technology.
It is not just great institutions that make for great changes. The innovation of a simple system can open up vast new opportunities. The system of warehouse receipts in the USA enables a buyer to verify the quantity and quality of agricultural commodities offered by a seller without ever going for on-site inspection.
Our knowledge of transitions will be complete and ourare capacity to abridge the time and costs of change will be metfull only when we have come to fully understand fully the role of these institutions and systems in society. Our ability to bring about a better future for all humanity at the earliest possible time depends on our ability to envision what new and better institutions will emerge in the coming century to solve the problems and eliminate the limitations that still encumber human activity and exchange.
General Conclusions and Recommendations
The objective of this report is to present new perspectives and strategies of global relevance and significance. We have argued that a rapid and smooth transition in Eastern Europe is vital to the political security and economic development of all countries, both developing and developed. We have attempted to set forth the basic principles of a new perspective on rapid transitions such aslike those taking being attempted in Eastern Europe, based on the view that transition is a multidimensional social process. Our intention in focusing in detail on the events and problems in the former Soviet Union was to provide sufficient specificity and detail to show that this perspective has very practical implications for the way we understand the problems of transition and the strategies we formulate to solve them. This section present an overview of our conclusions and recommendations for more general application.
1. The world lacks a coherent intellectual framework for understanding and dealing with radical transitions. High priority should be given to developing a fresh conceptual approach that is not encumbered by allegiance to existing theories and systems. Transitions should be regarded as social transformations, which depend on and reflect in corresponding changes in social, political, economic, and cultural spheres. Efforts to guide a multidimensional social transition through uni-dimensional strategies, particularly those limited to manipulation of macro-economic policy, are unlikely to yield the anticipated results. Even those transitions which are apparently confined to economic activities within a stable political context necessarily depend on changes in social attitudes and in social institutions which can be dealt with most effectively by assuming a wider perspective of the process.
2. Clear visualization of the before and after states of transitions, the existing system and the goals of the change, and a detailed picture of the changes that need to occur in behavior, attitudes and institutions are necessary for deriving the most effective transition strategies.
3. Transitions depend on changes in the knowledge, understanding, attitudes and behavior of the population. These changes can be hastened considerably through massive programs of public education and by widespread dissemination of information regarding new laws and policies, individual and commercial opportunities, new initiatives and success stories.
4. The success of a transition, especially in a democracy, depends on the degree to which it is supported by political parties, interest groups and the general public. Much public resentment is generated when governments fail to properly to inform the people in advance about the consequences or educate them about process of change, or when the people cling to unrealistic expectations about the effort required and the benefits they will receive. Building social consensus and commitment prior to launching new programs will minimize the friction and confrontation during implementation.
5. Creation of the right macro policy environment is essential for preparing rapid transitions. But the establishment of essential institutions at the micro level is essential for converting the right policies into right actions and right results. Efforts at the macro and micro level should proceed hand in hand in a consistent and complementary manner.
6. Rapid transitions are attempts to hasten and abridge the process of development which has occurred in other countries over many decades or centuries. Acceleration of these natural processes cannot be achieved solely by reliance on the economic forces of the market. Government has necessarily to play a central role in efforts for rapid transition.
7. The speed of transitions can be substantially increased by catalytic initiatives and well-conceived demonstrations of all sizes and types that illustrate the new types of desirable activities and document the beneficial results of the change.
8. A detailed inventory of current types and levels of skill in the society and the types and levels of skills needed to complete the transition will help identify critical gaps that need to be filled through special training programs.
9. A detailed inventory of the type and functioning of existing institutions, and the type and functioning of institutions that will be needed to complete the transition, will make it possible to design programs to meet critical institutional needs.
Working Group:Garry Jacobs - Convenor
Robert van Harten
B. S. Raghavan (Advisorr to ICPF)
G. Rangaswami (Former Vice Chancellor, Tamil Nadu Agricultural Univ.; Advisor, Planning Commission, Government of India)
Jan de Boer (CEBECO/Agricultural Cooperative, The Netherlands)
Stanley Johnson (Director, CARD, University of Iowa;
Chairman, Institute for Policy Reform, Washington D.C.)
Lance Taylor (Professor of Economics, Massachusetts Institute of Technology, USA)
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