Russias industrial sector is outdated and antiquated, and thus produces a surplus of goods neither wanted nor needed by the R ussian people. Its decline, therefore, will free scarce resources for new private sector development in Russias highly underdeveloped service and retail trade sector. This will mate the types of goods and services needed by Russian consumers, as well as t h e capital needed for the development of modern high-tech industry and Western-style free market prosperity Russias unique history and culture give it an inhospitable environment for the development of Western-style entrepreneurial capitalism.
This is not true Russias history and culture, to be sure, have created problems unique to Russia that make the establishment of a free market economy there difficult But this has been true in all countries that have embraced entrepreneurial capitalism.
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Russias problem s may be more intractable than most, but they are not insurmountable In fact, before the Bolshevik takeover in , Russia had one of the worlds fastest growing capitalist economies. They affect the political c l imate not only inside Russia but in the West as well.
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Western journalists adopt these myths and spread them in their coverage. It is very important, therefore to debunk these myths, not only to advance reform inside Russia but to develop in the West a pro p er understanding of Russias problems 2 1 Myth 1: The policy of radical economic shock therapy has been tried in Russia Russias economic reform program is regularly depicted by the Western media as a hastily implemented and break-neck dash to a free-marke t economy.
Russia, so the argument goes, is attempting to make the transition to capitalism in one huge leap by means of shock therapy in which market conditions are imposed forcibly across the entire economy. The Russian government supposedly has a sink-o r -swim attitude toward a bewildered citizenry and the ill-prepared state-owned industry alike. According to those who hold this view, the tremendous political and economic difficulties produced by shock therapy have only deepened economic failure in Russia.
The pain, they say is not worth the cost because no prospects for success m in sight. What Russia should the market in favor of a more balanced process that is less costly to industry and the public I instead attempt to do, it is argued, is to moderate t h e speed and scale of its move toward I Russian Reality. Russias economic difficulties, however, are not caused by shock therapy. Quite the contrary: they result from the governments failure to adopt a truly radical and comprehensive economic reform progra m. In many mas-control of the money supply, agricultural reform, and privatization, for example-there has been far less structural change than is even minimally necessary for the functioning of a market economy.
Far from sweeping away the restrictions that impede Russias private sector the government instead has erected many new impediments over the past year. Even some of Russias liberalizing programs have been cut back or modified because of their perceived negative effects on the economy. The result has b een a package of half measures, few of which have achieved their stated aims, and which collectively often have produced little but chaos.
Shock therapy cannot be said to have faiM because it has not yet been med In some areas, there has indeed been exten s ive change. Take, for example, price liberalization-the freeing of prices from government control.
In January , the Russian government launched its economic reform program by freeing prices on 90 percent of goods and services. But price liberalization is only one aspect, albeit an important one, of a comprehensive economic reform program.
A free-market economy after all, is comprised of much more than f-ree prices. To function effectively, free prices must exist in the complex environment of a free mar k et, which requires private property private businesses, and the soft infiastructm of basic laws and institutions to facilitate 1 David M. December 16,, p.
myths modeling in psychology and marketing russian edition Manual
This assumes, of course, that the government had, in fac t, adopted a policy of shock therapy which allowed for the working of unbridled market forces. This has not. Foreign Policy, No. Among these laws and institutions are legal ar rangements governing ownership, corporations, labor, pensions, bankruptcy, banking monopolies, and taxation. Yet legal refm and privatizrition so far have proceeded s lowly.
The Myth of Mentalizing and the Primacy of Folk Sociology
The Russian legal code, for example, still classifi s a significant degree of entrepreneurial activity as crimi nal conduct punishable by law. Since no clear right of land ownership yet exists, more than 90 percent of the farm land is still owned b y the state, as are more than 90 percent of commercial and industrial properties.
Significant tariffs and other barriers to foreign trade and investment remain in place. Private-property rights lack adequate legal row tion. Less than 3 percent of the state housing stock has been sold off to residents. Domestic trade is still largely regulated and restricted by the state.
Small-scale privatization has yet to get off the ground in most of Russia? And measures adopted by the central government to promote econo mic reform often are ignored by local and re gional governments. Mareover, not all prices have been freed from government control. Indeed, the prices of some of the Russian Federation's most important commodities, most notably energy products such as oil, remain fixed at far below market levels. The price of oil in Russia for example, is only 20 percent of its world market price.
Yet, because oil is a vital part of a modem, industrialized economy, price controls on it and other energy products have led to gross price distortions throughout the Russian economy. Price controls on oil and energy have proved especially costly since energy exports are the single largest source of Russian hard currency earnings and government revenues.
Yet because of price contr o ls on energy products, incentives to produce are lacking, leading to a 30 percent decline in energy production since B John D. C Fall According to Sullivan, laws that criminalize entrepreneurial activity are by and large not enfarced today, even though they lire on the books Perhaps, but Russian reformers a nd entrepreneurs still complain of harassment by state officials and insist that not a small number of enmpreneurs are legally punished for legitimate entrepreneurial activity, often by regional and city governments that are less reform-minded than the Ru s sian central government and that often solicit bribes which make the at of entrepreneurship prohibitive.
Laws against private-sector initiative could well take on a new life, moreover, in the event of a hard-line crackdown on the Russian "mafia which offi cials typically construe to include honest and dishonest enmpreneurs alike.
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C November According to the International Finance Corpor ation, there are between , and , smaU shops restaurants, retail-trade outlets and the like in Russia, less than 50,OOO of which have thus far been privatized. Most of the small-scale enterprises that have been privatized, mover, are located in only a few major cities such as Nizhny Novgorod, Moscow, and St. Perhaps the most prominent accomplishment is that Russia has cleared the formidable psychological hurdle of acce p ting the necessity for a transition to a market economy. Still, the fact remains: the government has not yet implemented a comprehensive and far-reaching economic reform program.
The Russian economy has been "shocked" not by moving too quickly toward a fr ee market, but by moving too slowly I Myth 2: Radical reforms have impoverished the Russian nation. What has impoverished Russia is not radical economic reform but a lack of radical reforms.
Exploding the Myth About Economic Reform In Russia
The old command economy is disintegrating, yet a market economy is not rising fast enough to take its place. For example, anti-reformers often blame Yeltsin's price liberalization program for much of Russia's economic misery. In January , the Russian government freed prices on 90 percent of goods and services. Thi s caused a one time price hike of percent, which, it is alleged, impoverished millions of Russians standards.
It resulted in a rapid increase in the supply of goods and services, and largely eliminated most shortages. It also has sharply reduced the le ngth and number of queues. Moreover, because there are fewer shortages from which black market entrepreneurs can profit, suppliers in Russia's informal sector increasingly have been pressured by the market to lower their prices. Price liberalization, there fore, has made Russia's growing entrepreneurial sector more accessible to consumers and moxt responsive to their needs.
What has impoverished millions of Russians is not radical reform but hyperinflation which has resulted from the overnment's failure to adhere to a sufficiently radical and far-reaching reform program. Russian hyperinflation-now running at a rate of more than 50 percent a month-in turn has been caused by the government's continued support of inefficient state enterprises through increased subsidies and easy credits.
The record is clear in this regatd. During the first quarter of , the government tried to rein in spending to curb inflation and give the ruble a stable value. After the initial, one-time price hike of percent in Januar y caused by price liberalization inflation was brought gradually down to about 10 percent a month by late spring.
But the government reversed course in April when it substantially increased subsidies and loans to state-owned industries to shield them from market pressures. As a result, the budget deficit rose from 1. Spending substantially increased again during the third and fourth uarters of , t hereby driving the quarterly budget deficit to 15 percent of GDP.
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This was compounded by the explosion of easy credit to these In fact, however, price liberalization has had a positive effect on Russian living gil Q 7 According to a survey done for the Wa s hington Post by the independent Moscow-based Center for Marketing Research, 73 out of every 10 Russians have gotten poorer over the past two years. Their average purchasing power is just 42 percent of what it was in Moreover, "the average Russian fam i ly now spends 75 and 80 percent of its income on food.
Russias runaway inflation has proved costly for all social classes because it has sharply reduced the value of the ruble, which has declined in value against the U. The collapse of the ruble has been a great impediment to c ommercial exchange and to private-sector entrepreneurial activity Indeed, Russian entrepreneurs increasingly are divesting them selves of their rubles and embracing hard currencies, particularly the dollar. But the dol lar and other hard currencies in sho rt supply in Russia, and the government has taken measures to restrict their use.
Consequently, there has been a rise in barter exchange, which is far less efficient and productive than using money and far less conducive to economic growth and develop ment If present trends continue, the inflation rate in Russia for will be more than 5, percent. Although inflation adversely affects all social classes, its burdens are most pain fully borne by the poor and the elderly pensioners, who axe the least eq u ipped to deal with the devaluation of their savings and wages.
The reason: The poor devote a far greater percentage of their wages to the purchase of essen tial goods and services such as basic food, clothing, and housing. Among the poor, pen sioners and those with fixed incomes also suffer because they tend to be elderly and thus less able to adapt to theunfamiliar workings of a market economy, and therefore less able to supplement their income through private-sector entrepreneurial activity have tried shock therapy-and the results have been far from impoverishing the na tion. Unlike Russia, Poland and Czechoslovakia enacted such far-re a ching economic measures as rapid price and trade liberalization; privatization, particularly of small shops restaurants, and retail-trade outitits; legal and fiscal incentives to spur new private-sector production; and tight control of the money supply.
And inflation in Poland and the Czech and Slovak Republics is but a fraction of what it is in Russia. For example, last year the general inflation rate in Poland was less than 50 percent and in Czechoslovakia, no more than 25 percent. In Russia, by contrast, inflation now is running at a rate of more than 50 percent a month.
As for unemployment, it has proved more troublesome b u t has yet to exceed 14 ercent in Poland, 13 percent in Slovakia, and 4 percent in the Czech Republic.