Trajectories of Economic Transformations. Lessons from 2004 for 2024 and Beyond. Valery Kushlin

of August 1998 helped to mobilize our economy.

      The economic growth rate in 2000 was particularly significant due to the sharp fall of the ruble against the dollar after the default and a significant improvement in the foreign economic situation for Russian exports in the commodity markets, especially oil and gas, and a few other favorable circumstances. Economic growth continued in 2001—2004.

      In December 1998, inflation was recorded at 84% and in 1999 it was 36%, but in 2000 and 2001 the consumer price index fell to 20%. There was a steady increase in gold and foreign exchange reserves in the Central Bank of Russia: if in 1999 they were at the level of $12.5 billion, by the end of 2000 – $28 billion, then at the beginning of 2003 – $50 billion, and in mid-2004 – $65 billion.

      In Table 4.2, along with the data on macroeconomic indicators for the favorable years (1999—2003), a comparison of the indicators of 2003 and pre-reform 1990 is given (see the last column of the table). As we can see, the growth indicators achieved over the past 5 years are far from compensating for the recessions that were allowed during the previous period of reforms. In 2003, GDP was (in comparable prices) lower. 27% more than in the base year of 1990, industrial production by 33%, and agricultural products by 28%.

      The situation is particularly destructive in mechanical engineering (-38% of the 1990 level) and in light industry (-85%). But the fuel and energy sectors, some managers of which are inclined to present their activities as “saving” for Russia, also have nothing to be proud of, because the decline in them was significant (-13%), but at the same time there was a significant increase in industrial and production personnel. Thus, in the first ten years of reforms, electricity production decreased by one quarter, and the number of personnel in the industry increased by 1.5 times. The volume of oil production amounted to 60% of the 1990 level, while the number of employees increased by 1.9 times.

      It should be noted that investments in fixed assets remain at an extremely low level. Their volume in 2001 was 3 times lower than in the pre-reform year of 1990.

      In 2003, real disposable incomes were almost one-third lower than in the pre-reform year. Moreover, according to this indicator, the gains achieved in 2000 and 2001 did not compensate for the losses incurred in the year of default. As of 2001, the share of the population with incomes below the subsistence level exceeded 30%.

      Thus, the economic results of the entire past period, which is identified with radical reforms, do not look satisfactory even against the background of the rather favorable years of 1999—2003. Therefore, doubts that the current economic course has the necessary potential to reach the boundaries of the people’s well-being and the development of production soon, which would become compensators for the previously incurred losses in the economy, are more than justified.

      The high levels of 2000 cannot be replicated or sustained, and economic growth rates in 2001 and 2002 were significantly lower. Further trends were in fact determined by the external environment in the energy markets, which is by no means a sustainable growth factor.

      Professor Jacques Sapir, Director of the Higher School of Economics of Social Sciences in Paris, said: “After the 1998 financial crisis, Russia experienced significant growth over the next three years… This growth came as a real surprise to most Western observers. The Russian government, born out of the 1998 crisis, did not enjoy the sympathy of Western observers, who were more lenient with previous governments. Recall that in April 1999 the IMF provided for a decrease in GDP to -7% for the current year. However, the year ended with an increase of +5%. The error amounted to more than 12 points of GDP – a gap that is infrequent and unexpected for the estimates of well-known professionals. But it must be emphasized that this mistake occurred at a time when relations between the IMF and the Russian government, headed by Yevgeny Primakov, were bad, and the probable causes of the mistake must be sought in a misunderstanding34 of the mechanisms of the Russian economy.

      Sapir, like other serious experts, points to the lack of an effective investment policy as the reason for the crisis state of the Russian economy. He notes the illusory hopes of some members of the Russian government for foreign direct investment and, in contrast to this, points to the importance of intensifying investment in the private sector. “Resources derived from both domestic trade and exports,” Sapir writes, “have been only partially reinvested.” At the same time, he states that from 1994 until the financial crisis of 1998, Russian oligarchs “played big.” They “actively used their financial resources to facilitate the re-election of Boris Yeltsin, and then played the card of devaluation of the ruble on the export of raw materials, when world prices fell as a result of the Asian crisis.”35

      Balancing Ideals and Results

      Comprehending the results and the course of transformations in Russia, analyzing the experts’ assessments, we must conclude that the percentage of negative phenomena in the overall balance of the results of transformations was exorbitantly high. Russia as a state has lost almost a quarter of its territory with the richest mineral reserves, half of its population and half of its economy, assets worth more than $500 billion have been exported abroad, and our military-strategic potential has been reduced by dozens of times.

      The main destructive influence stemmed from two circumstances. First, it was the wrong choice of the conceptual basis of economic reforms and turning it almost into a religion. Secondly, from the inability (unreadiness) of society to resist the egoistic pressure of the criminals, who were increasingly merging with the authorities. Moreover, these circumstances taken together were well used by external forces interested in weakening the former political rival.

      As is well known, our “elite” did not hesitate to choose certain refined principles of the free market as a conceptual basis for economic reforms, reduced to the form of universal recommendations of the “experienced” West for “newcomers” entering the market world. But more and more well-known economists of the world are forming an opinion that the standard reform policy, recommended at a certain stage by international economic and financial institutions as a model for developing countries and countries with economies in transition, in fact turned out to be quite ineffective and clearly does not correspond to the realities and requirements of the future. This type of economic policy is associated with a set of provisions developed in the early 1990s, called the Washington Consensus, and it remains the basis for existing Russian economic programs.

      In fact, sharp criticism of the concept of the “Washington Consensus” now comes even from the circles directly involved in its development. The already mentioned Professor Stiglitz, who until recently served as senior vice president and chief economist at the World Bank, argues that the attractive simplicity of this scientific doctrine is in fact “using a very simplistic model of calculation.” He notes that these programs do not include effective financial regulation, measures to stimulate technology transfer, maintain competition and enhance the transparency of markets.

      For example, as can be seen from Table 4.3, the structure of industrial production in Russia over the years of market transformations has undergone a clearly negative shift towards a decrease in the role of mechanical engineering and metalworking and a noticeable increase in the share of the fuel industry, metallurgy, chemistry and petrochemistry. Some progress has been made in the development of the food industry, but it is taking place based on the expansion of foreign capital and is often several steps behind the world’s highest technological level. A clear degradation is observed in the light industry sector.

      The most tragic consequence of the mistakes of the economic course since the beginning of the reforms is the consolidation of the trend towards the degradation of the productive forces

34

Sapir J. Russia’s Economy in 2001: From the Satisfactory Present to the Unclear Future // Chinovnik. 2002. No. 2. P. 67.

35

Ibid. Pp. 69—70.