Book Review
Anders Aslund: How Russia Became a Market Economy

reviewed by Martin Schrenk

Anders Aslund was one of the best known foreign advisors to the Russian government in 1991-94, the most turbulent period of transition. His recent book is a record of this adventure, a personalized account that leaves the reader with no doubts about the author's loyalties and convictions. Aslund wrote the book immediately after his departure from Moscow and wrote it quickly. Not meant to be a detached academic treatise, the book aims to reach a nontechnical audience, which is both its strength and weakness.

As the past tense in the title indicates, Aslund believes that Russia has indeed crossed the Rubicon, and become a market economy. Products, labor, capital and property are allocated by markets, although-as he readily admits-often by highly imperfect markets. Aslund firmly believes that the basic institutions for a democratic regime have also been put firmly into place. His criticisms on particular issues should be seen against this underlying optimism.

While the book does not offer new analytical insights, it gives a first-hand insider report of the chaotic, stop-go process of system change, sometimes propelled, sometimes stalled by the shifting alliances and clique-fighting of an unhomogeneous leadership (which is itself constantly changing) and by shifting access of various players or groups to the President, the ultimate arbiter. Since this is the least understood aspect of transition in Russia, even the expert will find illuminating new facts to better our understanding of the confusing events in Russia and their eventual outcomes.

Old New Elite?

The role assigned to the old elite (senior civil servants, party officials, and senior managers) shows the strength and weakness of this personal approach that allows the author to characterize the old elite as rent-seeking, corrupt, criminal, vicious, and asocial, and to accuse them of large-scale theft of social property and being the principle obstacle to system transformation.

But while demonizing the old elite, the book has little to say about the ethics of the emerging, new, business elite, although the chapter on privatization reveals the author's considerable unease about how to handle this issue. For if the alleged massive theft of social property by the old elite were true, would not these same people become the new business elite, the core of the new money aristocracy? The huge and sudden accumulation of wealth in Russia certainly could not be explained by the "virtue of thrift." Last century's ruthless businessmen in the United States or the contemporary "nouveauriche" of Latin America suggest that the characteristics assigned to Russia's old elite, rather than being system-specific, are symptoms of what Gunnar Myrdal called the "weak state." The chapter on privatization refers repeatedly to the "socially corrosive distributional result" of rapid privatization. It seems that the ambiguity surrounding this core problem points to important issues not yet thoroughly plumbed by socioeconomic research.

In contrast to the new business elite, the new political elite receives considerable attention. In the author's view successful transition can only be carried out by a small minority of "reformist technocrats." He consequently rejects the view that speed and technocratic decisionmaking are by definition undemocratic. His argument might be interpreted as advocacy of authoritarian rule justified by the difficulties of establishing effective government in the absence of democratic traditions. Aslund believes that nobody above the age of 40 can understand the challenges of transition, since they have not been exposed to modern social science during their formative years. It will take decades, maintains Aslund, to train enough lawyers to create an effective Russian "culture of law" in commercial matters.

It's a Cultural Thing

In Aslund's world cultural change in the broad sense plays a central role in the transition process. While he sees rudimentary democratic structures and the basic market institutions as now formally and firmly in place, he still considers the state as inherently weak because of the fragility of the new culture and the tiny size of the technocratic elite. He therefore proposes "far-reaching deregulation and laissez-faire" economics as the only feasible interim solution, using the analogy of developments in Western Europe and the United States during the nineteenth century. It is not clear whether this proposal is meant to exploit the institutional void boldly by letting loose entrepreneurial activism.

Throughout the book, particularly in Chapter 6, privatization is pronounced the real success story of system reform. Aslund's criterion of success is apparently the share of firms that have been privatized under one or the other option of the Privatization Law (or the share of workers in such firms). The relevance of this formal criterion for success or failure of the ultimate purpose of system reform-emergence of a vibrant market economy-will undoubtedly be questioned by many readers. But But Aslund himself recognizes that the legal act of privatization is inconsequential, in the absence of efficient primary and secondary securities markets, and an efficient and liquid banking sector ready to provide long-term financing.

Aslund concludes with an excellent chronology of events since the beginning of the transformation but fails to explain why the estimated cumulative contraction of GDP reached 33 percent in 1990-94 (table 8-2), although employment declined by only 6 percent (table 8-1). It is possible that either productivity (output per man-hour) or the average number of active man-hours plummetted, which would suggest burden sharing among workers.

Alternatively, a large number of workers could have been unemployed in fact but counted as employed. At any rate, the differences between output and employment trends is clearly an important issue for assessing progress and success of transition.

Searching for a Threshold

Most observers, including Aslund, seem to agree that transformation is not sustainable politically unless the accompanying social costs are kept below a critical threshold. While this level cannot be determined through economic analysis, extension of the qualitative argument to an explicit cost-benefit analysis would be feasible in principle but has never been tried.

Aslund offers some interesting observations for such an analysis. According to his evidence, in 1994 real wages were only 10 percent less than in 1987, although an adjustment for improved selection of consumer goods and the end of a shortage economy (and of long lines) brings the margin down further.

But the comparison of costs and benefits should also consider the cutback or elimination of earlier free, or inexpensive, services. The balance is further complicated by the implications of shifts in income and wealth distribution, accompanied by rapid privatization. Aslund deserves credit for addressing this issue,which has been ignored or dismissed by most authors.

Anders Aslund's, How Russia Became a Market Economy, is published by Brookings Institution, Washington, D.C., 1995, 378 p.

The author is a senior associate at the Carnegie Endowment for International Peace and economic advisor to the Ukrainian government. He is professor and director of the Stockholm Institute of east European economics at the Stockholm School of Economics.

Martin Schrenk is Economist in the Transition Economy Division, the World Bank.