Russia

1. Russia Вы действительно хотите, чтобы я понял экономики? (You really want me to understand Economics?)

2. Planned v market-based • Planned = command economy • Constructed acc’d to Marxist/Leninist ideology • Designed to transfer production from private to public ownership • Began after the Russian Civil War (1920) with forced collectivization of farms by Stalin • and then Lenin

3. Capital belongs to everyone and no one • Since there would be no “owner” class (capitalists) all property would belong to the working class who would thus be the owners • Getting rid of private property = nationalization of all forms of property

4. Forms of Property • State owned firms Heavy industry and regional firms Company towns • Budgetary institutions Universities, etc Look at page 104-105. What problem can you see with funding and this group? • Cooperatives Primarily agricultural Company towns

5. State and regional firms State owned firms under national-level ministries control: heavy industries Regional firms under control of local governments Economist Janos Kornaisays this is a meaningless distinction since the local governments were under the control of the central government anyway (104). AND “Servility and a heads down mentality prevailed” among managers and workers (106) because there were no real incentives to be productive.

6. Collectives created by Stalin in the 1930s • Initially to ensure a reliable source of grain (remember the French Revolution?) • Believed that large farms were more efficient • Ensured that gov’t had control over peasants so they couldn’t become economically free • In Russia, grain grows YOU! • Capitalists could no longer exploit the masses (but the government could)

7. Planned / Command Economy • Dictated from the top down • Supposed to eliminate the “anarchy” of the free market • Supposed to accomplish a more equitable distribution of goods than the free market provided

8. I HAVE A PLAN!!! A bunch of them!!! And they’re all FIVE years long!!! DEVISED BY GOSPLAN APPROVED BY CENTRAL COMMITTEE ENACTED BY COUNCIL OF MINISTERS

9. ASSIGNMENT: • HOW MUCH TOILET PAPER DOES JONES COLLEGE PREP USE? • HOW MUCH DO WE HAVE TO ALLOT FOR A YEAR’S SUPPLY? • WHAT MIGHT AFFECT THE SUPPLY? • Check out the info at the bottom of p. 105-6 for help

10. System management Planners tell directorates Directorates tell individual firms Firms tell workers Workers could make suggestions, but … Bad planning led to shortages

11. So I work hard. Then what? • Incentives were ideological • Is your DUTY to the Party!

13. Planning system created serious economic distortions • Chronic shortage economy because of misestimation of supply of and demand for goods • Managers would under-report production so next year the targets wouldn’t be raised and they could make the same amount (or a little more) and still look good

14. Planning system resulted in waste • Inputs toproduction expectations Waste and shortages • Focus was on quantity, not quality Shortages led to the growth of a black market economy (remember Prohibition?)

15. Then came Gorby • General Secretary of the Communist Party, 1985 -1991 • Faced stagnant economy, inflexible systems, and no computers or robotic technology to track needs and / or improve production

16. “I KNOW!” “Let’s change the economy through perestroika (reform and reconstruction), not the establishment of a market-based, liberal system.” So how did that go for you, Gorby?

17. He DID begin reform with the economy – 4 phases • PHASE I – 1985-86: Acceleration of Investment in old infrastructure. • Failed because of bootleg liquor(p.108)

18. PHASE 2 – 1987-88: Glasnost (social openness) and Demokratizatsiya(limited governmental accountability) *Led to discussion of benefits and drawbacks of communist and market systems *Loosened governmental controls *Initiated public discussion of private property OOPS! Worsened the overall economy; managers took advantage of the situation AND Gorbachev equivocated too long and missed his opportunity to avoid “stagflation”(p.109).

19. PHASE 3: Stagflation – 1989 (not really part of the plan). Gorbachev’s: 1- Lack of certainty how to fix economy; 2- Tendency to compromise ; 3- Inconsistent policies, deepened the economic crisis. This led to

20. Reform (and stagflation) results: • Bigger budget deficits • Too much currency in circulation • High wages (fueled inflation) • Confused tax policies • No real mechanism for collecting taxes • Restrictions on developing cooperative movements • Growth of barter • Limited agricultural reform

21. LAST PHASE • PHASE 4 – Reform Alternatives (1990-91) * The Five Hundred Day Plan was developed by Gorbachev advisors and economists StanislavShatalin and GrigoriYavlinsky. It was a: Polish-style “shock therapy” which called for: immediate elimination of price controls, move to market convertibility of the ruble, privatization of property, stabilization of economy, and liberalization of trade

22. Well? Did the PHASE 4 – Reform Alternatives work? • Gorbachev advisors and economists StanislavShatalin and GrigoriYavlinsky said “Try it, Gorby! You might like it!” • Gorby said “Nyet!” and went back to conservative approach of price controls. • In reaction to Yeltsin’s growing popularity, Gorby leaned toward more radical market solutions but…

23. Too little too late -Boris Yeltsin is elected in 1991 as Russia’s first president What have I gotten myself into? Gorbachev’s erroneous focus: politics over economic necessities Gorbachev’s legacy: empty shelves and an inflation rate over 100 percent.

24. Pg. 111 – The Communist Legacy • Soviets boasted full employment in 1991, but that’s because most people were on the state payroll • Command economy had created a system of chronic shortage b/c planning info was imperfect • Soviet system did not promote technological innovation while Western tech was booming

25. Pg. 111 – The Communist Legacy – cont’d • Still no incentives = poor quality goods and in individual initiative • Soviet economy pushed to reliance on gas and oli exports when global prices were falling  • Because the state controlled money conversion rates there were two types of rubles: regular peoples’ and enterprise accounts’ – stifled foreign trade

26. Soviet economy collapses in 1991(along with the Soviet Union itself) • “These…aspects of the Soviet economic system, combined with (Gorby’s) clumsy reforms produced falling growth rates • “By the end of 1991, the rate of growth was -17.0 percent, down from +3% in 1989…”(p.111)

27. The Rise of the Russian Market Economy • 1991 – Russian president Boris Yeltsin agrees to “shock therapy” for economy • Developed by YegorGaidar to stabilize the macro-economy by ending subsidies to unsuccessful companies and liberalize trade and prices to open the door to foreign trade and domestic competition (of all things - imagine!) and privatize property

28. Stabilization and liberalization and privatization – oh my! • Sudden “shock therapy” went into effect Jan. 2, 1992 • Production dropped, foreign goods flooded the Russian market = chronic shortages gone, but average person had no to spend • By April, 1992, there’s a backlash from industrial managers • Inflation grows, austerity sets in

29. Privatization 1992 - 1996 • June, 1992 – Yeltsin & Gaidar pass privatization legislation with 4 goals: • Create private property rights to create socioeconomic classes, esp. a MIDDLE CLASS • Build a market economy via private property • Ensure the separation of ownership from management and create managerial accountability • Create a whole new system of incentives for enterprise management guided by supply and demand principles

30. It’s a matter of choice… p. 113 -114 • Firms could choose from 3 different options for privatizing their enterprises – all three options gave workers and managers favored access to shares • Second stage of privatization issued in July, 1994 • FAIL! Minister of Privatization Polevanov froze privatization and advocated renationalizing companies

31. Loans for shares – read 114 - 115 • Led to HUGE public uproar because of a conflict of interest between banks and the government • HOWEVER, by 1996, more than 75% of Russia’s large and midsized enterprises and 90% of industrial output were privatized and out of state hands

32. Causes of 1998 Economic Crisis  • Deficit had been handled through borrowing, through no taxation on large oil and electric companies, and through NONPAYMENT of wages to state-sector employees! • Foreign debt increases by $18.5 million in 1998 • International Monetary Fund gives $$ to fix the situation BUT Russia decides to save the ruble, not pay the workers –> ruble is DEVALUED! ARRRRGH!

33. Economic Recovery – p. 117 • Default and devaluation of ruble brings on recovery of Russian domestic industry because ruble CRASH made imported goods too pricy and Russians had to buy Russian-made goods • Russia also benefitted from the rise of global prices for raw materials Russia could export <- Not really

34. Economic Growth 2000-2008 • “It is by their indirect effects…that oil and gas price rises fuelled Russian economic growth.”–Philip Hanson • Russia’s chief oil export (Urals crude oil blend) rose in value from $12 a barrel in 1998 to $70 a barrel in 2007 – Wahoo! We’re rich!

35. Putin’s the Man!!! • SO President Putin enacts several reforms, including a 13% flat income tax, new land ownership codes , new legal codes, etc (p.117)

36. But then… • Putin’s economic policies begin to display symptoms of the “resource curse” – excessive dependence on oil export revenues. • Russia contracted THE DUTCH DISEASE – a high exchange rate making manufactured goods too expensive to produce, allowing imported goods to replace domestically reduced goods

37. THE DUTCH DISEASE has repercussions • Increasing debt • State ownership of mineral extractive industries • Government corruption (insert look of surprise here) • Negative growth

38. Analyst EvgenyGontmakhersez… “This (Russia’s economic economic circumstances) is all a result of incorrect economy, oil dependence, and rampant corruption. “Until the system changes, these problems will persist.” (117)

39. Connections Resource curse phenomenon + Putin’s policy choices + Russia’s econ circumstances = • Loosened fiscal policy • Oil companies take on debt • Imports increase • Dutch disease emerges • Russian economy has few alternatives to make up for the loss of oil profits

40. Gazprom has a gaz problem • See P. 118 and read the end notes!!! • Then, rate of production GROWTH drops from 10% in 2004 -> 2% in 2007. • Export volumes decline

41. Medvedev replaces Putin Spring , 2008 – Russians richer than ever before THEN the global financial crisis hits, Sept.2009!!!

42. Stock market drops by 70% in value (shades of 1929!) • Foreign reserves gone because of rising corporate debt, troubled banks and credit crunch (sound familiar?) • Inflation rises • Industrial output decreases • Russia’s cycle of problems re-emerges: • Negative growth, high inflation and unemployment and falling oil export revenues

43. Putin’s Policies Poop Out • Neither his autocratic policies nor his state-led economic policies led to the Russian economic growth – seems to have been coincidental with growth of oil prices • Recovery will come from: • Rising consumer demand for Russian products • Another rise in world oil prices (Nooooooo!) • Prudent fiscal policies (well, duh)

44. Medvedev sez, “I think I’m gonna… • “Construct our own “Silicon Valley” outside of Moscow • Improve legal regime in order to better protect foreign investors • Figure out a way to overcome dependence on our disproportionate dependence on the global oil and gas markets. • Yeah, that’s the ticket!”