TIME: Almanac 1993/TIME Almanac 1993.iso/time/120792/12079940.000

Text File | 1993-04-08 | 9.6 KB | 201 lines

                                                                                COVER STORIES, Page 60

THE NEW RUSSIA: ECONOMY

Why It Still Doesn't Work


Free enterprise is stalled in the clash between reform and
reaction

By JOHN GREENWALD - Reported by James Carney and Yuri
Zarakhovich/Moscow and J.F.O. McAllister/Washington


    Cumbersome, inefficient and corrupt, the Soviet economy
functioned, such as it did, because it had its own internal
logic. Moscow decreed the production of every tank, shoe and
potato; every working-age person was supposed to have a job; and
prices were stable. If the end result was not exactly according
to plan -- a long-drawn-out failure, in fact -- at least the
command system offered a coherent vision of what the plan was.

    No such coherence or vision applies to the new Russian
economy. Since Boris Yeltsin began shock treatment last January,
the result has been a bundle of contradictions. In the
industrial city of Rostov, the mammoth Rostselmash factory still
makes grain harvesters that no one wants. The clunkers lose up
to 15% of the grain as they pound rich topsoil into brick-hard
earth. Yet Yeltsin visited the plant last summer and personally
guaranteed tens of millions of rubles in state credits to keep
the communist relic afloat.

    On a busy street in Moscow, pure capitalism is on display.
What was once the black market is now legitimate
entrepreneurship in the thriving sidewalk kiosks that peddle
everything from Dutch chocolates to Japanese tape recorders.
Shortages -- and long lines of shoppers -- have diminished even
at state-run food stores since price controls were lifted. With
inflation racing ahead at an annual rate of more than 1,000%,
most middle-class people cannot afford to buy much. Yet high
prices don't bother the newly rich who drive by in Mercedes and
BMWs on their way to nightclubs that charge $100 a person to
dine and dance.

    When Yeltsin decapitated the old command system without
putting something new in its place, Russia became a battlefield
on which the concepts of free enterprise and state control went
to war.

    On one side are the reformers, led by Yeltsin and acting
Prime Minister Yegor Gaidar, who want to instill the basics of
capitalism through rapid privatization, price decontrol and
tight money to curb inflation. On the other are the
conservatives, who argue that such policies will destroy
Russia's industrial base and exact too high a human cost.

    In the past 11 months, Yeltsin has freed prices of
consumer goods and begun selling state property into private
hands. But the reforms have ripped Russia's social safety net,
worsening inflation, unemployment and standards of living and
even creating nostalgia for communist rule. To go forward,
officials must next settle the fate of thousands of outmoded
factories, where millions of workers produce heavy goods ranging
from T-72 tanks to rolled steel. While the reformers want to
halt government subsidies to the state-owned dinosaurs and let
them die out, opponents argue that the shutdowns would devastate
entire regions that totally depend on those factories for jobs.
But continued subsidies would require Moscow to print mountains
of new money and risk sending inflation into the stratosphere.

    In an effort to break the stalemate, Yeltsin last week
tried to strike a deal with critics that was aimed at easing
economic hardship over the next six months while retaining the
main elements of reform. But the deal fell through. Gaidar
refused to yield to conservative demands for wage and price
freezes or restoration of state control over distribution of
resources.

    While the political and economic leaders wrangle, Russia
is undergoing the most severe economic hardships since World
War II. State orders for unwanted factory goods have dried up,
shrinking Russia's gross domestic product as much as 23% this
year. The number of jobless workers has surged from 59,000 in
January to 905,000 today. An estimated one-third of the
population now lives below the poverty line. Russian economists
expect inflation to hit a monthly annualized rate of 2,200% by
the end of the year, further eroding faith in the ruble and
threatening to scuttle reform.

    Even as hard times sweep the republic, the advent of
capitalism has created a new monied class. Communism had its
elite, but they kept their privileges discreet. In the absence
of laws governing the emerging system, doing business in Russia
has become a free-for-all. By taking advantage of the chaos,
savvy entrepreneurs, Mafia-style dealers and corrupt government
bureaucrats have profited handsomely -- and flaunt it. "The
split between rich and poor is growing rapidly," says Igor
Dmitriev, deputy secretary of the state statistics committee.

    Much of the legitimate new money comes from importing
foreign goods or wheeling and dealing with local authorities on
behalf of foreign firms. Other entrepreneurs provide services
like news or shipping, which once were the sole province of the
state. "You will notice that money here is mostly made by
middlemen, not in the realm of actual production," says movie
mogul Ismail Tagi-Zade, whose ventures, ranging from films to
clothing factories, make him something of an exception to his
own rule.

    But these entrepreneurs, hampered by still prevalent red
tape and the sheer size of the country, have no way to expand
their businesses to a national scale. And too much of the new
abundance is imported. To convert old industries to efficient,
high-quality production, Russia must first create a legal
foundation for property rights, slash inflation and press ahead
with its privatization plans. Such moves would encourage
homegrown and foreign capitalists to come forward with their
investments and ideas.

    Russia's reforms began well when Gaidar lifted price
controls. Despite the hardship inflicted on consumers, the high
prices lured goods to market and shortages all but disappeared.
The big setback came when the Russian central bank began
funneling money to cash-starved state industries. That kept the
old behemoths in business but whipped up inflation and sent the
ruble plunging to more than 400 to the dollar.

    The shrinking currency threatens to bankrupt retirees as
well as clobber middle-class workers who had been doing
relatively well. "I used to make more than 500 rubles a month
and felt like a prince," says a former space engineer who
currently heads a department in a Moscow technical school. "Now
they pay me 5,250 inflated rubles, and I feel totally broke."

    A more menacing specter looms in the possibility of
hyperinflation, which economists define as price increases of
1,000% or more a year. Russia is headed in that direction, says
Jeffrey Sachs, a Harvard economist and Gaidar adviser, as long
as it continues to subsidize obsolete industries.

    In October the government started issuing every man, woman
and child in Russia a voucher worth 10,000 rubles to help
purchase state property and speed up the transition to free
enterprise. Using the beige coupons as money, people bought 59
used trucks in the first such sell-off in the city of Nizhni
Novgorod. In fine irony, an auctioneer, clad in black dinner
jacket, gaveled them off beneath a glowering statue of Lenin.

    Scheduled next for the auction block are Intourist hotels,
state-owned hard-currency shops and 5,600 major factories,
including the Vladimir tractor factory in central Russia.

    The strategy could be the reformers' best hope of
outflanking the conservatives. "The government is trying to give
up its responsibility for part of the economy by turning it over
to the managers of these enterprises," says a Western diplomat
in Moscow. "The real test will come when some of these managers
are faced with bankruptcy, and they come to the government for a
bailout, and the government says, `No, that's not our
responsibility anymore.' " The more fundamental question is
whether the Russian people will come to understand that they,
not the government, are ultimately responsible for their entire
economy.

    Tougher still could be overcoming powerful conservative
resistance to private ownership of land. Laments Gaidar:
"Without private land ownership, it is almost impossible to
launch the full range of market mechanisms to support
agriculture." In desperation, Yeltsin issued a presidential
decree last month ordering land to be included in property that
Russians can buy with vouchers.

    Initial promises of support from the West remain largely
unfulfilled, and Yel tsin is still waiting for $13 billion of
the $24 billion in Western assistance that the major
industrialized countries pledged last April. That money stopped
when Russia failed to meet targets set by the International
Monetary Fund for stabilizing the ruble and keeping inflation
and the budget deficit in check.

    The political and economic turmoil hurts Russia's ability
to attract desperately needed investments from Western firms.
But with a highly educated population of 148 million people, or
roughly half the former Soviet Union, Russia is simply too
large to ignore. "It's like the Wild West," says John Kiser, a
Washington technology-trade expert. "There's no law and no
contracts. The only thing you have to build on is your
confidence in the people you're dealing with," he says.

    Ultimately, the fate of Russia's economy depends on the
grit of reform leaders like Yeltsin and Gaidar and the animal
spirits of entrepreneurs. In the paradox-riddled new Russia,
Yeltsin's struggling reforms still look like the biggest and
best risks that the country can take.