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Why Didn't Russia Take off?

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dadmonson

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After the former Soviet Union collapsed, Russia ended much state planning, leaving individuals free to carry on business privately. Many economists expected the Russian economy to take off. Instead, it declined 41 percent over the next seven years. Why do you think that was?

Joseph E. Stiglitz argument says this..."Privatization without necessary institutional infrastructure [such as law] in the transition countries led to asset stripping rather than wealth creation."

Edited by dadmonson
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Many economists expected the Russian economy to take off. Instead, it declined 41 percent over the next seven years.

Unless there's a magical way to determine Russian production in the 80's, that figure has to be based on what the Communist State said they were producing.

I've read about how the tallying up of resources was done under Communism: everyone reported that they produced exactly what they were supposed to produce.

Or, if this figure takes into account what people were earning, before and after the wall fell, that's a fake figure too: the value of the currency was determined by the State, and the real value was just a fraction of that.

The reality is that the USSR fell because people were starving. After 80 years of Communism, there was nothing left, in reality. There was no Russian economy: the factories, mines, even wells were all working at a loss, and had to be closed down or sold. That ridiculous notion that "asset stripping" was the reason why they were sold can only come from someone who doesn't understand the difference between a viable enterprise and one that is costing its owners money, rather than producing something.

What assets? Those factories weren't even bringing a profit with plenty of slave-labor available to the State anymore, let alone in a free economy, competing with countries like Estonia which quickly killed all the Communist industrial fossils and started from scratch, in a free market.

The fact is that you can't decline 41 percent from an economy which was already producing a negative, and was only kept alive because the IMF and World Bank gave Russia huge loans. The mistake Eltin made was to take those loans, and keep all this cancerous industry around for years with it, in the name of a "gradual" move toward Capitalism. Instead, the remnants of Socialism sprung huge corruption, which was competing for the handouts coming in from Western loans, through the filter of Russian bureaucrats.

That is why Russia didn't take off, while Estonia, or Slovenia, the Czech Republic, even Poland, Hungary, did take off pretty fast. Many of these countries (especially the last three) have since stalled, because of the socialism pouring in from their new buddies in the European Union, but in the 90's, before EU membership, they were growing spectacularly.

Edited by Jake_Ellison
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Joseph E. Stiglitz argument says this..."Privatization without necessary institutional infrastructure [such as law] in the transition countries led to asset stripping rather than wealth creation."

That may be one of the first things I've ever agreed with Stiglitz on. We here in the States take for granted the institutional infrastructure behind our markets. Imagine if nobody had faith in the judicial system. Fraud would be a regular occurance. Capitalism demands that the rule of law be established and held supreme.

The other thing to take into account is that many older Russians were socialized through the Soviet communist system. This means that these elders did not have the fundamental values that capitalism needs to survive, i.e. hard work, honesty, productiveness. I know several Russian immigrants here in the States who recognize the superiority of capitalism. One of them told me, however, that his parents remain in Russia, and claim that communism is a political ideal. He said that, in the former Soviet Union, there is a disconnect between the values and thoughts of the younger generations, as opposed to the older generations. Someone correct me if I am wrong, but I think a similiar story happened in Rand's family: her sister liked the Soviet Union and refused to immigrate to America later in Rand's life.

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I agree with everything that Adrock said.

In western societies, a lot of economists focus on the impacts of fiscal, monetary or trade policy. Yet, these are not primary in economics. They focus on these because the stuff that is primary has been taken pretty much for granted for a long while now: de facto property rights. What we see in China and India and Russia are primarily a function of the degree to which people can -- de facto -- exercise their rights or not exercise their rights in the economic realm. It is very important that this include the de facto protection of such rights, not just from government, but also from various varieties of private thugs.

Edited by softwareNerd
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I think that the problem does not lie so much in intellectual or historical blindness or lack of infrastructure. The central problem is still lack of adequate property rights.

The lack of property rights in Russia can be explained in terms of historic culture and the fact that The Enlightenment never reached that part of the world. Though I suppose one could also say it never reached the Orient either during that time period, but certainly America ideals began to get into the oriental culture (Japan and Korea) after WWII and other conflicts in which America took charge to some degree. I think Russia as part of the former Soviet Union had a more stringent hold on its people at a time when values from the West could not penetrate the Soviet blockade on free speech versus today when people can get access to satellites and therefore the Internet. I'm not saying the Internet will set all people free, as those government could still crack down on dissidents and do, but rather the chance of getting the right ideas into place once forbidden is better today than it was during The Enlightenment.

And I don't just mean abstract philosophical ideas but the way people in the West live and what they take for granted (though they shouldn't take it for granted). What I have in mind is even something as innocuous as "Sex in the City" which I don't enjoy watching but certainly gives women raised in more restrictive cultures some idea of how American women are. In fact, the Mullahs of Iran and other Arab countries have issues a fatwa against the owners of those satellite broadcaster for ruining their women.

So, in a way, Russia missed the boat and didn't have access to Western values during a crucial time of their historic throwing off of communism. I don't know if they will ever understand the importance of private property. I guess they might some day, but I would say these days that the better people would rather leave than fight the current corrupt regime.

Edited by Thomas M. Miovas Jr.
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I once met a Russian guy in Frankfurt, Germany. He was from a place that used to be called Simbirsk, but was renamed by the Communists to Ulyanovsk, as it was the birthplace of Lenin--and is still called Ulyanovsk today. He told me that his pay in Germany was much less than what his German coworkers earned, but he was still afraid to tell about it to anyone in Russia, because it was not unusual for people to be killed for $20 in Simbirsk. He told me of a beautiful young lady he'd seen on his flight, but immediately went on to add that, "...unfortunately, she was on business class," which meant she was "rich." He thought being focused on making money, like that woman must have been, was pointless, because people would only want to "take it away" and you would become the target of all kinds of attacks. I tried to explain to him that it wasn't like that in the West, but he just wouldn't believe me; the idea of wealth seemed to be indelibly associated in his mind with having to be constantly afraid for your life. He wouldn't even accept that your wealth was safe on a Swiss bank account--and that was the point I gave up.

If his thinking is anywhere near typical of the mentality people are brought up with in Russia, I do not find it surprising at all that that country did not take off.

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Lets not forget the cultural history of the nation. 100 years ago, they were basically a nation of serfs. When Czarist Russia collapsed, they had no idea how to be free, how to work for their own future, etc. They starved, and welcomed Communism with open arms as their salvation because generation after generation of being sheep had made them dependent.

When Communism collapsed, almost a century later, why would it be any different?

The Russians have generations of change ahead of them before they can culturally embrace *rational* capitalism.

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I once met a Russian guy in Frankfurt, Germany. He was from a place that used to be called Simbirsk, but was renamed by the Communists to Ulyanovsk, as it was the birthplace of Lenin--and is still called Ulyanovsk today.

Appallingly it's one of the relatively few cities that did not change back. Its near neighbor Samara ditched the Kuybyshev (sp?) name the Commies gave it. (BTW for those scratching their heads wondering what Ulyanovsk would have to do with Lenin--"Lenin" was a pseudonym that Vladimir Ulyanov adopted.) I suppose he is their biggest claim to fame. Ironically Kerensky, who was the first head of government after the tsar abdicated, was also born there, but Kerensky is not nearly as famous.

He told me that his pay in Germany was much less than what his German coworkers earned, but he was still afraid to tell about it to anyone in Russia, because it was not unusual for people to be killed for $20 in Simbirsk. He told me of a beautiful young lady he'd seen on his flight, but immediately went on to add that, "...unfortunately, she was on business class," which meant she was "rich." He thought being focused on making money, like that woman must have been, was pointless, because people would only want to "take it away" and you would become the target of all kinds of attacks. I tried to explain to him that it wasn't like that in the West, but he just wouldn't believe me; the idea of wealth seemed to be indelibly associated in his mind with having to be constantly afraid for your life. He wouldn't even accept that your wealth was safe on a Swiss bank account--and that was the point I gave up.

If his thinking is anywhere near typical of the mentality people are brought up with in Russia, I do not find it surprising at all that that country did not take off.

OTOH we get our money stolen from us all the time, by government taxation. Not as severe as getting killed over 20 bucks but still....

Edited by Steve D'Ippolito
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  • 2 weeks later...
After the former Soviet Union collapsed, Russia ended much state planning, leaving individuals free to carry on business privately. Many economists expected the Russian economy to take off. Instead, it declined 41 percent over the next seven years. Why do you think that was?

Joseph E. Stiglitz argument says this..."Privatization without necessary institutional infrastructure [such as law] in the transition countries led to asset stripping rather than wealth creation."

I'm not an economist, but from a security and political perspective (not an expert in those fields either), it seems that there is too much risk associated with investment in Russia. When the prime minister who is constitutionally inferior to its president tells that president what to do, it means that there is a power structure aside from the rule of law. Whether that power structure is a good or bad thing is an interesting question, but the significant is, in my opinion, that this power structure is hidden. If you are a Frenchman who just invented a new product and you want to sell it outside of France, there are so many countries you would choose before you ever take Russia into consideration. That's my impression, and I haven't studied it to give statistics.

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