Which Term Best Describes Russia’S Transition To A Market Economy One year has passed since the financial crisis that struck Russia in August 1998. This crisis prompted a significant shift in perspectives on the Russian economy, both domestically and internationally. Initial optimism gave way to deep cynicism and pessimism. However, there remains a lack of adequate recognition of the true extent of the problem. The question at hand is the nature of the Russian economy itself. Is it an incompletely reformed planned economy, a semi-reformed one, a deeply flawed market economy, or an entity distinct from either its initial state (planned economy) or its intended destination (developed market economy)?
This confusion is highlighted by the use of conflicting metaphors, as exemplified by a quote from Boris Yeltsin. These metaphors are not only mixed but also incompatible. A hybrid is not a transitional phase; it represents a unique entity, which may or may not sustain itself. This biological metaphor aptly characterizes Russia’s economic development. Russia is not merely “halfway” to a market economy; it’s not even on that path. The Russian economy has undergone a mutation; it’s a hybrid, an entirely new economic system. It’s neither a non-monetized command economy nor a fully monetized market economy. It’s something fundamentally different, with its own set of rules and behaviors.
In this system, enterprises continue to produce non-competitive goods, often the same products as during the Soviet era, using non-monetary exchange mechanisms like barter. This allows for arbitrary pricing, typically overpricing, creating the illusion of greater value production than actually exists. Such overpricing is crucial for subsidizing unprofitable production within the Russian economy. Barter and non-monetary exchanges account for a significant portion of transactions among industrial enterprises, and offsets and barter constitute the majority of tax payments by these enterprises. This demonetization conceals the destruction of value within the economy.
To summarize, the virtual economy in Russia is marked by two key features: value subtraction and pretense. Many parts of the economy do not create value; instead, they destroy it. Meanwhile, participants in this system maintain the pretense that value is being created, perpetuating a veil of non-transparency. Unfortunately, this pretense has negative consequences, leading to exaggerated claims on the limited value actually produced, particularly evident in Russia’s budgetary issues.
The future of Russia’s economy appears to be heading towards a pattern similar to its agricultural sector. Large enterprises, often subsidized through virtual economy mechanisms, will dominate, while smaller enterprises will be marginalized. These smaller enterprises will continue to operate at a basic level, supplying essential needs to local workers and communities. Investment in these smaller enterprises will be minimal, ensuring their sustainability at a low level.
There are several implications of this trajectory for Russia’s economy:
1. Economic Growth:
Official growth figures become meaningless in the virtual economy, which relies on illusory prices resulting in illusory GDP growth. While the virtual economy may appear stable in the short to medium term, it undermines the future competitiveness of the economy. Over time, the economy becomes less competitive and contracts.
2. Private Sector Development:
The dominance of the virtual economy is incompatible with a thriving private sector. Small businesses will exist but face constraints, including heavy tax burdens. The private sector will be squeezed for cash and market access.
3. National Integrity:
The virtual economy has a tendency to fragment the national economy into self-contained local economies, potentially threatening national integrity.
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4. Public Sector:
The public sector will become smaller, more demonetized, and localized. Government agencies will struggle to provide public goods, with many employees focusing on earning money for their own survival rather than serving the public.
In terms of political scenarios, Russia could follow a path of libertarian virtual economy, which would lead to localism and inequity, or it could see a resurgence of central authority based on perceived threats to national survival. The latter scenario would resemble a militarized virtual economy, with prioritized sectors and limited compulsion. However, over time, it could evolve into a full-scale command-administrative economy, requiring greater compulsion.
In conclusion, the future of the Russian economy is uncertain, and various scenarios are possible. Acknowledging that Russia has developed a new economic system, which cannot be reformed through marginal efforts, may be the first step toward addressing its challenges.