Background to the book
This book aims to describe, with some granularity, one of the most momentous and controversial economic reforms of the twentieth century: the privatization of Russia in the early 1990s. This involved unwinding the “great Soviet experiment – an attempt to run an entire economy … by administrative command rather than by markets” (Gregory and Stuart 1994: 5).1 The book should be of obvious interest to those who study Russian history, or transition economics, and it should also be of interest to anyone who wishes to reflect upon the gap between economic theory and the practical reality of economic policy and implementation. Privatization was not only an event of great importance for the people of Russia. In its rapidity and scale, it was also an experiment that created great debate among western economists about the nature and direction of economic policy.
It is now some 20 years since the passage of the 1992 Privatization Programme in Russia. This is the date when the process is typically assumed to have begun.
Initially it was seen as highly successful, as the foundation of political and economic freedom. Popular support was widespread for privatization (Nelson et al. 1992). But since the mid-1990s the climate of opinion among economists has changed. The process came to be seen as corrupt. The popular Russian label was Prikhvatizatsiia (the Grab),2 and in English, “Piratization”, as in the title of a book on reforms written by Marshall Goldman (2004). Indeed the failure of Russian economic reform in general, and privatization in particular, is often cited as evidence of the inadequacy of the liberal “Washington Consensus” as a prescription for economic reform.
As people who worked as advisers in Russia during that period, we both felt that this often heated debate failed properly to reflect our experience of what was happening on the ground. The accounts often failed to pay proper attention to the detail of either the history of events, the institutional framework for reform, or the political forces that influenced it. So, for example, they tend to overlook the degree of privatization, both de facto and de jure, which had taken place before 1992. They fail to distinguish between the many forms of privatization, some of which commanded broad support from the executive and legislature, and some of which did not. Often all Russia’s economic ills are ascribed to privatization without adequate understanding of their origin in the economy to be reformed, or of the political context within which economic policy had to be developed.
Perhaps because these events were of such significance to the economic policy debate in the West, there has been a danger that, rather than drawing their conclusions from the events of the time, economists have been guilty of selecting aspects of the history of privatization to justify preconceived views.
Our aim is therefore to begin to set the record straight. To do so, we have aimed to review the privatization debate. This included hosting a conference of academics and other participants at Oxford in 2010. We have aimed to supplement this with interviews with participants from both sides of the debate. And we have had access to personal documents of the advisers to the Privatization Ministry (the GKI) during the period 1992–94. In the future, others may be able to add to this historical perspective. For now we hope that this short book will provide a record of the evolution of the policies and events, which will be of assistance to anyone who wishes to study the period, or indeed anyone who wishes to refer to these events to support a particular point of view in economic policy. Privatization in Russia is not just an important event in Russian, or indeed world, economic history. It is also one which is called as evidence to support or critique different economic policy prescriptions.
A guide to the book
For those who supported the reform, the need for private ownership derived from the assumption that with the establishment of private property rights, a key step towards efficient economic outcomes had been taken. Those who criticize the privatization policies reflect differently on the state of the Russian economy today, and see its ills emanating from the era of privatization. In Chapter 1 we review the debates over the assessment of privatization, and we find that the profound disillusionment and increasingly heated criticism show a complex and highly politicized subtext.
For example, to political journalists and non-mainstream economists the Russian government was too concerned with the liberal economic thinking behind the policy. It has not helped, in this regard, that theoretical economics most often assumes away the political context within which policy is developed. At a given moment, policy makers need to decide what to do, and that in turn is determined by what is feasible. This does not mean that privatization policy implemented in 1992 emerged out of the blue. We show in Chapter 2 that it emerged over time and was a result of both successful and failed negotiations between many interested parties and of legislation that predated the breakup of the Soviet Union. We note that the authority and room for manoeuvre of the government and, still more, of the reformers within the government, was very small. Further, privatization could not be implemented without regard for its broader consequences. Reformers had to design a policy able to dismantle the Soviet economy without generating destabilizing unrest. We review this, and its implications for reform, in the first part of Chapter 3.
The “reformers” and those who advised them were aware of the dangers and the limitations of what was proposed. Indeed, they were aware that, on its own, privatization was unlikely to achieve the goals that the programme intended. Nevertheless, they chose to support its implementation and, to a degree, aimed to steer it away from the worst pitfalls, in particular the re-creation of a command and control structure based on the old Soviet ministries. We review this in the second half of Chapter 3.
In Chapter 4 we chronicle the progress of the implementation of the 1992 programme, why it was initially viewed as successful, and why that view proved to be short-lived.
The year 1994 marked the end of “voucher privatization” in Russia, and also the end of the period for which we have had access to privileged information. However, in Chapter 5 we move on to reflect on what happened in the period after 1994 as Russia moved to cash sales of its larger companies, and the critical similarities and differences from the earlier period.
Why is the book significant?
In Chapter 6, we summarize our objectives in writing this history. We believe they are important.
The first is to foster a more accurate history of this momentous period. In the first half of the 1990s Russia underwent the most fundamental economic and political changes. Indeed, the year 1991 witnessed the breakup of the Soviet Union and the elevation of the Russian Federation as a separate nation. Privatization was but one of the enabling reforms, and arguably not the most important. No single policy was free-standing or an end in itself; together they served as a means to a more prosperous and open economy for Russia. Understanding the successes and failures of at least one policy is of some importance in understanding the history of the country during that period.
The second is to reflect on the economic models that were used by the western and Russian promoters of reform, and their adequacy. Russian privatization is cited in the popular press as an example of the failure of aid to Russia, along with aid priorities referred to as the Washington Consensus (Freeland 2000). However, little attention is given to what alternatives to rapid privatization in Russia were actually feasible, the degree to which they were considered, and whether they would be likely to have worked. This, in turn, may help identify the adequacy or otherwise of the corpus of our economic knowledge, and where we might focus to make it more salient to policy makers operating in the real world.
Finally we argue that the issues that confronted policy makers in 1992 and bedevilled reform in Russia remain urgent in countries such as Cuba, where market-oriented structures are being introduced. Some issues related to privatization remain important even in Russia, where considerable reform has already remade the economic environment. For example, we would suggest that some of the constraints to improved corporate governance and economic growth which existed 20 years ago have now been removed, but some remain.
Privatization prior to 1992: a synopsis
In most transition countries, privatization was the third of three key reforms designed to encourage the market economy. Meant to follow in close sequence, they comprised “an incentive approach” to jump-start the economy. The first was price and trade liberalization. Only when prices reflected the real structure of costs (scarcity) would there be an incentive for a well-functioning financial system, where households could save instead of hoarding goods and investors could identify the best opportunities for the long term. Since the price shock was expected to be inflationary due to the release of repressed inflation, fiscal and monetary tightening was immediately required for stabilization; the third reform, privatization, aimed to encourage entrepreneurship and the spread of private ownership in previously command administrative economies. Privatization was the one reform of the three for which ready models existed: since the 1980s, there had been waves of “denationalization”, reflecting a roll-back of post-Second World War nationalization in a liberal environment in market countries.3 Only in a few communist countries, however, had any private sector activity been permitted, and therefore privatization was needed everywhere not in its classic case-by-case form but as a more radical and all-encompassing, decisive step. In one country in particular, Russia, radical privatization was required also because of political circumstances.
At considerable cost, Russian privatization was pushed forward in 1992 despite ongoing macroeconomic volatility and rapid inflation. Both timing and speed had to do with competition over privatization plans. In 1990 and 1991, there was evident tension between groups of government officials drawing up plans for privatization. Those who advocated essentially giving factories to the employees were particularly influential in the heart of the Soviet government; those who advocated a reform more like what was planned in Central Europe were dominant in the newly sovereign Russian Federation government.4
The era of market-oriented reforms had begun with Mikhail Gorbachev’s reform agenda presented to the Communist Party on 10 December 1984, three months before he was elected its General Secretary (Åslund 1989: 26). In the spirit of economic revitalization, Gorbachev had introduced changes in investment policy to foster innovation, some instruments and market levers for enterprise managers, and the liberalization of foreign trade allowing even individuals to engage in profitable cross-border trade. In the name of accelerating growth and productivity, the government had embraced these liberalizing measures without fully anticipating the consequences for the management of enterprises.
They had envisioned the gradual diminution of the state sector over time and the preservation of socialism. Thus laws had enabled “individual labour activity” (19 November 1986),5 joint ventures between state enterprises and foreign firms (13 January 1987),6 the transformation of enterprises from administrative to legal status (30 June 1987)7 and a self-financing mechanism for independent “cooperatives” (26 May 1988),8 which eliminated the barrier between cash and non-cash transactions and removed some restrictions on trade.9 The most important law, and the beginning of what Russians call peredel (“the new order”, or “breaking point”), associated with the economic reformer Petr Bunich, was About Rent (Leaseholding) (23 November 1989).10 It had allowed work collectives legally to lease-to-purchase space and equipment from their enterprise and to accumulate new assets through retained earnings or bank loans (Ustiuzhanina 2001: 79). Some enabling rulings, particularly about Joint-stock and Limited Liability Companies on 19 June 1990,11 had then allowed factory directors to shift state assets (including intellectual property rights) into the fixed capital of the new firm, thus giving shareholders possession of property of value. Managers and workers’ collectives had then acquired substantial profits for reinvestment: they could borrow on their shares and, given rapid inflation, they could repay loans at a fraction of their real value. The Gorbachev regime, dominated by industrial interests, essentially had guaranteed future ownership rights to spin-offs from state firms (Nellis 1995: 8–9). Spontaneous privatization, as this was called, was certainly a way to launch a market-oriented economy in that it had led to asset seizing by the management and workers, but it had left the rest of the population without similar entitlement (Lieberman and Kopf 2007: 266; Feige 1991: 637; Abalkin and Miliukin 1990; Sutela 1991; Åslund 1997). In 1990, in some sectors, “trusts” had taken over general management of cooperatives and spin-offs under the director-ship of ministry officials; these proliferated throughout 1991.12
Reform plans to carry out slower privatization had been proposed by one group in the Union government, headed by Leonid Abalkin. From this group the famous “500-Day Plan” by Grigory Yavlinsky and Stanislav Shatalin emerged; another group of reformers, economists working separately for the Russian Federation government under Evgeny Saburov, including such distinguished public figures as Evgeny Iasin, Aleksandr Shokhin and Vladimir Lopukhin, had also proposed a plan to Premier Ivan Silaev. Neither group had seen its proposals accepted (Mau 2010).
However, with more modest ambitions, the group in the Russian Federation, in the subcommittee for property and privatization, headed by Petr Fillipov and Petr Mostovoi, of the Supreme Soviet Committee for Economic Reform, had witnessed some success with laws passed on first reading on 24 and 25 December 1990.13 These measures had limited the rights of workers’ collectives to appropriate the profits of firms. They had clarified juridical definitions of private property and privatization, and aimed to stop spontaneous privatization by stipulating that privatization would only proceed on annual plans approved by the parliament of the Russian Federation. These laws were followed by a major law passed by both bodies, the Russian Federation Supreme Soviet and Union Supreme Soviet, in early July 1991.14
With this law on de-statization or privatization begins the history of the 1992 legal refinement of the process of privatization.15 In the chaotic circumstances after the failed coup attempt of August, the July law became a mandate and resulted in the Privatization Programme for 1992, planned by members of Premier Gaidar’s government, and passed by the now governing Russian Federation parliament in June 1992. This law, and the decree on the use of vouchers in the summer of 1992, so significantly transformed the process that they constituted the real first phase of legislated reform.
From 1992 to 1994, the Russian government carried out the Mass Privatization Programme (MPP), which used as its model the Czech voucher programme with some differences: for example, vouchers were made tradable. In the first phase of reform, 75,000–100,000 small-scale enterprises were created. Through the MPP, some 16,000 medium-size enterprises were privatized (Lieberman and Kopf 2007: 265). The cash phase of privatization began in September 1994. The remaining shares left over from the MPP were sold by auction along with other enterprises. But in 1995, a different approach was taken. Some valuable properties were given to selected bidders for loans in order for the government to gain an immediate source of revenues before the elections. The final phase, which used as its instrument that classical case-by-case method, began with the auction of part of Svyazinvest, the national telecommunications company, and other large companies in a process by which the government selected suitable owners for a state-owned company.
The main focus of this book is the 1992 Privatization Programme, though the penultimate chapter discusses subsequent events. We hope to throw new light on the history and introduce more historical context so that scholars may rethink the intense economic debate that still surrounds these events.