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by Maxim Boycko, Andrei Shleifer, and Robert Vishny
(Cambridge, MA: M.I.T. Press, 1995)
The French Revolution began in 1785, when the magnitude of the fiscal
collapse in the finances of the ancien regime royal government became clear,
when the political nation reached a consensus that things could not continue
as they had been, and when the first steps toward reform were proposed.
But France did not become a stable social-democratic mixed-economy industrial
democracy until the establishment of the Third French Republic in 1871,
or perhaps not until the establishment of the Fifth French Republic in 1958.
The real Russian Revolution began in 1985, when the magnitude of the economic
and ecological catastrophe of the ancient regime Communist government became
clear, when the political nation began to wonder whether continuation of
the past might be impossible, and when the first steps toward reform were
taken. Russia is not yet a stable social-democratic mixed-economy industrial
democracy--if it follows the trajectory of France, the story that in Russia
began a decade ago will not reach its end until 2071, or perhaps 2158.
In fact, there is every reason to think that the Russian Revolution is barely
begun. Ten years after the first signs of the French Revolution take us
only to the fall of Robespierre, with not even the first sign of the French
Revolution's dominant figure, Napoleon. So the Russian Revolution will have
many twists and surprises: we should not expect to even be able to begin
to draw up a balance sheet, or to assess the value of what has happened
so far, because the story is still so incomplete. Zhou Enlai in the 1960s
answered the question "What do you think of the French Revolution?"
with "It is too soon to tell." This is the right attitude to take
toward the ongoing Russian Revolution: it is too soon to tell.
Nevertheless, we can begin to describe what has happened--although what
it means and what its long-term implications will be must wait for the twenty-first
or, more likely, the twenty-second century.
Maxim Boycko, Andrei Shleifer, and Robert Vishny have been near the center
of one of the most important parts of the Russian Revolution so far--Anatoly
Chubais's "privatization" program. Now they have written down
their view of what went on--and of why it was such an important step. Some
15,800 enterprises, employing some 17.8 million people, were transformed
from "state" enterprises--responsible to the Subministry for Textiles,
or some other such government body--to "private" enterprises:
corporations where ultimate legal "ownership" rests with shareholders
who elect a board of directors that then hires and fires senior managers.
That such a privatization program was an important thing to do follows from
Boycko, Shleifer, and Vishny's vision of the problem of Russia's economy.
There is a sense in which their view of the problem is very new-fashioned.
It is built on recent thinking in law and economics and the economics of
institutions and property rights.
There is another sense in which their view of the problem is very old-fashioned.
Karl Marx would have understood what they are talking about instantly: the
political organization of society had become a hindrance to the development
of productive forces; it was a fetter blocking the development of the mode
of production.
As Boycko, Shleifer, and Vishny see the pre-Gorbachev Soviet Union, it was
an economy in which what they call "cash flow rights"--claims
on the social surplus in excess of workers' wages and material costs produced
by an enterprise--were widely distributed throughout the society; but what
they call "control rights"--the power to make decisions as to
who should manage the enterprise, how it should be managed, and how it should
evolve--were concentrated in the hands of that oligarchy of power-seeking
politicians that made up the nomenklatura of the Communist
Party.
Thus increasing the economic efficiency of the enterprise was low down on
the list of goals of those who made managerial and investment decisions:
they saw some benefits from figuring out how to make products that consumers
found more attractive, or how to cut costs to produce more output from the
labor and materials inputs they had available, or how to boost the productivity
of the enterprise through skillful investment that built up its capital
stock. But their stake in improving the effectiveness of the enterprise
as a social surplus-producing mechanism was limited.
By contrast, their stake in making the enterprise function as a generator
of political power and obligation was very great. Doing favors
for your boss, or your boss's boss, or your future boss, or those who might
enable you to displace your boss have direct and massive impacts on the
quality of your life. Thus at every margin there is a strong temptation
for enterprise managers to sacrifice a little bit more out of productive
efficiency in order to gain a little bit more in terms of favors owed the
managers by others, or in terms of political obligations created. None of
the countervailing forces at work in the industrial mixed economies of the
West to keep enterprises interested in increasing productive efficiency
functioned in the Soviet Union: managers did not gain and lose status vis-a-vis
their peers by their success or failure at generating a social surplus (that
is, a profit); shareholders did not occasionally rebel and force out managers
who they believed had done a bad job at managing the enterprise; corporate
raiders able to convince banks that they would do a better job at managing
the enterprise never seized control; and bankruptcy--the ultimate market
sanction on an enterprise that does not match the productive efficiency
of its competitors--never happened.
Thus it is not surprising that the pre-Gorbachev Soviet economy was less
"efficient" in the sense of delivering a lower standard of living
all across the income distribution than the mixed economies of the industrial
West. What is surprising--what is still surprising, at least to me--is the
magnitude of the shortfall. It now looks as though the Soviet
economy delivered a material standard of living perhaps one-tenth that of
the United States, and perhaps one-fifth of what one would have expected
from the "normal" trajectory of a successfully-industrializing
European economy beginning this century at the level of economic development
that Russia possessed in 1900.
Something around eighty percent of the potential economic productivity of
the country was sacrificed as a result of what Boycko, Shleifer, and Vishny
call the politicization of the economy. The Bolshevik replacement
of enterprise managers with a keen interest in improving the efficiency
of their enterprises as productive operations by enterprise managers with
a keen interest in using their enterprise as a base to accumulate political
power and do reciprocal favors proved to be incredibly expensive.
How to change this? How was Russia to accomplish what Boycko, Shleifer,
and Vishny call the depoliticization of the economy, by which they
mean the creation of enterprise managers who focus on increasing productive
efficiency, and the withdrawal of politicians to a set of political-economic
functions--balancing off the broad interests of different groups, setting
up the institutional framework for a market economy, tweaking the distribution
of income, investing in infrastructure, and making it easy and straightforward
for people to invest in the country and in themselves--that they can do
well, or at least less badly? How to change this in view of the fact that
politicians live by power exercised or ostentatiously not exercised--that
they seek to maximize their ability to do favors for others, and to maximize
the number of favors they have done in the past?
Karl Marx knew the answer: when the political organization of society is
blocking the development of the productive forces of the economy, you need
what he called a bourgeois revolution: you need to transfer a very
large chunk of political power to people who have a direct and strong interest
in rapid economic growth. Once this bourgeois revolution is accomplished,
practicing politicians find that there is a large arena in which they gain
political power--and place others under obligation--not by sacrificing productive
efficiency to do favors, but by doing the favor of enhancing productive
efficiency.
Anatoly Chubais's privatization program has been a powerful step toward
such a bourgeois revolution : it has created a bourgeoisie--a
class with a strong and direct interest in rapid economic growth. Some 25%
of the shares of the nearly 16,000 enterprises privatized are in the hands
of "outsiders"--those who used the privatization vouchers distributed
to the Russian people on a per-capita basis to purchase shares in companies
at the privatization auctions. Some of the remaining shares are still held
by the government. Some of the remaining shares are now held by employees.
A large chunk of the remaining shares are held by firm managers.
A smaller chunk of shares were sold at auctions than I, or many others,
think was ideal. Why should those managers lucky enough to have been in
top positions at well-functioning enterprises have wound up with such a
large stake? But Boycko, Shleifer, and Vishny convincingly argue that Russian
privatization could not have taken place without such a distribution of
shares to the enterprise's "insiders." As they see the situation,
firm managers and to a lesser degree firm employees already had effective
control over what the firm produced and whether it created any social surplus.
Any privatization program had to be better than the status quo for
a firm's top managers or it simply would not happen. And the only way to
make a post-privatization distribution of shares attractive to firm managers
was to grant them a large chunk of the shares.
Of Russia's 100,000,000 voters, 40,000,000 now hold shares in privatized
firms and in mutual funds.
If the Russian privatization program is going to work in its largest,
broadest sense, we should start to see motion along two different axes.
First, Russian firms should begin to show a much greater concern with productive
efficiency. Managers now have a large financial stake in enterprise profitability,
and should turn a lot of energy that was in the past devoted to other goals
to increasing productive efficiency. A large chunk of the extra social surplus
created will accrue to managers and other shareholders as increased market
value of the enterprise. But an even large chunk will accrue to consumers
and workers in lower product costs and higher real wages.
Anatoly Chubais saw this transformation underway from his position in Yeltsin's
cabinet. As the authors report:
Chubais...explained to us the evolution of managerial thinking. In 1991, enterprise managers came to him to lobby for inputs, such as cement. In 1992 and 1993, after [he end of price controls] they came to lobby for cheap credit [access to working capital at a low rate of interest]. In 1994, after privatization, they started coming to lobby for favorable disposition of [remaining] government-[owned] shares, and for help with foreign investors...
Second, Russian politics should take on a somewhat different flavor. Better
police protection of persons and property from crime. Government policies
that avoid macroeconomic chaos. Free trade. Land privatization. Macroeconomic
stabilization. Creation of a commercial law code. Further reforms to allow
a mixed economy to function more productively. There are now forty million
voters who have a direct material interest--most small, some large--in the
continuation of economic reform to make private enterprise more profitable.
As Boyko, Shleifer, and Vishny write:
[P]erhaps the most significant consequences of privatization are political. Privatization has created a class of property owners who have become the clear economic beneficiaries, and political supporters, of further liberalization of the Russian economy and society. This class is not limited to a few brokers and traders driving BMWs around Moscow, as some Western observers would like to believe. These property owners include the 40 million Russians holding shares in privatized firms and in mutual funds who want their investment protected. They also include the millions of people working for the growing service sector.
In a country of 100 million voters, these are significant constituencies, which will throw their weight behind such critical reforms as land privatization, stabilization, and free trade. More important, the new property owners support the economic reformers who continue their struggle against communists and nationalists. Privatization and reform have created powerful political interests that are injecting some liberalism into Russian politics.
Will this creation of a class with a direct material interest in successful
economic reform and economic growth be enough to allow Russia to escape
another generation or two of political turmoil and economic distress? Almost
surely not. Will it be enough to make even ex-Communist and proto-fascist
politicians shade their policies in ways that are somewhat more favorable
to economic growth? Almost surely yes--as long as democracy stands.
Western critics of Yeltsin, Gaidar, and Chubais usually accuse them of
trying to do too much too fast. They believe that a more "gradual"
approach to reform--as was undertaken in China--would have produced less
disarray and discontent with reform, while still yielding solid gains in
terms of increased production and higher standards of living. Thus--critics
argue--if Russia had followed a reform program more like China's, reformers
would today be in a much better position to do more than they in fact are.
Boycko, Shleifer, and Vishny agree that:
Go-slow advocates are surely right that price liberalization has hit the poorer members of society the hardest, and that their welfare payments have not kept up with inflation. Reforms would have been moe popular, and politics less divisive, if social payments received a higher priority. Part of the problem, of course, was that the anti-reformers insisted on pumping resources into [supporting inefficient existing] industry and agriculture...
Boycko, Shleifer, and Vishny do not say--but should--that the failure
of the industrial West to provide massive aid to cushion the transition
in Russia will be judged by historians as one of the most hideous and disastrous
wastes of opportunity in the twentieth century. The U.S. spent some $6 trillion
in today's dollars over the past three decades preparing to defend itself
against the Soviet Union. Yet it has not been willing to commit even a quarter
of one percent of that sum to an economic aid program to improve the chances
that Russia becomes a stable industrial democracy--and thus never again
a threat to the national security of the United States--over the next generation.
In addition, it is hard to see Chinese development as an overwhelming success.
Political liberalization has not yet begun. Police states are nasty places
to live. China has grown very rapidly in percentage terms, but from a very,
very low initial base. And China's bureaucrats and industrialists are moving
some $20 billion or more a year on net out of China and into New York, London,
Frankfurt, Tokyo, and Zurich in the belief that they want foreign assets
outside of the control of China's government as an insurance policy should
the political wheel turn.
Deng Xiaoping has been a good emperor, interested in economic liberalization
and growth and able to override the forces that have traditionally made
China's bureaucrats the enemies of economic growth. But what can we say
about his successor? And his successor's successor? At some point China's
political organization will either collapse into civil war on its own, or
once again become a binding contraint on economic growth.
I think that when either of these possibilities comes to pass, it will be
much harder to criticize Yegor Gaidar's attempt to do as much as possible
as quickly as possible in order to push reform past the point of no return.
This book presents and spirited and persuasive defense of Russia's approach to privatization and economic reform. It explains the urgent need for market reform and democratization in Russia. I hope that it is widely read.
--Yegor Gaidar
Privatization has made a giant step toward transforming Russia into a market economy. This book provides a first-hand account of its trials and successes by my closest advisers. I recommend it to all those interested in economic reform.
--Anatoly Chubais
The best economic policy always marries thought and action. This book shows how powerful economic ideas, some traditional and some from the latest journals, are changing history. The authors did remarkable things in Russia, and now they have written a remarkable book.
--Lawrence Summers
ReviewsCreated 2/21/1996
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