Working Paper
A Russian Puzzle

This paper seeks to explain, why Russian (and CIS) economic transformation was neither a shock therapy nor a gradual transition case, but instead followed a sort of middle ground inconsistent shock therapy path. It is argued that there were some objective constraints, mostly of a social and cultural nature, that prevented the policy makers from successfully implementing the classical shock therapy approach. Nevertheless, actual Russian policy during transition was far from first best feasible choice in such areas as macro-stabilization, exchange rate management, cuts in budgetary expenditure, industrial restructuring, social and labour market programmes. If current trends continue, emerging Russian capitalism is not likely to duplicate European or East Asian patterns of development, but instead may resemble somewhat the Latin American model. Poor traditions to comply with laws and regulations and low tax revenues; highly uneven distribution of wealth and income and strong social tensions; government failure in providing public goods and social transfers and in restructuring the economy through supporting the winners rather than the losers; poor investment climate, capital flight, growing foreign debt, low savings, investment, and growth - this bleak picture is the most probable option provided that the government will not proceed with major reforms. The brighter scenario implies that the government would adopt a growth strategy based on: downsizing part of the government, while making the remaining part more efficient; sound industrial policy favouring export-oriented industries; efforts to build consensus through strong social policy; measures to stimulate savings and investment (through a low exchange rate, pension system reform, increased government and foreign investment).