The Economic Reform Process in Russia


WP/93/55-EA


The Economic Reform Process in Russia
by John Odling-Smee and Henri Lorie

The economic problems confronted by Russia at the end of 1991 were in
some respects similar to those faced by other countries before major periods
of adjustment--the large Latin American economies in the early 1980s, the
problems of economic reconstruction in Europe and Japan following the Second
World War, and, especially, the countries of Eastern Europe as they move
toward a market economy a year or two ahead of Russia. However, various
factors point to a longer and more arduous transition period in Russia than
in Eastern Europe. The broad policy approach in Russia should nonetheless
be similar; it is as important to make rapid progress with macroeconomic
stabilization measures and structural reforms in Russia as in Eastern Europe
in order to create the conditions in which market mechanisms will eventually
grow.

The essential systemic change in the transition to a market economy is
trade and price liberalization. Demonopolization, through breaking up large
enterprises, removing barriers to entry for new enterprises, and allowing
free competition with imports, is an important complement to liberalization.
But slow progress in this area does not negate trade and price liberali-
zation.

Russia's experience in 1992 shows that a necessary condition for
effective macroeconomic stabilization is the imposition of hard budget
constraints on enterprises. Accordingly, financial assistance from the
Government and the central bank to enterprises must be strictly controlled
to ensure both compatibility with inflation objectives and the creation of
incentives for reform. Such assistance should be temporary, with targets
for phasing out clearly established, and conditional on satisfactory
financial privatization and restructuring plans for enterprises that
qualify.

Russia's need for external financial assistance in the short term
is comparable to that faced by Europe and Japan at the end of the Second
World War. It reflects the need to smooth the consumption stream of the
population, restore the infrastructure, and finance enterprise reform
and restructuring. Equally important, Russia must be willing and able to
pursue economic policies that ensure that the external assistance has the
desired effects. These include measures to achieve macroeconomic stability
and rapid progress on a wide range of systemic reforms.