Is Russia on the Road to Recovery?

• Author: Rabushka, Alvin
• Position: Brief Article

Alvin Rabushka is a senior fellow at the Hoover Institution.

Since 1991, living standards in Russia have fallen by 47 percent. The 1990s have witnessed serial defaults, currency devaluations, and continuous contraction. This year, for the first time, Russia is enjoying a 10 percent increase in industrial output and 7 percent economic growth. Tax and payroll arrears are being reduced. Foreign debt is being paid on schedule. A new president has pushed through a 13 percent flat tax, a balanced budget and is working on land and regulatory reforms.

Has Russia turned the corner?

The jury is still out on this question. This year's growth is largely attributable to high oil, gas, and other commodity prices. Foreign exchange earnings are helping fuel Russian economic activity. But true structural reform has yet to begin.

For years, the International Monetary Fund and other foreign experts have advised Russia to follow the trinity of stabilization, liberalization, and privatization (SLiP). Russia has clung faithfully to this path. The advice rested on the conventional wisdom that these policies would transform Russia and other postcommunist countries into market economies. But SLiP failed in Russia and other postcommunist countries. Why?

The Russian economy under central planning can be likened to a single nation-enterprise. When communism collapsed, the government lifted its economic controls over wages, prices, foreign trade, and capital flows. It rapidly privatized enterprises. However, these enterprises--a coordinated network of suppliers and producers under communism--quickly formed a network of their own outside government control.

The new network did not behave as enterprises do in market economies. Rather...