Russian reform: possibility or pipedream?

Author:Grossman, Peter Z.

The progress of Russian economic reforms is shaky at best, and this will continue until Russia establishes economic institutions similar to the ones that exist in the US. These institutions took centuries to set up and have created formal and informal rules for the US economic system.


THE NEWS from Russia these days is perplexing. "Capitalism is working," the international press reports one day, but soon after talks of Russia's "reform muddle." Readers are told that "Things are looking up." then that there is a hopeless "mess in Moscow." What is really going on?

In the euphoric days following the collapse of the Soviet Union, the future appeared to be clear: Russia, a country rich in resources with a large industrial capacity, soon would develop a prosperous market economy and a democratic state. All it had to do was free markets, privatize property, adopt sound government fiscal practices, and let the invisible hand of the price system take over. It seemed straightforward enough. After all, Americans, Europeans, and Japanese had been able to build powerful market economies. The Russians seemed poised to join the rich capitalist nations of the world.

However, Russia's progress to free enterprise and democracy has not been easy. The country has struggled with imperfect markets, organized crime, continual fiscal problems, and shaky government authority that are likely to continue for years to come. The process of getting everything to function the way the American system works is not, and can not be, simple.

Experts and laymen alike often forget what went into making an economic system like ours. Our markets did not appear overnight; our rights in private property did not materialize suddenly out of state ownership five years ago. Our economic system took centuries to build and rests on a vast set of recognized formal and informal rules, what may be called our economic institutions. Until Russia has similarly reliable institutions, reliably enforced, it will continue to send confusing (if not depressing) signals about its progress.

Formal laws governing business behavior in the U.S. fill many shelves of libraries. Above all, Americans have constitutional rules on commerce and property, provisions that have been subject to refinement and interpretation, but never repeal, for more than 200 years. These rules were based on British common law traditions and trace their roots back to the Middle Ages.

Moreover, we have lengthy commercial codes that affect the way contracts are drawn, the practices business people adopt, and the expectations of all parties to economic exchange. Consumers as well as producers know and benefit from these rules. Because of them, American consumers expect certain standards of quality and practice, and will rush to court when these standards are violated.

It is fair to say that without these rules (or another set equally detailed) we would not be able to do business as efficiently. We take for granted such everyday transactions as the transfer of title to property, the acquisition of a mortgage, or the legal standing of a properly executed contract. Without recognized rules, none of this would be certain. Some of it, like transfer of title, would not even be possible. Business practice and market exchange depend first and foremost on the existence of established institutions.

We also need to have some belief that the rules, at least...

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