Privatization in the Former Soviet Union - One Year Later

By Wessel, Robert H. | Business Economics, January 1993 | Go to article overview

Privatization in the Former Soviet Union - One Year Later


Wessel, Robert H., Business Economics


IN THE FALL of 1991, the old Soviet Union broke apart, leaving the former member republics to find their own way to economic reform. Most have chosen to move in the general direction of private business economies. This is a step most are ill prepared to take, however. Many important prerequisites for the transition from communism to capitalism are lacking in that region. Especially important are the attitudes and commitments of the leadership and the public for such a change. Most of the countries of Eastern Europe, on the other hand, have a considerable segment of the population that can vividly remember what their countries were like before the communist takeover after World War II. In addition, the process of economic reform in the Soviet area has been frequently interrupted by outbreaks of ethnic or nationalistic violence. Consequently, after a year of hesitating progress, the success of many programs seems in doubt.

Nevertheless, impressive progress in the role played by private business in the former Soviet Union was registered during the first twelve months since the breakup. Business enterprises enjoy substantial independence of operation, businessmen are free to start and develop private firms, and the prices businessmen charge for most commodities have been decontrolled. In addition, a unified exchange rate has been established in Russia for the ruble, making international business more possible. Western style advertising is finding the Russian public receptive rather than hostile. The lines at McDonalds are longer than those at Lenin's tomb, and western firms are encountering more and more success in negotiating contracts to supply technology and services. Witness the recent deal calling for Hughes Aircraft to equip remote Tatarstan with cellular and satellite telecommunications.

Enormous problems remain, however. In 1992, Russia's foreign trade fell a precipitous 27 percent from a year earlier, while industrial production dropped off 14 percent. At the same time, decontrol left consumer prices almost 10 fold higher than they were a year previously. Investment in early 1992 was only 56 percent of what it was in 1991. An unprecedented peacetime decline in public health has taken place. In addition, the birth rate has dropped precipitously and now is below the death rate.

As a result of these many factors, political opposition from groups like the "Civic Union," an alliance of old state-owned industry managers and leaders of former communist trade unions and the Party of Economic Freedom, which represents Russia's new businessmen, was being felt. The first group believed that only the existing managers can run the large industries, while the libertarians felt that Yeltsin's plans leave government with too much control. Although temporarily in opposition to the government, it was encouraging that private business interests had gained sufficient strength to be a meaningful political force.

Conditions were sufficiently favorable so that the Yeltsin government had not given up its plans for drastic reform of the economy. Although threatened by unwise central bank policy, the budget deficit was down from 20 percent of GDP in 1991 to 5 percent in mid-1992. The inflation rate had fallen to 10 percent per month from much higher previous numbers. Against this background, a voucher plan for privatizing state-owned ventures was started on October 1, 1992. A change of emphasis by the Yeltsin regime had taken place, however. The new approach stressed attempts to build consensus step by step rather than by executive degree. In addition, the very stringent credit policy had been moderated to ease social tensions.

Russia, a year after the breakup, was ahead of the other former Soviet Republics in its movement toward private business but they too were going through a similar process and were moving in the same favorable direction.

RUSSIA'S PRIVATIZATION PLAN

Under Russia's privatization plan, part of the ownership in business ventures is being given to employees and management. …

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