"Reverse Gradualism", Investment Collapse and Monetary Degradation in Russia in the 1990s
In the 1990s The Russian transitional economy was characterized by many adverse economic processes, but the very important are two of these ones. The first one was the long and biggest fall in output and fixed capital investment. The second was monetary degradation which is increase of primitive med...
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| Cite this: | "Reverse Gradualism", Investment Collapse and Monetary Degradation in Russia in the 1990s / I.V. Rozmainsky // Економічний вісник Донбасу. — 2014. — № 4(38). — С. 5-11. — Бібліогр.: 27 назв. — англ. |
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| citation_txt | "Reverse Gradualism", Investment Collapse and Monetary Degradation in Russia in the 1990s / I.V. Rozmainsky // Економічний вісник Донбасу. — 2014. — № 4(38). — С. 5-11. — Бібліогр.: 27 назв. — англ. |
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| description | In the 1990s The Russian transitional economy was characterized by many adverse economic processes, but the very important are two of these ones. The first one was the long and biggest fall in output and fixed capital investment. The second was monetary degradation which is increase of primitive mediums of exchange and means of payment – cash, interenterprise arrears ("non-payments") and barter – and (relative and absolute) decrease of "advanced" kinds of money. The goal of this article is to explain interconnections between these processes. The main idea is that these phenomena were generated by shock therapy policy which is turned to be a something like “reverse gradualism”. It means that shock therapy policy is the immediate introduction of all reforms but is not immediate completion of all ones. If that policy takes place, logically later reforms are ended more early because of its extremely small relative duration! That was a case of Russia in the 1990s.
У 1990-і роки російська перехідна економіка характеризувалася безліччю несприятливих економічних процесів, але найважливішими були два з них. Перший - тривалий і величезний спад виробництва і інвестицій в основний капітал. Другий - грошова деградація, що була збільшенням ролі примітивних засобів обміну і засобів платежу - готівки, неплатежів і бартеру - укупі з відносним і абсолютним зменшенням ролі «просунутих» видів грошей. Мета цієї статті полягає в поясненні взаємозв'язків між цими процесами. Основна ідея полягає в тому, що ці феномени генерувалися політикою шокової терапії, яка виявилася чимось на зразок «зворотного градуалізму». Останнє означає, що політика шокової терапії є миттєвим впровадженням усіх реформ, але не їх миттєвим завершенням. Якщо така політика здійснюється, то ті реформи, які логічно мали б бути проведені пізніше, реалізуються раніше із-за їх надзвичайно малої відносної тривалості. Це і відбувалося в Росії в 1990-і роки.
В 1990-е годы российская переходная экономика характеризовалась множеством неблагоприятных экономических процессов, но самыми важными были два из них. Первый – длительный и громадный спад производства и инвестиций в основной капитал. Второй – денежная деградация, представлявшая собой увеличение роли примитивных средств обмена и средств платежа – наличности, неплатежей и бартера – вкупе с относительным и абсолютным уменьшением роли «продвинутых» видов денег. Цель этой статьи заключается в объяснении взаимосвязей между этими процессами. Основная идея состоит в том, что эти феномены были генерированы политикой шоковой терапии, которая оказалась чем-то вроде «обратного градуализма». Последнее означает, что политика шоковой терапии является мгновенным внедрением всех реформ, но не их мгновенным завершением. Если такая политика осуществляется, то те реформы, которые логически должны были бы быть проведены позже, реализуются раньше из-за их чрезвычайно малой относительной длительности. Это и происходило в России в 1990-е годы.
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I. V. Rozmainsky
5
Економічний вісник Донбасу № 4(38), 2014
SCIENTIFIC ARTICLES
UDC 330.322: 336.74
I. V. Rozmainsky,
PhD (Economics),
Russia, Saint-Petersburg
"REVERSE GRADUALISM", INVESTMENT COLLAPSE
AND MONETARY DEGRADATION IN RUSSIA IN THE 1990s
I. Introduction
In the 1990s The Russian transitional economy
was characterized by many adverse economic process-
es, and this paper will focus on the two of these ones.
The first one was the long and biggest fall in output
and fixed capital investment. The second was monetary
degradation (this term will be explained below). These
phenomena (especially the first one) reflected clearly
failure of economic reforms in Russia, because large
negative economic growth implied nothing but fiasco.
Why the Liberal Reforms of the 1990s were so unsuc-
cessful?
The goal of this article is to give the answers to
this and some other questions. I will show that roots of
economic failure of Russia in the 1990s are in the type
of the strategy of economic reforms. I called it "reverse
gradualism"; indeed it is the newest label for the shock
therapy strategy, as I will explain below. Such strategy
generates the criminalization of the economy, which, in
turn, does the adverse influence on investment, output
and finance. The interaction between investment sector
and monetary processes deepened crisis. The general
outcomes are underdeveloped economy, technological
backwardness and ineffective institutional environ-
ment. These ones can be considered as one of the roots
of social and political processes started after reelection
of Putin in 2012 in Russia.
The structure of the paper is the following. The
Section 2 describes (in detail) the essence of gradual-
ism and its important elements and also explains why
shock therapy strategy – at least, in the case of Rus-
sia – is nothing but "reverse gradualism". The Section
3 illustrates the ideology of the Russian transitional
reforms. The Section 4 describes both concrete carry-
ing-out of reforms in Russia and how these reforms
generated criminalization of the economy. The Section
5 describes the influence of criminalization on fall in
fixed capital investment. The Section 6 contains the
description of the influence of the same process on
monetary degradation. Section 7 tells about the interac-
tion between changes in fixed capital investment ac-
tivity and financial development in the developed
countries (including "new industrial countries") and in
Russia. The Section 8 is the conclusion.
2. Gradualism versus Shock therapy or "Nor-
mal Gradualism" versus "Reverse Gradualism"
The problem of the gradualism/shock therapy
choice is widely discussed among the economists who
are concerned with the economics of transition (Dewat-
ripont & Roland, 1995, 1997; Аslund, 1996 etc). It
seems to me that, however, underestimation of the
essence of gradualism takes place. Gradualism is the
sequencing of reforms. Yes, of course, it is true. But
this definition is not sufficient. It does not give the
information about duration of each of these reforms.
This point is very important.
What reforms constitute gradualist transition to
the market economy? I think that it is necessary to
mention the following ones.
a) The creation of the legal framework for the
market economy. I mean such things as clear system of
property rights, contract law, the definitions of rights
and duties of private and state enterprises, the proce-
dure of the bankruptcy, provision of the general coher-
ence of laws (for example, coherence of instructions of
the President with laws of legislative organs) etc (see
Udovenko and Gurinovich (1994)).
b) The development of private sector.
c) Demonopolization and restructuring of the en-
terprises.
d) Privatization.
e) Price liberalization.
f) The departure of the government from the
economy (in particular, from the sphere of the enter-
prises administration and management).
What especial feature of this list? Each successive
reform takes less time than preceding one. The dura-
tion of price liberalization or of departure of the gov-
ernment from the business administration can be equal
to one day. On the other hand, the creation of the good
legal framework or the development of (even small)
private sector can take a few years. More early reforms
are longer (and also complicated).
It means that shock therapy policy is the immedi-
ate introduction of all reforms but is not immediate
completion of all ones! If that policy takes place, logi-
cally later reforms are ended more early because of its
extremely small relative duration! For example, imme-
Economic Theory
I. V. Rozmainsky
6
Економічний вісник Донбасу № 4(38), 2014
diate introduction of both the development of private
sector and the departure of the government from the
business administration simply means that, as a (inter-
mediate) result, many enterprises will remain without
any administration (Raskov, 1995)! Or the attempts to
create simultaneously privatized enterprises and legal
framework will lead to the situation of the "game with-
out rules". Both such situations took place in Russia in
the 1990s.
I would like to note that the shock therapy policy
ex ante has been transformed into the "reverse gradual-
ism" ex post. Those reforms that must (from economic
point of view) be implemented later, take place more
early (it is the definition of the "reverse gradualism").
Such "bad" succession complicates the transition to the
market economy and also generates chaos and increas-
es the uncertainty of the future. But the main evil of the
"reverse gradualism" is the creation of the prerequisites
for criminalization of the economy. In other words,
such policy gives the broad possibilities for the getting
income by cheatings, plundering and other "black" (i.e.
illegal) kinds of economic activity (I will show it in the
Section 4).
Broadly speaking, the above reasoning implies
that the ("normal") gradualism is the only effective
strategy for the transition to the market economy. Pri-
vatization and price liberalization can be successful
only if these reforms are based on clear legal frame-
work and are realized under the existence of private
sector. It means that the time period between the initial
decision to create the market economy and fully de-
sired liberalization must be long. But then that transi-
tion will be very effective, as experience of China
(country which was gradualist very consistently)
shows. Quick reforms in the spirit of shock therapy
approach, on the other hand, can lead to the sharp eco-
nomic slump and to many social problems.
So there is effectiveness/duration trade-off. More
effective reforms are more long and vice versa. The
effective policy a la ("normal") gradualism is slow.
The quickest shock therapy measures (the "reverse
gradualism") are harmful for the macroeconomic per-
formance and financial development.
But the political constrains also take place. Many
economists believe that high costs of reversal are dis-
advantage of shock therapy policy (Dewatripont &
Roland, 1997). But if there are both extreme political
instability and the threat of the seizure of power by the
reactionary forces, then transitional reforms must be
quick and irreversible in order to make the market
economy rising inevitable. In that case high costs of
reversal are the advantage of shock therapy policy
(Aslund, 1996) because in such politically adverse
situation rapidity is more useful "good" than effective-
ness and macroeconomic performance (it is the point of
view of many extreme liberal reformists). It is such
circumstances that took place in Russia, when the Rus-
sian government made the decision to create the market
economy.
3. The Ideology of Transitional Reforms in
Russia
In order to understand especial features of the
Russian economic reforms, it is necessary to ascertain
its ideology. According to my opinion, this ideology
was characterized by the following points.
a) The idea of the "jump into the market". Many
economists said: "the main is to jump into the market,
all the rest does not matter". In other words, for many
Russians the market economy was not the means but
the goal. The market became the idol. “Towards the
Market at any cost”. I think that it is the reflection of
the essential features of the psychology of the Rus-
sians. "All or nothing" is the principle of many Russian
people. For such people the "cost/benefit" thinking
(which is so typical for the Americans) is not charac-
teristic.
b) The Hayekian idea of the "spontaneous rising
of the market institutions". This idea occupied the
brains of Gaidar and many other reformists. According
to this principle, the creation of the market economy
must not be concerned with the government actions.
The government should depart from the economy and
open the way for the rising of the market institutions.
The emergence of such institutions is the effect of the
chaotic interactions between many atomized individu-
als. The government must not disturb the "mystery" of
spontaneous rising of the market economy.
c) The above-mentioned fear of the seizure of
power by the reactionary forces, i.e. of the revenge of
the communists. "If we will make reforms very quick-
ly, the return (to the power) of the communist forces
cannot deteriorate situation, because the transition to
the market will become irreversible". It is the way of
thinking of many Russian reformists. "The main thing
is to make the reforms as quick as possible".
These fundamental principles had laid the founda-
tion of the Russian transitional reforms. The analysis of
these principles shows that such reforms were extreme-
ly quick and completely "unreasoned" and "unstruc-
tured". The implementation of these reforms generated
big chaos and increased the uncertainty of the future in
Russia.
4. "Reverse Gradualism" and Criminalization
of the Economy in Russia
By the 1991 in Russia the state organs of the en-
terprises administration were abolished. In the January
of 1992 price liberalization took place. In 1992 - 1994
the main part of privatization took place. But these
reforms were executed in conditions of the absence of
such important elements of the healthy market econo-
my as a clear legal framework, private sector and com-
petitive environment. In other words, economic agents
got large possibilities to "make money" by illegal
means. The main such means was the “nomenklaturna-
I. V. Rozmainsky
7
Економічний вісник Донбасу № 4(38), 2014
ja privatizacia”. It took place when managers of state
enterprises created false firms and transmitted re-
sources of these enterprises into such firms. These and
similar actions (together with famous "rent-seeking
activity") displaced "usual" productive and investment
activity. The point is that because of the government
departure the property which belonged to the state
became belonging to nobody. It led to massive redistri-
bution of incomes and criminal formation of capital of
many economic agents. More exactly, the most part of
the Russian private capital was created because of such
"reverse gradualism" by criminal and semi-criminal
methods, that is, by "nomenklaturnaja privatizacia",
speculation, theft, rent-seeking activity and so on.
These phenomena became possible owing to the ab-
sence of clear property rights and other "rules of
game". Such institutions are the necessary condition
for domination of the motive of profit maximization on
the base of productive and investment activity. In the
transitional economy these institutions must be created
in the first phase of "normal" gradualist reform and
make the base for the subsequent measures (see the
Section 2). In Russia in the 1990s this base was not
satisfactory. That is why as in the beginning of the
transition as in the end of the 1990s, speculation, cheat-
ings and transactions with rights, privileges and licens-
es generated more benefit to economic agents than
"normal" productive and investment activity.
In 1992 and 1993 the amount of criminal appro-
priation by private agents was equal to 75-80% of
GDP; in 1996 (when law framework became already a
little more clear) it was equal to 12-15% of GDP
(Shmeljov, 1997, p. 32).
As a result in the Russian economy in the 1990s
there was rising of informal rules of game created by
criminal groups. Criminalization of the economy was
self-intensifying. It did the adverse influence on the
investment and financial sector, as I will show in the
next two sections.
5. Criminalization of the Economy and Col-
lapse of Fixed Capital Investment in Russia
It is known that fixed capital investments are the
moving force of macroeconomic dynamics. Such in-
vestments increase the level of aggregate demand,
expand productive possibilities of the economy (La-
voie, 2006, ch. 5) and are the channel of innovations’
diffusion. Without fixed capital investment there are no
economic growth and technical progress. The conse-
quences of the slack capital investment activity are
stagnation and technological degradation. The long
decrease in such investment leads to the heavy slump.
But fixed capital investment activity is concerned
with the long-run estimates and expectations of the
future. The necessary condition for the carrying-out of
fixed capital investment projects is (more or less) sta-
ble socio-economic environment. In other words, fixed
capital investment is the decreasing function of the
(high) uncertainty of the future, economic and political
instability, "non-clear" legal framework, the absence of
certain guarantees from the government etc (Rozmain-
sky, 2013)..
It is stupidly clear that conditions which are fa-
vorable for fixed capital investment and ones which are
favorable for criminalization of the economy are op-
posed each other. Criminal and semi-criminal kinds of
activity - stealing, illegal speculations, "games" with
rights and licenses - are the "fishing in troubled wa-
ters". Criminalization needs chaos, instability and
uncertainty. Time horizon of the representatives of
criminal groups is extremely short-term. The goal of
such economic agents is to make money as quickly as
possible ("while waters are still troubled"). Such agents
are characterized by investor myopia which means that
agents evaluate consequences of their decisions only
over short-time horizon (Rozmainsky, 2013). Criminal
actions are inconsistent with any long-run activity. In
short, the uncertainty of the future, socio-economic
instability and helter-skelter with legal framework both
increased the uncertainty of the future and created
prerequisites for the success of criminal activity.
On the other hand, investment activity needs the
"calm waters". Time horizon of "fixed capital inves-
tors" is very long (5-40 years). The goal of such agents
is to earn maximal profit during a very prolonged time
period. Any uncertainty, instability and chaos are ex-
tremely disturbing the fixed capital investment activity.
So if in the economy the most profitable activity
becomes short-term and extreme short-term one, that it
means unattractiveness of fixed capital investment.
Such investments are impossible in the system of
short-term horizon economic agents. At the same time
in this system criminal activity can be gainful.
Two of the most harmful effects of the Russian
"reverse gradualism" were "troubling of waters" and
forming of short-term orientation of economic agents.
These effects are interactive. "Troubled waters" were
ideal for criminal activity; such activity, in turn, "trou-
bles waters" in a more degree. So "reverse gradualism'
in Russia generated catastrophic effects to fixed capital
investment activity. The main channel of influence of
these effects was criminalization of the economy. The
profitability of criminal and semi-criminal actions
implied non-profitability of fixed capital investment
because of sharp distinctions in accompanying condi-
tions (short/long time horizon, non-clear/clear legal
framework, high/low level of uncertainty of the future
etc).
But criminalization was harmful for fixed capital
investment activity not only because of these listed
forces (of "troubled/calm waters"). The second funda-
mental reason was the criminal origin of new private
capital. Many Russian reformists believed in the
Marx's theory of "primitive accumulation of capital".
"Let them accumulate as they (new entrepreneurs)
I. V. Rozmainsky
8
Економічний вісник Донбасу № 4(38), 2014
like". According to the point of many Russian reform-
ists, criminally formed private capital was much better
than absence of private one. Reformists believed that
new entrepreneurs will invest own criminal capitals in
the Russian economy and, therefore, help both to trans-
it to the market system and to begin economic growth.
And then rich criminals will become honest (fixed
capital) investors (Davydov, 1997).
It turned out that this conception is not true. Crim-
inal origin of capital induced owner of such capital to
invest outside the country where this capital was
formed because that owner wants to conceal his (or
her) crime from authorities of this country. This "law"
is the main reason for the huge capital outflow form
Russia during the transition to the market system. An-
nual capital outflow (in the 1990s) equaled about $ 50
billions. Foreign financial and productive assets were
the main (and very strong) competitor to Russian fixed
capital for Russian investors. The glaring blunder of
Russian reformists was creation of favorable condi-
tions for the concentration of capital at criminal
groups; for example, in 1997 in Russia domestic and
foreign criminals possessed 55 per cent of capital and
80 per cent of voting stocks (Davydov, 1997, P. 116).
As a result, those who wanted to invest in fixed capital,
had no money, and those who had money (these people
were criminals), did not want to make it.
In 1999 investment in Russian fixed capital was
equal less than 25 per cent of its level in 1990 (and
during the transition period R&D expenditures, accord-
ing to the studies of Shmeljov (1996), fell by ten
times). That collapse was much more awful that the
American Great Depression. Such collapse, as I
showed, was the effect of failed "reverse gradualism"
which led to the "troubled waters" (high uncertainty,
absence of clear legal framework, "short-termisation"
etc) and concentration of capital at criminal groups.
6. Criminalization of the Economy and Mone-
tary degradation in Russia
In developed countries (including new industrial
ones) financial evolution takes place. This term means
rising and spreading of new kinds of money (and qua-
si-money) and new financial practices. I mean liability
management, securitization, off-balance sheet activities
etc. As I will show in the Section 7, there is a positive
interaction between financial evolution and economic
growth. The former facilitates fixed capital investment
activity, which, in turn, is the reason for the further
development of financial system.
In Russia during the transition period there was
monetary degradation. I use this term as a reflection of
increase of primitive mediums of exchange and means
of payment - cash, inter-enterprise arrears ("non-
payments") and barter - and (relative and absolute)
decrease of "advanced" kinds of money. The negative
influence of such degradation on investment activity
will also be shown in the Section 7. In this Section I
will describe criminal roots of monetary degradation in
Russia.
The point is that criminalization needs "adequate"
financing. Financing is "adequate" for criminal activi-
ty, if it allows to conceal outcomes of (criminal) trans-
actions and makes more difficult of all calculation and
accounting. In other words, such financing creates
conditions for above-mentioned "fishing in troubled
waters". Bank money is not good for it. But any new,
"advanced" kinds of money and quasi-money (certifi-
cates on deposit, repurchase agreements etc) are bank
money or are created by the financial institutions’ ac-
tivity. Therefore, to some extent, financial evolution
disturbs criminal activity, because it makes all transac-
tions "transparent" for the statistical services and tax
authorities.
On the other hand, primitive kinds of mediums of
exchange can help criminal groups to hide its actions.
a) Cash. Black cash ("chjornyj nal") is cash in-
flows and outflows which are not reflected in ("offi-
cial") enterprises accounting. Such kind of financing is
the simplest way to hide income from taxation. In Rus-
sia in the 1990s so-called "black cash" was widespread.
The share of cash in the total Russian money supply
increased in the 1990s (for example, in December of
1991 cash/M2 ratio was equal to 0.18, in December of
1993 it was equal to 0.36, and in October of 1998 it
was more than 0.38). It is reflection of criminalization
of the economy (Nesterov & Vakurin, 1995).
b) Barter. Barter is ideal means to conceal in-
comes. Under barter pricing is very muddle, and mate-
rial things flows are reflected in accounting only partly
(or not reflected at all). Multi-stage barter exchanges
are based on "word of honor" and personal connections
between enterprises top managers and very often un-
knowable for the other workers. (Makarov and Kleyn-
er, 1997). So barter allows to hide from tax authorities
and police enormous amount of wealth. The cases were
known when managers of some Russian enterprises
bought "Mersedeses", and at the same time "simple"
workers could not get wage during the months. In 1996
in Russia barter financed 34-50 per cent of turnover of
manufacturing enterprises, 70-80 per cent of transac-
tions with raw, and 75 per cent of turnover of small
businesses producing nonconsumption goods
(Makarov and Kleyner, 1997, p.26). According to so-
ciological interrogatories, in 1996 Russian firms fi-
nanced 35-38 per cent of its transactions by barter (and
only 17-23 per cent by bank money and 9-12 per cent
by cash); the share of transactions financed by barter
had risen in this year by 15 per cent (Klepach, 1997,
p.45, 54).
c) Inter-enterprise arrears ("non-payments"). Ar-
rears did the influence on criminalization through three
channels. In the first place, mutual arrears between
firms are not but specific kind of barter. In the second
place, "non-payments" allowed enterprise-creditor to
I. V. Rozmainsky
9
Економічний вісник Донбасу № 4(38), 2014
delay tax payments. In the third place, rising of "bad"
arrears induced firm-creditor to ask criminals to take
debt principal and interest away from firm-debtor. In
other words, in this last case, incentives to cooperation
between firms and criminal groups appeared. Only in
1996 annual increase of inter-enterprise arrears was
equal to 16 per cent (Klepach, 1997, p.54). In January
of 1997 "mismatured" inter-enterprise arrears were
more than 23 per cent of Russian GDP (Shmeljov,
1997. p 26).
Degradation of monetary system was both cause
and consequence of criminalization of the Russian
economy in the 1990s; the former was the reaction of
financial sector on development of criminal tendencies;
but such degradation, in turn, created conditions for
intensification of these tendencies.
Monetary degradation (and especially barteriza-
tion) was harmful for economic development and tech-
nical progress. It increased transaction costs - because
the carrying-out of exchanges becomes more difficult -
and reduced allocative efficiency (Makarov & Kleyner,
1997, p.33; Malahov, 1997, p.86). But, possibly, the
main evil of monetary degradation was negative influ-
ence on fixed capital investment.
7. Fixed Capital Investment and Financial De-
velopment: Very Important Interaction
In orthodox macroeconomics the problem of fi-
nancing fixed capital investment and economic growth
is, unfortunately, not studied. Only some representa-
tives of Post Keynesian Economics explored this ques-
tion (Minsky, 1977, 1985, 1986; Carvalho, 1992;
Pollin, 1994; see also Rozmainsky, 1995, 1996).
On the one hand, permanent expansion of invest-
ment possibilities increases enterprises demand for
finance and induces banks and other financial institu-
tions to search new ways to satisfy this demand. In
these circumstances financial institutions try to escape
from the central bank (reserve) control; to make it,
these institutions create new kinds of money and finan-
cial practices (already mentioned liability management,
securitization, use of credit lines etc). So banks and
other financial institutions get the possibility to create
money independently on central bank policies. Money
supply becomes endogenous (Chick, 1992; Chick &
Dow, 1988; Niggle, 1990, 1991; Rozmainsky, 1995;
Nozdran and Berezin, 1993).
On the other hand, such financial evolution ex-
pands opportunities for financing expensive and long-
term fixed capital investment. The financial barriers to
investment projects weaken. The increase in the pro-
ductive possibilities becomes quicker. The economy
grows more rapidly. All this is the essence of men-
tioned interaction between economic growth and finan-
cial development.
The above-described story is about positive
tendencies in economic and financial development. But
negative tendencies can also take place. It is case of
Russia in the 1990s. I showed already how criminaliza-
tion (induced by "reverse gradualism") generated both
collapse of fixed capital investment and degradation of
monetary system. The problem is that now even under
the successful struggle with criminal tendencies in-
vestment fall and monetary degradation can interact
and deepen each other. On the one hand, fall in invest-
ment will decrease demand for finance and, therefore,
do not stimulate financial development. On the other
hand, decrease in real (deflated) amount of financial
sources (because of monetary degradation) will narrow
possibilities for financing investment expenditures and,
consequently, economic growth. Growth is impossible
without sufficient financial resources, without separa-
tion of finance (financial sources of investment) from
savings (Carvalho, 1992; Pollin, 1994) because other-
wise for increase of investment it is necessary at first to
increase savings; but owing to famous the "paradox of
thrift" such increase will lead to output fall.
I mentioned already the data about a level of in-
vestment fall in Russia and about a monetary degrada-
tion measured by increase of share of cash in the total
money supply. Now I would like to note that during the
period of 1992-1995 the price level rose by 8,500
times, money supply (including cash) rose by 230
times (and cash rise was more than increase in the total
money supply). The M2/GDP ratio was equal to 0.7 in
1991 (this figure is typical for industrial countries) and
0.1 in 1996 (Shmeljov, 1997, P.26). According to
Shmeljov, the total money supply was less than aggre-
gate money demand of the economy by 15-20 times.
The quasi-money/total money supply ratio was equal to
about 0.01-0.03 during all the transition period in the
1990s (in the developed countries now this ratio is
equal to about 2/3). In other words, in Russia M2 and
M3 were not created. Nozdran and Berezin (1993,
P.39) believe that the reason for it is the investment
collapse. I agree with this point of view. So we can see
that combination of investment collapse and decrease
of real (deflated) money supply (especially "advanced"
kinds of money) was the reality in Russia in the 1990s.
During this period there was threat for Russia to
get into dangerous "trap of absence of financial sources
of growth". This trap is the part of or even the reason
for the "trap of equilibrium at low level of income"
described by Kornai (1994). Moreover, during all
1990s gross domestic output and investment fall in
spite of the government's promises of "stabilization".
8. Conclusion
In this paper I tried to describe the essence and
some negative consequences of shock therapy policy of
transition to the market system. I called this policy
"reverse gradualism" because in fact all reforms cannot
be completed immediately (as the "philosophy" of
shock therapy postulates); there is full realization of
reforms with less duration; it is these reforms that
should from economic point of view be last. For exam-
I. V. Rozmainsky
10
Економічний вісник Донбасу № 4(38), 2014
ple, privatization must be implemented only after crea-
tion of clear legal framework; and attempts to make
both reforms simultaneously lead to situation when
state enterprises are privatized without clear system of
law.
So "reverse gradualism" increased uncertainty, in-
stability and creates law chaos. All these phenomena
generated profitability of short-term kinds of economic
activity, first of all, criminal and semi-criminal "opera-
tions": stealing (for example, "appropriation" of state
property by managers of state enterprises without state
administration), illegal speculations, transactions with
rights, privileges and licenses etc. Economic agents
tried to "fish in troubled waters". Criminalization of the
economy took place.
This process, in turn, had two adverse effects. In
the first place, criminalization was inconsistent with
long-term fixed capital investment activity. Criminali-
zation "troubled waters" in a more degree; at the same
time fixed capital investment projects can be executed
only in the "calm waters" (clear legal framework, in-
cluding clear property rights and duties of government;
low uncertainty of the future; socio-economic stability
etc). Many agents started to behave in the manner de-
scribed by the concept of investor myopia. Further-
more, owners of criminal capital did not want invest it
inside the country where they formed this capital (in
order to hide crimes from police and tax authorities).
Such criminalization generated huge capital outflow.
In the second place, criminalization required "ad-
equate" financing, that is, financing which allows to
conceal value of transactions from the government
agencies (tax authorities etc). Such financing was pro-
vided by monetary degradation, i.e. spreading of primi-
tive kinds of mediums of exchange - cash, barter and
inter-enterprise arrears ("non-payments").
But fall in fixed capital investment and degrada-
tion of monetary system interacted and deepened each
other. This interaction pushed the economy into the
"trap of absence of financial sources of growth". The
backwardness of such transitional economy from the
developed industrial economies increased. That is why
collapse in Russia in the 1990s was so huge. It was, to
a large extent, a consequence of "unreasoned" "reverse
gradualist" reforms in Russia in the 1990s.
And the echoes of these processes are beyond the
1990s! Let me give one example. The average age of
equipment in the USSR and the US was equal in 1970
to 8.4 and 6.4 years respectively, in 1990 10.8 and 7.1.
In 2004 the same variable was equal to 6 years in the
US and 21 years in Russia (Fedotov, 2005). So, the
resulted technological and financial backwardness
together with higher uncertainty is perhaps one of the
roots of adverse political and economic processes in
Russia after reelection of Putin in 2012.
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Розмаїнський І. В. «Зворотний градуалізм»,
колапс інвестицій і грошова деградація в Росії в
1990-ті роки
У 1990-і роки російська перехідна економіка
характеризувалася безліччю несприятливих еконо-
мічних процесів, але найважливішими були два з
них. Перший - тривалий і величезний спад вироб-
ництва і інвестицій в основний капітал. Другий -
грошова деградація, що була збільшенням ролі
примітивних засобів обміну і засобів платежу -
готівки, неплатежів і бартеру - укупі з відносним і
абсолютним зменшенням ролі «просунутих» видів
грошей. Мета цієї статті полягає в поясненні взає-
мозв'язків між цими процесами. Основна ідея поля-
гає в тому, що ці феномени генерувалися політи-
кою шокової терапії, яка виявилася чимось на зра-
зок «зворотного градуалізму». Останнє означає, що
політика шокової терапії є миттєвим впроваджен-
ням усіх реформ, але не їх миттєвим завершенням.
Якщо така політика здійснюється, то ті реформи,
які логічно мали б бути проведені пізніше, реалі-
зуються раніше із-за їх надзвичайно малої віднос-
ної тривалості. Це і відбувалося в Росії в 1990-і
роки.
Ключові слова: градуалізм; інвестиції; грошова
деградація; перехідна економіка; економічна теорія
переходу; російська економіка.
Розмаинский И. В. «Обратный градуализм»,
коллапс инвестиций и денежная деградация в
России в 1990-е годы
В 1990-е годы российская переходная эконо-
мика характеризовалась множеством неблагопри-
ятных экономических процессов, но самыми важ-
ными были два из них. Первый – длительный и
громадный спад производства и инвестиций в ос-
новной капитал. Второй – денежная деградация,
представлявшая собой увеличение роли примитив-
ных средств обмена и средств платежа – налично-
сти, неплатежей и бартера – вкупе с относительным
и абсолютным уменьшением роли «продвинутых»
видов денег. Цель этой статьи заключается в объ-
яснении взаимосвязей между этими процессами.
Основная идея состоит в том, что эти феномены
были генерированы политикой шоковой терапии,
которая оказалась чем-то вроде «обратного градуа-
лизма». Последнее означает, что политика шоковой
терапии является мгновенным внедрением всех
реформ, но не их мгновенным завершением. Если
такая политика осуществляется, то те реформы,
которые логически должны были бы быть проведе-
ны позже, реализуются раньше из-за их чрезвычай-
но малой относительной длительности. Это и про-
исходило в России в 1990-е годы.
Ключевые слова: градуализм; инвестиции; де-
нежная деградация; переходная экономика; эконо-
мическая теория перехода; российская экономика.
Rozmainsky I. V. "Reverse Gradualism", In-
vestment Collapse and Monetary Degradation in
Russia in the 1990s
In the 1990s The Russian transitional economy
was characterized by many adverse economic process-
es, but the very important are two of these ones. The
first one was the long and biggest fall in output and
fixed capital investment. The second was monetary
degradation which is increase of primitive mediums of
exchange and means of payment – cash, inter-
enterprise arrears ("non-payments") and barter – and
(relative and absolute) decrease of "advanced" kinds of
money. The goal of this article is to explain intercon-
nections between these processes. The main idea is that
these phenomena were generated by shock therapy
policy which is turned to be a something like “reverse
gradualism”. It means that shock therapy policy is the
immediate introduction of all reforms but is not imme-
diate completion of all ones. If that policy takes place,
logically later reforms are ended more early because of
its extremely small relative duration! That was a case
of Russia in the 1990s.
Keywords: gradualism; investment; monetary
degradation; transitional economies; economics of
transition; russian economy.
Received by the editors: 03.09.2014
and final form 23.12.2014
|
| id | nasplib_isofts_kiev_ua-123456789-86820 |
| institution | Digital Library of Periodicals of National Academy of Sciences of Ukraine |
| issn | 1817-3772 |
| language | English |
| last_indexed | 2025-11-27T10:11:40Z |
| publishDate | 2014 |
| publisher | Інститут економіки промисловості НАН України |
| record_format | dspace |
| spelling | Rozmainsky, I.V. 2015-10-01T18:08:57Z 2015-10-01T18:08:57Z 2014 "Reverse Gradualism", Investment Collapse and Monetary Degradation in Russia in the 1990s / I.V. Rozmainsky // Економічний вісник Донбасу. — 2014. — № 4(38). — С. 5-11. — Бібліогр.: 27 назв. — англ. 1817-3772 https://nasplib.isofts.kiev.ua/handle/123456789/86820 330.322: 336.74 In the 1990s The Russian transitional economy was characterized by many adverse economic processes, but the very important are two of these ones. The first one was the long and biggest fall in output and fixed capital investment. The second was monetary degradation which is increase of primitive mediums of exchange and means of payment – cash, interenterprise arrears ("non-payments") and barter – and (relative and absolute) decrease of "advanced" kinds of money. The goal of this article is to explain interconnections between these processes. The main idea is that these phenomena were generated by shock therapy policy which is turned to be a something like “reverse gradualism”. It means that shock therapy policy is the immediate introduction of all reforms but is not immediate completion of all ones. If that policy takes place, logically later reforms are ended more early because of its extremely small relative duration! That was a case of Russia in the 1990s. У 1990-і роки російська перехідна економіка характеризувалася безліччю несприятливих економічних процесів, але найважливішими були два з них. Перший - тривалий і величезний спад виробництва і інвестицій в основний капітал. Другий - грошова деградація, що була збільшенням ролі примітивних засобів обміну і засобів платежу - готівки, неплатежів і бартеру - укупі з відносним і абсолютним зменшенням ролі «просунутих» видів грошей. Мета цієї статті полягає в поясненні взаємозв'язків між цими процесами. Основна ідея полягає в тому, що ці феномени генерувалися політикою шокової терапії, яка виявилася чимось на зразок «зворотного градуалізму». Останнє означає, що політика шокової терапії є миттєвим впровадженням усіх реформ, але не їх миттєвим завершенням. Якщо така політика здійснюється, то ті реформи, які логічно мали б бути проведені пізніше, реалізуються раніше із-за їх надзвичайно малої відносної тривалості. Це і відбувалося в Росії в 1990-і роки. В 1990-е годы российская переходная экономика характеризовалась множеством неблагоприятных экономических процессов, но самыми важными были два из них. Первый – длительный и громадный спад производства и инвестиций в основной капитал. Второй – денежная деградация, представлявшая собой увеличение роли примитивных средств обмена и средств платежа – наличности, неплатежей и бартера – вкупе с относительным и абсолютным уменьшением роли «продвинутых» видов денег. Цель этой статьи заключается в объяснении взаимосвязей между этими процессами. Основная идея состоит в том, что эти феномены были генерированы политикой шоковой терапии, которая оказалась чем-то вроде «обратного градуализма». Последнее означает, что политика шоковой терапии является мгновенным внедрением всех реформ, но не их мгновенным завершением. Если такая политика осуществляется, то те реформы, которые логически должны были бы быть проведены позже, реализуются раньше из-за их чрезвычайно малой относительной длительности. Это и происходило в России в 1990-е годы. en Інститут економіки промисловості НАН України Економічний вісник Донбасу Economic Theory "Reverse Gradualism", Investment Collapse and Monetary Degradation in Russia in the 1990s «Зворотний градуалізм», колапс інвестицій і грошова деградація в Росії в 1990-ті роки «Обратный градуализм», коллапс инвестиций и денежная деградация в России в 1990-е годы Article published earlier |
| spellingShingle | "Reverse Gradualism", Investment Collapse and Monetary Degradation in Russia in the 1990s Rozmainsky, I.V. Economic Theory |
| title | "Reverse Gradualism", Investment Collapse and Monetary Degradation in Russia in the 1990s |
| title_alt | «Зворотний градуалізм», колапс інвестицій і грошова деградація в Росії в 1990-ті роки «Обратный градуализм», коллапс инвестиций и денежная деградация в России в 1990-е годы |
| title_full | "Reverse Gradualism", Investment Collapse and Monetary Degradation in Russia in the 1990s |
| title_fullStr | "Reverse Gradualism", Investment Collapse and Monetary Degradation in Russia in the 1990s |
| title_full_unstemmed | "Reverse Gradualism", Investment Collapse and Monetary Degradation in Russia in the 1990s |
| title_short | "Reverse Gradualism", Investment Collapse and Monetary Degradation in Russia in the 1990s |
| title_sort | "reverse gradualism", investment collapse and monetary degradation in russia in the 1990s |
| topic | Economic Theory |
| topic_facet | Economic Theory |
| url | https://nasplib.isofts.kiev.ua/handle/123456789/86820 |
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