By John Ross
It didn't take long for popular support for Russia's economic shock therapy to start evaporating.
On January 18, little more than two weeks after the reforms had been introduced, Muscovites were asked if the Yeltsin government's actions were helping the country to escape from crisis. Some 43% said "no" or "probably not". Just 26% supported the government.
In St Petersburg, the margin was greater — 50% to 22%. And these two cities had given high votes to Yeltsin in Russia's presidential elections, and returned pro-market mayors.
Internal criticism of the Russian government's policies fails, however, to go to the heart of the problem when it complains that price liberalisation preceded privatisation.
Privatisation will not eliminate monopolies. The Russian economy is monopolised not simply in terms of state ownership but in terms of physical production. Some 40% of former Soviet industrial output is composed of goods produced from one site.
Single sites produce 100% of sewing machines, tram rails, hydraulic turbines, freezers and coking equipment, 97% of trolley buses, 96% of rolled stainless steel and 95% of diesel locomotives and steam turbines.
Nor can international trade provide sufficient competition to control prices. In the short term, limitation of Russian export earnings ensures that imports sufficient to contain prices on the internal market cannot be financed. Foreign aid sufficient to overcome this problem is not even proposed.
More fundamentally, the large size of the Russian economy, which is disguised by the rouble's excessively low exchange rate, ensures imports cannot occupy a role sufficient to control price increases.
In an economy which will remain monopolised for years, neither economic theory nor practice indicates that liberalisation of prices will lead to increases in output. The smartest way for a monopolist to make money is to restrict supply and increase prices, thereby creating inflation accompanied by economic contraction.
The consequence of such rapid inflation, not matched by equivalent increases in wages, is collapsing domestic demand.
Computer simulations carried out at the Russian Institute of Economic Forecasting by Andrei Belousov and Andrei Klepach illustrate the process.
Simulations in February indicated total industrial output in 1992 falling by 20-25% and consumer goods output declining by 40-45% if the full impact of energy price increases were allowed to develop.
The situation in agriculture is potentially worse. Because farming can be demonopolised rapidly and industry cannot, agriculture faces a double squeeze.
Soaring inflation contracts the real market for agricultural products. Inputs into agriculture, however, come from the monopolised industrial sector. While agricultural output prices have risen by about 400%, prices of inputs to the sector have risen by nearly 800%.
Squeezed between a contracting market and soaring costs, agriculture will deteriorate further under price liberalisation — as in other east European countries.
Belousov and Klepach have described the course the Russian economy has embarked on following price liberalisation.
"First: liberalisation of prices is a strong factor accelerating the decline in output of 'end products' — machine building, construction, output of consumer goods ...
"Second: the decline in standards of consumption will continue. In 1991, consumption of consumer goods in the USSR ... fell by about 20%. Liberalisation of prices will place the majority of the population below the poverty line. The concentration of the population's demand on the most basic necessities will make impossible a development of consumer durables production ...
"Third: according to estimates, the reduction in capital investment ... will be 30% and will take on a long-term character ...
"Fourth: ... A harsh and unjustifiable reduction of personal savings [due to inflation] will undermine the financing of the state debt and budget deficit and bring the country's credit system to the verge of bankruptcy.
"Fifth, price liberalisation will seriously dislocate trade between former Soviet republics.
"Such a combination of developments will make the economic crisis self-reproducing and irreversible."
Given the size of the economy, exports cannot compensate for the collapse of domestic Russian markets and inter-republican trade — a point forcefully put by Andrei Kolganov, an economist at Moscow University who is an adviser to the Russian Party of Labour.
It took two years for the Polish government, in more favourable circumstances, to begin to back-pedal on its economic shock therapy. It would be surprising if Russia's policy succeeded in lasting until the autumn.
[Abridged from an article that first appeared in the British Guardian.]