Russia has been a command socialist economy from the last century. The high debt, shortage of goods, burden on government, higher taxes, coercive charity burden on economy and soaring prices led to the resentment among the people. A demand from the economy and the people as well started to coming out to transit towards the most widely used system of economy that is the market economy.
The transition of market will encompass the Socialist privatization, which calls for a constitutional grant of private property rights to all citizens and for the state to relinquish its stewardship of the means of production.
But, the task to transition to an open market economy was not so easy as it looked. The efforts were initiated under Mikhail Gorbashev, who became General Secretary of the Communist party—the highest leadership post in the Soviet Union—in 1985. He adopted the political and economical policy of Glasnost (openness) and Perestroika (restructuring) respectively.
A radical transformation plan- 500 Days plan was suggested by the team lead by Stanislav Shatalin. The plan was not adopted by Gorbashev, as it was strongly opposed by the Soviet power elite- the top bureaucrats and military leaders because it threatened their positions.
A modest reform programme was than adopted to satisfy the elites and to transform the economy. The major sectors and industries remained under the state control and only, the prices were raised to reduce the goods shortage. This further led to black marketing, which was not rectified by the state even after increasing the prices of goods to 10-20 folds.
The Soviet people faced the worst economic situation as the output plunged sharply, prices were up dramatically, and there was no relief from severe shortages. Further, deterioration of the situation caused the breakup of the Soviet Union.
Boris Yeltsin, the first elected President of Russia, was the strong supporter of market reforms and started the policy of market economy and adopted the Shatalin Plan. The 500-Day Plan was adopted, under which mass distribution of state property was done through Vouchers. The price liberalisation was done and the vouchers were sold on stock exchange.
Despite the hurdles, Prices of most goods have been freed from state controls. Most state-owned firms have been privatized, and most of Russia’s output of goods and services is now produced by the private sector.
To privatize state firms, Russian citizens were issued vouchers that could be used to purchase state enterprises. Under this plan, state enterprises were auctioned off. Individuals, or groups of individuals, could use their vouchers to bid on them. By 1995 most state enterprises in Russia had been privatized.
The output and the standard of living fell through the first half of the 1990s. Despite a financial crisis in 1998, when the Russian government defaulted on its debt, output recovered through the last half of the 1990s and Russia has seen substantial growth in the early years of the twenty-first century.
The government finances have improved by major tax reform and decline in inflation. Despite these gains, there is uneasiness about the long-term sustainability of this progress because of the over-importance of oil and high oil prices in the recovery.
To assure the irreversibility of reforms, the old system of central planning must be scrapped and replaced by a new system of legal, administrative, commercial, social security, fiscal and monetary institutions capable of supporting a market economy.
Challenges in transition
1. Russia lived with command socialism longer than did any other country. In addition, Russia had no historical experience with market capitalism. The lack of policy efficiency towards reduction of public stake and increase in private investment poses a real challenge to transition.
2. The double digit inflation reduces the savings of individuals which led to further reduction in investment and growth. This creates a price hike which eventually reduces the output of industries and causes a downward trend of economy.
3. A program of gradual reforms is more likely to produce a stable transition by maximizing the flow of output over the entire transition period. Which is a real obstacle towards the transition as people needs to see the immediate results and they starts loosing faith soon in the whole process of transition.
4. Lack of Legal setup for propriety ownerships and private dispute settlement is one of the basic hurdles towards privatization of economy.The creation and enforcement of an efficient system of property rights governing the ownership, use and exchange of real and financial assets over time and space and the distribution of state property to the public is necessary to make transition a success.
5. The higher tax base and lack of proper adjudication leads to foreign capital flight. This reduces the investment portfolio in the country by the citizens and fails to attract the foreign investment.
6. The lack of government back up and a long gap in returns from the long term investment and large scale industries reduces the success rate and establishment of this industry.
7. After the mass distribution of stocks under the 500 days plan, the major stocks went into the hands of riches and gave rise to the ‘oligarchy’, which concentrate the wealth and power in few hands.
8. The heavy dependency on oil and petroleum products has contributed the high growth since 2003. The export of this sector has been the major fuel towards the economy growth. The intermittent plunge in oil prices in 2008-9 and 2014 onwards had impacted the economy to a great extent. So, there is a need to bring more innovation in the economic sectors.
9. The lack of political will has also reduced the extent of expected outcomes. The ministers and elites had held the higher positions in the state run industrial set ups.The move towards privatization has reduced their fortunes and caused opposition towards the transition of market economy.
10. The improper sequencing of reforms is likely to have a significant impact on the stability of the transition to a market economy. Transformation strategies typically define the final objectives of reform and the nature, sequence and timing of reforms most likely to achieve. A proper sequencing of stabilization, privatization and liberalization is needs to adopt instead of a miscalculated strategy. The price liberalization program unconstrained by stringent fiscal and monetary stabilization unleashed further inflationary expectations and increased the fragility of the monetary system.
11. To further strengthen stabilization, state subsidies to consumers and firms are phased out, and hard budget constraints are imposed on the state sector. This posed the concern over the general well being of the citizens. The government expenditure is also necessary to uplift the living standard of the people.
12. Once the economy is stabilized, price liberalization (decontrol) can be completed without the threat of initiating inflation. But during the privatization process the Ruble was left without any stabilization drill which led to the debt crises and higher inflation.
13. Inadequate administrative preparation along with high VAT tax rates made non-compliance commonplace, depriving the government of sorely needed tax revenues.
14. The extraordinary degree of industrial concentration and the absence of domestic or foreign competition permitted large state enterprises to fully exploit their monopoly positions by raising prices and actually reducing output.
15. The absence of a developed capital market and an effective inter-enterprise payments mechanism gave rise to large scale state enterprises debt accumulation to other enterprises.
16. The potential financial failure of a major segment of state owned enterprises and the concomitant threat of widespread unemployment has created great political pressure from the military and industrial enterprise interests on the central bank to issue vast new credits to offset the massive accumulation of inter-enterprise arrears.
17. In the first half of the 2000s, a choice was made in favor of the actual re-nationalization of core fuel and energy assets. Resources and revenues in the sector were redirected to the state (to the federal budget and state-controlled companies). The re-nationalization of core sectors can again reduces the faith of individuals in private industries and could reduce the further investment.
Conclusion
The privatization of economy has helped in developing countries such as China and India to take a leap from low income countries toward middle income section. This has proved a very efficient system to change the well being of economy and its citizens. By doing a proper assessment of the most suitable system and implementing it in a most suited way can lead to better outcomes. Here the need is to overcome the shortcomings and reduce the felonies to get the transition a success.
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