By Renfrey Clarke
MOSCOW — Russian Premier Viktor Chernomyrdin on January 18 abandoned price controls imposed several weeks earlier on a range of food and household products. The decision to lift the controls, which were introduced in response to alarming food price rises during recent months, confirms the widespread impression here that the new government will pursue modified neo-liberal strategies differing little from those of its predecessor.
Prices of staple food items have been increasing recently by as much as 50 or even 60% per month, compared with general inflation of 20 to 25%. The price spiral is widely believed to reflect profiteering by the warehousing organisations which still dominate the supply of foodstuffs to retail stores. Chernomyrdin's December 31 decree imposed caps ranging from 10 to 50% on the profits that could be realised from the sale of 17 basic products.
The premier's move reportedly took most of his ministers by surprise. The government's chief economic strategist, vice-premier and former World Bank board member Boris Fyodorov, described the decision to impose the controls as "not only mistaken, but impossible to realise".
Liberal journalists responded with horror, seeing the attempt to curb price-gouging as the opening move in a campaign to dismantle the "reforms" initiated during 1992 by the government of Yegor Gaidar.
However, nothing Chernomyrdin has done suggests an important break with Gaidar's methods. Even the new premier's much-criticised decision to grant cheap credits to enterprises in the energy sector merely continues a pattern established by Gaidar.
The limited signs of future policy directions that have emerged so far suggest that, if anything, the adherence to monetarist doctrines under Chernomyrdin and Fyodorov will be more hardline than during the final six months of the Gaidar government. As hyperinflation passes from threat to reality, Fyodorov has reportedly been working on a plan to curb increases in the money supply through harsh credit restrictions.
During recent weeks the new elite has felt the need for desperate measures, as fresh data have indicated that the collapse of the Russian economy will continue, and prove much more severe than the catastrophes in eastern Europe.
A forecast prepared by economists for the newspaper Business World predicted that the average daily volume of industrial production in January 1993 would be 27.6% below the level in January 1992. This indicates a significant acceleration of the decline compared with the months from July to November, when output was down by 21.5-26.1% from the levels a year earlier.
Another Business World study indicates that overall capital ian economy during 1993 will drop by a further 10% from the dismal levels of 1992, plunging to a mere 45% of the 1991 figure. This will bring continuing falls in output.
According to Business World, Russian gross national product in 1993 will fall by 28% from the 1992 figure, which itself was down by 20% on the previous year. Total output of goods and services in Russia this year is thus likely to be no more than about 55% of the levels in 1990.
As plotted by the computers of the economic forecasters, the collapse of the Russian economy will eventually exceed the worst declines in the West during the 1930s depression almost twice over. The argument that this crash is an unavoidable part of the process of constructing a market-based economy thus seems rather lame. The Chinese, using quite different strategies, introduced market mechanisms to their economy after 1978 without experiencing any decline. On the contrary, the Chinese reform quickly set off rapid growth which has continued to this day.
Nor can the catastrophe in the Russian economy be blamed on the heritage of the "era of stagnation"; the Chinese reformers also inherited a stagnant economy with decrepit infrastructure and industrial plant. History's worst-ever peacetime economic disaster is the fault of the neo-liberal policies followed by the "Gaidar team" — most of whose members still control economic ministries in the Chernomyrdin government.
Perhaps their key folly was to ignore two obvious and well-known features of the Russian economy: Russian industry is heavily monopolised, and industrial producers are protected against foreign competition by the country's acute shortage of foreign exchange.
These two facts are enough to turn the neo-liberal dogma of universal price liberalisation into economic poison. When the Gaidar government freed almost all prices in January last year, the Russian monopolists cut production and raised prices in order to maximise profits.
The extravagant price mark-ups caused huge debts to accumulate between enterprises. Non-monopoly producers, whose ability to raise prices was limited by competition, were devastated; consumer industry was hit especially hard, as was agriculture. Tight-money policies introduced in an attempt to control inflation contributed to a drastic decline in real wages, and thus of effective demand.
According to neo-liberal doctrine, inefficient, loss-making enterprises must be allowed to fail, their production being replaced by imports if necessary. But in Russia, loss-making enterprises are frequently the sole national producers of indispensable items. With little hard currency available for imports, the choice has often been to prop up failing enterprises or allow whole branches of industry to shut down. The Gaidar government thus found that one of the key principles of its "economic rationalism" was impossible to apply.
Last summer, as the crisis of enterprise debts threatened to shut down industry anyway, the government gave in and allowed the emission of edits. The debt crisis abated, demand picked up, and the decline in output slowed. But inflation, which had fallen during the spring, began rising again. Now the combination of monopoly price-fixing and large-scale credit has tipped the economy into hyperinflation — the bizarre state in which saving and investment become absurdities, speculation is more rational than production, and government spending is almost guaranteed to rise faster than revenues.
The only "remedy" that government strategist Boris Fyodorov appears ready to consider is a return to harsh restrictions on credit. But the main effect of this would be to bankrupt non-monopoly enterprises, especially producers of food and other consumer goods dependent on sales to the increasingly impoverished population. The monopoly sector, whose price-gouging is arguably the main catalyst of inflation, would be hurt much less.
Amid the mayhem, almost the only positive note that can be sounded is that the catastrophe is at last forcing serious debate onto the pages of the mass-circulation liberal press. The daily Nezavisimaya Gazeta has now carried several interviews with prominent critics of the Gaidar strategies.
In one of these, two leading Economy Ministry officials took issue with the insistence of the Gaidar team that price controls are invariably a bad thing. "It is universally recognised that price regulation is a lesser evil than inflation and unemployment", the officials argued, going on to urge controls on the profits of monopoly producers, and especially of raw materials producers. The interview suggested this regulation could be made effective through a combination of levers such as price fixing and profit caps, adapted to specific cases.
In another interview, Central Bank chief Viktor Gerashchenko called for a three to four-month freeze on wages and prices, together with indexation of savings bank interest to the inflation rate to encourage saving. Gerashchenko opposed the privatising of large monopolies, saying this would impede the ability of the government to regulate prices.
Nezavisimaya Gazeta has yet to publish a detailed critique of neo-liberalism, and even Gerashchenko was merely condemning the Gaidar team's inept and destructive approach to the goal of building capitalism. Opponents of this goal are still banned from Russian television, and from the country's largest-circulation newspapers. Nevertheless, the flip-side totalitarianism of the new nomenklatura-liberal establishment is starting to break down, and particular tenets of the new faith are coming under unprecedented attack.