Russian virtual economy faces real abyss
10:54 a.m. Nov 24, 1998 Eastern
By Peter Henderson
MOSCOW, Nov 24 (Reuters) - Russia's crisis has pushed the economy deeper into
the realms of fantasy and the government is losing its power to keep the country in one
piece, a senior U.S. economist said on Tuesday.
Clifford Gaddy, a fellow at the Brookings Institution think tank, who has described
Russia's convoluted system as a virtual economy, said Russia at best was heading for a
downward spiral.
The collective fantasy of the virtual economy is that inefficient industry is productive,
wages are well earned, and the government is a benevolent regulator. Debts pile up
but its popular, though cynical, support is reflected in an old Soviet joke: They pretend
to pay us, and we pretend to work.
''Continuing along the track Russia is now on is a dead end -- not just for the
economy to become prosperous, but for an economy that can be viable, for a state
that can hold the country together,'' Gaddy said by telephone from Washington.
Gaddy and Barry Ickes, of Pennsylvania State University, argued earlier this year that
Russia's economic inefficiency was masked under a buildup of tax, wage and
payments arrears since there was not enough cash to pay inflated prices and wages.
''The ultimate pretence (is) that the Russian economy is larger than it really is. It is this
pretence that allows for larger government, and larger expenditures, than Russia can
afford,'' they wrote.
But the virtual economy is popular -- ending it would require cutting the budget,
pensions, wages and jobs, closing factories and generally realising pain put off by the
accumulation and occasional mutual cancellation of debts.
Crisis and the breakdown of the weak banking system, the major conduit of cash
money in the economy, had made the virtual economy stronger, making scarce
resources more sought after and the cost of dismantling the system more frightening, he
said.
''Almost everything the crisis has caused tends to reinforce the virtual economy.''
Efficiency and the market suffered.
Regions were increasingly dependent on the virtual economy as the post-crisis tax
base shrank, Gaddy said.
''This virtual economy always tends to break the national economy into more, almost
self-contained, regional economies.''
As the tax base shrank a region would prefer taxes in kind -- construction of a school,
for example -- leaving the federal government nothing. The region would have handed
over cash.
The federal government often would take some payment in kind rather than face
non-payment by cash-strapped firms or risk bankrupting industry by insisting on cash
from everyone.
Gaddy said Russia's only salvation was radical reform, culling out enterprises that were
inefficient, then shutting them down or reforming them -- a long and expensive process.
''They have got to start eliminating this pretence at the core of the virtual economy that
these enterprises are creating value.''
Previous foreign assistance had allowed the government to close its budget gap and
the virtual economy to limp on. Real reform would take more funds with a different aim
-- restructuring business.
''Without fairly massive Western assistance, I don't think the Russians are going to
consider doing this. They are always going to consider it is easier to muddle through,''
he said.
But muddling through could lead to disaster, since the federal government is
progressively weakening, Gaddy said.
''I'm not looking at internal strife immediately as the most likely bad outcome for
Russia. I see breakdown, where social functions of the federal government can't be
accomplished.''
He pointed to a food shortage expected this winter as a harbinger of future problems.
The grain harvest was the lowest in decades but he said the real issue was of
distribution rather than absolute lack of food.
Those regions with food to spare kept it from poorer ones, and the federal government
was unable to buy or take it.
''More and more functions of state, to the extent they are fulfilled at all, are fulfilled at
the local level. This creates some major difficulties for functions that can only be
fulfilled at the national level, like national security, control over nuclear materials,
environomental questions, public health...
''This winter's problem with food should be a real signal... This is not a problem of a
bad harvest, this is the problem of an incredibly weak and poor federal government in
Russia.
((Moscow Newsroom, +7095 941-8520 moscow.newsroom+reuters.com))
Copyright 1998 Reuters Limited |
