The conversion of the world's largest state-controlled economy into a
market-oriented economy would have been extraordinarily difficult
regardless of the policies chosen. The policies chosen for this
difficult transition were (1) liberalization, (2) stabilization, and (3)
privatization. These policies were based on the neoliberal "Washington
Consensus" of the International Monetary Fund (IMF), World Bank, and
U.S. Treasury Department.
The programs of liberalization and
stabilization were designed by Yeltsin's deputy prime minister Yegor
Gaidar, a 35-year-old liberal economist inclined toward radical reform,
and widely known as an advocate of "shock therapy".
The partial
results of liberalization (lifting price controls) included worsening
already apparent hyperinflation, initially due to monetary overhang and
exacerbated after the central bank, an organ under parliament, which was
skeptical of Yeltsin's reforms, was short of revenue and printed money
to finance its debt. This resulted in the near bankruptcy of much of
Russian industry.
The process of liberalization would create winners
and losers, depending on how particular industries, classes, age groups,
ethnic groups, regions, and other sectors of Russian society were
positioned. Some would benefit by the opening of competition; others
would suffer. Among the winners were the new class of entrepreneurs and
black marketeers that had emerged under Mikhail Gorbachev's perestroika.
But liberalizing prices meant that the elderly and others on fixed
incomes would suffer a severe drop in living standards, and people would
see a lifetime of savings wiped out.
With inflation at double-digit
rates per month as a result of printing, macroeconomic stabilization was
enacted to curb this trend. Stabilization, also called structural
adjustment, is a harsh austerity regime (tight monetary policy and
fiscal policy) for the economy in which the government seeks to control
inflation. Under the stabilization program, the government let most
prices float, raised interest rates to record highs, raised heavy new
taxes, sharply cut back on government subsidies to industry and
construction, and made massive cuts in state welfare spending. These
policies caused widespread hardship as many state enterprises found
themselves without orders or financing. A deep credit crunch shut down
many industries and brought about a protracted depression.
The
rationale of the program was to squeeze the built-in inflationary
pressure out of the economy so that producers would begin making
sensible decisions about production, pricing and investment instead of
chronically overusing resources—a problem that resulted in shortages of
consumer goods in the Soviet Union in the 1980s. By letting the market
rather than central planners determine prices, product mixes, output
levels, and the like, the reformers intended to create an incentive
structure in the economy where efficiency and risk would be rewarded and
waste and carelessness were punished. Removing the causes of chronic
inflation, the reform architects argued, was a precondition for all
other reforms: Hyperinflation would wreck both democracy and economic
progress, they argued; they also argued that only by stabilizing the
state budget could the government proceed to dismantle the Soviet
planned economy and create a new capitalist Russia.
http://en.wikipedia.org/wiki/History_...)
