Academician, R.Ac.Sci.
Director, Institute for Market Problems, R.Ac.Sci.

Corresponding Member of R.Ac.Sci.
Economics Deputy Director, Institute for Market Problems, R.Ac.Sci.


Recent years, like never before, saw this country's economy turn into a target of political speculation. The rate of inflation, of industrial decline, of the population's plummeting real incomes became "marked cards" in the political struggles. Yet the term "stabilization" - macroeconomic, financial, national-economic, sociopolitical - has strongly appealed to political demagogues. What with the nuances, one clearly discerns the one and only politico-egocentric interpretation of stabilization - that nothing is going to be revised as long as we, or at least our successors, are in power. Thereby the major economic problem of stabilization is being reduced to the level of a verbal cliche in political demagogy. Meanwhile, a theory of economic stabilization, sufficiently clear and rigorously proved mathematically, has been in existence for many years now. This theory had been developing in the framework of Soviet economic thought with the aim of proving the objective futility of that time's economic policy.

Economics is indifferent to political labels. There are actions (a concrete economic policy), and there are socioeconomic results. Whatever the actions are called: democratic reforms, shock therapy, a stabilization policy - the only criterion for evaluating them may be the economic results. Reformist economic policy, therefore, should be analyzed from positions of seeking a realistic way out, rather than from the priory political slogans slapped upon it. An unbiased assessment of the results of the feverish activities of Russia's reformers requires a clear-out definition of the conceptual apparatus. In this connection we must address the theory of economic stabilization.

What is Economic Stabilization?

The theory of economic stabilization (1) is exceedingly transparent from the viewpoint of defining the goals - minimizing the risk zones, loosening up the bottlenecks, pin-pointing the areas of unpredictable behaviour. The stable development of a system (here - an economic system) requires: first, an understanding of into what and how to invest resources; second, an assessment of the degree of risk the society is prepared to take. This depends not only on the mandate of trust won by a political leader or bloc in an election, but also on the objectively evaluated complexity of the system to be reformed. The more complex and dimensional the system, the greater the assets that have to be reserved for ensuring its stability in the course of reorganization.

Channeling part of the resources for stabilizing the economy has always been envisaged in advanced countries; for, depending on this, after all, is the degree in which they are civilized. It has long been axiomatic in economic life, that ensuring the steady, smooth running of various industries integrally bound into a single system of social division of labor, necessitates the availability by an estimate of possible damage inflicted by these or other contingencies. Reserve funds, materialized in different concrete forms, have different mobility. They may be stocks of finished products, raw and other materials reserves an enterprise's own assets, etc. Expenditure to establish and run all kinds of reserve funds is expenditure on stabilization. Spending on the creation and development of infrastructure, also means, without doubt, making inputs into the stabilization of the economic system. Without them, or when they are inadequate, the economy inexorably moves towards a state of disaster.

As is known, three types of infrastructure are singled out: material, belonging of roads, bridges, ports, communication systems, housing and community facilities; institutional, which includes all the facilities of the state administration, expenditure for the organization and maintenance of the monetary -credit and financing system (market infrastructure), spending on the development of basic research; personal, covering inputs into education, public health, culture and other services to the population.

All investments into the infrastructure are inputs aimed at stabilizing the socioeconomic system, since, along with investments towards raising the reliability of technical facilities and technological processes, they steeply enhance the degree of society's stability, its immunity to all kinds of social and economic ills, provide the necessary adaptive potential for responding adequately to the fast-changing world around us. Belonging here also is spending on nature protection and maintaining ecological equilibrium. Social stability problems deserve a special place. An economic section of these problems - incomes of the population: the level of their differentiation, formative and redistribution mechanisms. Social stability is a rather delicate matter. This is why in all civilized countries the sphere of social policy Come under the closest scrutiny of economists, sociologists, political scientists and politicians.

An enlarged classification of stabilizing factors determining the state of socioeconomic systems gives a clear understanding of a stabilizing policy's content. Imbalance of the economic situation, chaotic behaviour of individual components of a single economic organism call for heavier investment into the system's stabilizing elements. Failure to do so increases the probability of a breakdown, first in the already discernible trouble spots, followed by an increase, in geometric progression, of the number such spots. The economy and society find them themselves in a catastrophic situation. And here one should distinguish two actual situations: the system is in a pre-catastrophic state; catastrophe has already struck, that is, the system has disintegrated.

The former situation means that the policy of staking everything has brought about such a build-up of destabilizing potential within the system, that it no longer has sufficient internal resources to cope with the risks. The probability of their unfavourable realization fast approaches unity. In other words, with the mounting probability of a great number of breakdowns occurring in the system simultaneously, it may face an acute shortage of means for repairing the damage. It is then that the disintegration, atomization of the socioeconomic system sets in. The socioeconomic policy of staking one's all leads to the destruction of society's immune system, liquidates its inner adaptive mechanisms.

An analysis of the policy of the Gaidar-Chernomyrdin government gives Every ground to believe that by their efforts of the last four years Russia Has moved from a state of crisis to that of catastrophe. Having adopted The concept of financial stabilisation, which is of a rather limited, Derivative importance, they began multiplying destabilizing factors. A budgetary assets saving regimen leads to an infrastructural crisis. Saving on Maintenance caused in the last four years a dramatic increase of accidents in the mines, in industry, in transportation (especially pipe-lines), etc. Our top executives tend to attribute the growing accident incidence to natural calamities. Wrong, it is a direct result of destabilizing policies. Suffice it to recall the recent tragedy of Sakhalin. The following facts were made public at a session of the Russian government in November 1995: 52 seismic stations were closed down in the country since 1991, accuracy of defining the scope of earthquakes dropped fivefold. Similar example abound. There is not one sphere of economic activity or social services without a visible increase of destabilizing factors. Risk zones are expanding at a tremendous pace. The elected policy of bluffing is driving the economy, and, indeed, the entire society, into a blind alley. The miserly, short-sighted saving on maintaining The production and social infrastructure in normal running order is bound to Bring tremendous material losses in the nearest future.

The analyses indicates that the entire concept of socioeconomic reforms needs to be re-examined. To be more precise, what is needed is the formation of a conception, since the present leadership all throughout these four years Has failed to work out any. It acted like a fire brigade fighting Conflagrations resulting from its own activities. And, since from the very inception the flash-point was determined wrongly, the fire in our economic house is flaring up ever stronger and stronger.

Priority Anti-Catastpophe Measures

Russia's present economic situation is very much like that of the world s in the early 1930s. The collapse on the New York stock exchange in October 1929 precipitated a financial crisis. Within a week 14 billion dollars' worth of shares were reduced to dust, and before the end of the year that figure rose to 40 billion. The administration of President Herbert Hoover kept assuring the country that in the next few weeks, few months, in half a year, a year the situation would stabilize. Meantime the crisis spread to one after another of the leading industrialized countries. In 1929-1933 industrial output in those countries dropped by 40 percent, among them in Germany - by 42 percent, in the USA - by 48. Inaugurated as US President in March 1933, Franklin Roosevelt admitted The state of the economy was catastrophic, and in the very first days in Office proposed a new economic policy which in the long run Stabilized the situation.

Official reference books (2) offer the following data enabling A comparison of the performance (%) of the national economies of the USA and Russia in years of crisis (See Table).

As the Table shows, Russia's economic situation in 1995, compared to 1989 when production and investments, even though insignificantly, were growing, does resemble, approximately, the economic situation of the USA in 1933, compared to 1929. Here it is noteworthy that, where as in the USA, following 1933, economic growth began at an increasing pace, and in 1941 exceeded the indices of 1929, in Russia the year 1996 promises no break through in the state of the economy, unless resolute measure are taken.













Industrial Output









Agricultural Output









Capital Investments









Imperative priority measures aimed at overcoming the catastrophe. As we see it, may be the following.

State regulation of demand on products and services. An economic breakthrough will only take place upon a growth of production and marketing of produce. Yet such growth will start and proceed only given effective demand on the part of the population and industry. Which means they must have money - earned, on credit, or on deposit. Why and wherefrom is our raving payments crisis, that earliest harbinger of disaster? Because the government last control over money circulation, prices, the banks, crime, taxation, currency, foreign trade, and even domestic as well. Demand has shrunk: how can there be production? Hardly anyone likes to produce without pay. So it keeps shrinking ever more: tens of millions of purchasers have no money even for bare necessities, while they have tens of millions of dependents. And enterprises hardly have any money.

Delays in payment for deliveries have come to three months. How with almost no profit from marketing and almost no working capital, can enterprises survive transition to a market economy? Now, concerning non-payments, the government's stand is aptly, described by a remark by the executive secretary to the Government's Operative Commission on Improving the System of Payments and Clearing Operations:"At this time there is no payments crisis as such (3)."

Enterprises should be provided with the bare minimum of circulating assets (so as to pay for deliveries, pay wages and salaries) and minimum resources needed for keeping machinery and equipment running, and provide them with orders for the products they manufacture. Then industry, almost at a standstill, will start to revive, and workers will be able to earn a living. And the more industry revives, the more, understandably, they will earn and improve their living standards.

But where does the financing come from? For there is none, says the government, either in the state budget, nor in the Bank of Russia nor in the subjects of the Federation. Such resources are available on the financial market. It was precisely there that post-war Japan, where industrial output had dropped by 90 percent, found assets for the restoration of its economy. The government did not open its financial market for the first 10-12 years of restoration. The central investment bank accumulated considerable monetary assets and released them precisely for needs recognized as crucial to the national economy.

One should think that we, too, in order to restore the national economy, should compress, restrict, or close down altogether the "free financial market", accumulate capital in government-controlled banks and channel it for the liquidation of non -payments, for replenishing the circulating assets of enterprises, as well as for current and capital repairs of equipment. When today everybody is talking of the need for inputs into the economy, they fail, for some reason, to say that investments should be made, above all, to replenish the circulating capital. If, without investment into its fixed assets, an enterprise will stop running from the wear and tear' elf equipment in the matter of few years, without adequate working capital it will come to a stand-still even before a year is out. Non-payments are the fastest way to stopping the national economy from functioning. The only alternative may be a "natural economy" - without payments without money, and without(consequently no longer necessary) prices.

As to privatized enterprises, these may merit a differentiated approach. Large and middle-sized among them, provided the controlling package of shares remains with the state, will in no way differ from state-run enterprises. Generally speaking, according European standards, they are seen as belonging to the state anyhow. Regarding orders, prices, taxes, wages, credit, procedures during the critical period other large and middle-sized enterprises ought to be equated to state-run ones, i.e., should work to the country's benefit. Later on it will be possible to sort them out, each separately, to see which had been privatized to the benefit of the national economy, which - to its detriment, and which had been by hook and by crook simply "pocketed".

It is indicative, that , having brought up the number of incorporated enterprises in the country to 27.500 and privatized ones - to 12.500, the privatization agency, according to its head , ensured budget revenues from privatization to the tune of about 1 trillion rouble, instead of the planned 8.7 trillion (4). As soon as the economic disaster is averted, an estimation of the real and selling values of the privatized enterprises should be made. It is known, that 500 of the country's largest enterprises worth 200 billion dollars, were, sold by the State Property Committee for only 7 billion dollars. Apparently, such practices are widespread. If this is the case, the state is entitled to offer the shareholders the following opportunity: either pay up to the real value, or become lease holders of the unpaid part of the property, or hand it back to the state.

The state must place prices under its rigid control. Its duty is to ensure parity of prices in the successive sectors of the national economy - from coal and oil to grain and foot wear. Which means that electricity cannot bee cheaper than the coal and fuel oil used by the power plants, a grain-harvester - costlier than the grain it harvested coal mined at Kuzbass - cheaper than the cost of its transportation, etc. For NEP, for example, would never have been effective without parity of prices on, urban and rural products. Likewise, American farmers would have been utterly bankrupted had not the Roosevelt administration purchased their grain at parity prices.

During the oil crisis of the 70s IJS President Richard Nixon had twice frozen prices and profits. He called it a "period of enforced stability." Indeed, when it cannot be obtained in the natural way, one has to resort to enforcement,. It, is the only way in which haphazard and uncontrolled price rises can be stopped. But this is a temporary measure. For it conserves all the existing imbalances and price disparities as well. Therefore, measures need also to be prepared for putting them in order. According to the experience of modern industrialized economies, such measures may include, above all, legislation on procedures to charge expenditures to the costs of production and services. Thereby, under threat of criminal prosecution, the possibility of arbitrarily inflating costs and, subsequently, of whipping up prices, is eliminated. And, again, cheating the tax inspectorate (reporting inflated production costs - hiding profits) thereby becomes rather hazardous.

Besides, to ensure parity of prices with subsequent alterations the state must determine the profit ratio to production costs (unified or differentiated, depending on capital - and labor-intensity of the sectors - here a choice must be made). Excess profits may be withdrawn into the state budget through progressive profit tax rates, rentals. The following variant is also possible: the state fixes prices on the initial raw materials and fuel resources and on staple consumer goods, while intermediate production sectors determine their own prices by cartel agreements.

Prices on staple consumer goods should have clearly set ceilings. Even Boris Godunov's treasure during a bad crop failure four centuries ago established in Moscow bread prices. The Jacobin government in France in the late 18th century authorized a "bread maximum" - prices could not rise above a set top value. Post-war FRG adopted "socially-acceptable prices" on bread, footwear and goods of ordinary quality, and on housing. In Russia the minimum wages and salaries, pensions and benefits should be set not just at 48,000 or 56,000 roubles, but at the actual minimum cost of living. No serious government had ever neglected the incomes of its population in times of crisis or catastrophe, nor did it establish a citizen's minimum income at extinction level. On the country, it was the admissible maximum level of a. Citizen's income that was, directly or indirectly, established. More often than not this is is done in the following way: high and supra-high incomes are heavily taxed, even at levels going up to 90 percent and higher. Why shouldn't the Russian treasury follow this example today?

Tough penalties for corruption, racket, tax evasion. When production growth starts and, consequently, growth of incomes, it will make it easier for the treasury, and for the law-abiding tax-payer. In the meanwhile, the treasury has to squeeze out the utmost from the rich and the law-breaker, and not merely by exacting the taxes, but by confiscating his capital which, as a rule, is made by fraud.

By the way it is necessary to return to the generally accepted method of estimating an enterprise's profits - on the basis of receipts from sales. In connection with the massive non-payments of recent years, profits began to be estimated on basis of the volume of produce dispatched. Thereby, often remitted into the budget were not incomes from business, but the payee's circulating and fixed capital. This kind of procedure makes it impossible to tell a profitable production from an operation incurring losses, which has nothing to do with marketing methods of economic management.

There is an international legal regimen: when a consignment of commodities or capital is exported from a country without payment or with taxes underpaid, it should be returned upon a notice of loss made by the injured state. For Russia this is a vast source of capital investments and budget revenues. Is this known to members of our government? Of course it is, but they would rather spare the criminal bourgeoisie. True, so far the Finance Ministry takes pride in augmenting the budget at the expense of so-called non-inflationary sources - the sale of state securities. But this is a mistake. In a month, a quarter, a year they will have to be redeemed. At who's expense? Either at the expense in industry - the main income producer and tax payer, or by building new financial pyramids.

Now, speaking of inflation, with increasing credits to industry it also starts growing. There are two kinds of inflation. The first - a kind of payment for future well-being. For example, in wartime the state's revenues decline, while spending increases; the result - inflation, the blessing - victory. Or take the post war crisis: first one has to spend money to restore the enterprises, spend on their reconstruction, conversion, on the construction of new ones, partially also at the expense of inflation, and the "harvest" will be reaped when they become operative. In today's Russia , however, the government has let inflation soar not for boosting, modernizing, raising the effectiveness of production, but precisely to depreciate the assets of state enterprises (and at the same go - the incomes of the population), in order to and them all over on the cheap to the new bourgeoisie (second kind of inflation). This must be stopped immediately, and the state is quite capable of doing so by using that same first kind, that will lead to a burgeoning of sectors of the economy and of businesses.

The consequences of the second kind of inflation will be less arduous for people, since the state will start controlling prices, which on commodities of prime necessity will be fixed (a variant with statutory supplies of such commodities for the population at fixed prices). The growing output of commodities and, correspondingly, of the incomes of working people will reduce inflation to a minimum, or stop it altogether. No sooner did the Soviet industry, towards the end of NEP, start growing by bounds and leaps, than inflation ceased.

Effective Bank of Russia's control of the country's entire banking system. Roosevelt began with an overall state audit of all solvent banks and financial companies and closed those whose balance sheets were found wanting. This took only two weeks. Moreover, the US President announced that if the banks put up any resistance to the government course, a bill on their nationalization would be tabled in Congress; it worked. We too, should carry out such an audit, and close down the commercial structures that work not to promote the economy, but for themselves. A nationalization variant must be kept in store as well.

Besides, in accordance with an extraordinary law on banks, the American administration determined that investment banks should concentrate precisely on investments, so as to keep away from "short" money practices. In our economy today such a move is needed: to make investment financial structures, so designated under their articles of association, preoccupy themselves accordingly. Otherwise, while waiting for low inflation rates for starting to invest in the economy, as the present government is doing, one may never see the growth of capital investments. Yet without them production in this country will simply come to a standstill in the matter of a few years. Business managements should be denied the right to open numerous in different banks.

Channeling money flows into production to the detriment of the speculative financial market. The state must determine economic priorities and allow crediting and investing for priority targets only. The form of a bank's or corporation's property does not matter here. Acting in this way after 1945 were the governments of Japan, France, the UK and other countries. World War II was not yet over when British prime minister Winston Churchill defined the post-war economic priorities: food, jobs for all unoccupied labor, power generation, exports.

Also known are banking methods with targeted use of credits such as: special loan accounts, lines of credit. For a government anti-catastrophe course these measure are invaluable tools for bringing order into the country's money circulation. Why, in distinction from the rest of the world, they are not applied in this country? For the same reason: to make it easier for privateers and criminal business to build fortunes.

Organizing wholesale trading in the national economy. There is an urgent need to create in this country large-scale production and trading or commercial associations, of the old Soviet-type syndicates or contemporary Western industrial-financial groups, capable of organizing orderly flows of goods. A big wholesale merchant places large profitable and stable orders with producers. He stands out to advantage from the small retail merchant since he is not chasing great profits from a single commodity. He is well aware that even at minimum unit prices his profits will be high from the sheer mass of commodities sold.

Moreover, such big wholesalers more often than not determine themselves the retail price of a car, TV set, suit, or a pair of shoes, etc., while the small wholesaler or retailer is just left to bargain over his share of this price. In today's world nearly half the produce of industrially advanced countries is marketed at prices determined by just a few score of leading transnational and national corporations precisely on this principle. In this country these methods may be used to do away with the incredibly exorbitant and inflated prices, and with the chaos in the manufacture and marketing of produce as well.

Streamlining hard-currency and foreign-trade operations. It goes without saying that not a single industrial country keeps its foreign-economic borders open in times of crisis, leave alone catastrophe situations. The Central Bank must establish clear-cut rules for the import and export of currency, capital and profits. The rule here is simple: everything that promotes the growth of production in this country is permitted.

Today Russia needs a state currency monopoly and a determination of the rouble's real exchange rate based on a "currency commodity basket". Big state merchants or those under state control, are called upon to engage in exports and imports. Their task - not to export from the country just anything exportable for a song, leaving billions' worth of proceeds in foreign banks, nor to import anything today that the country can do without. They must protect domestic industry from perilous foreign competition and help it by imparting such materials, completing articles, paints and days, machine tools and equipment that is essential for raising the economy. It took western European countries 13 years after World War II to organize their own industries before they opened external economic borders, currency borders included.

State regulation of the country's debts. If the country is to follow an anti-catastrophe course, the IMF and IBRD, western credit clubs, are bound to present Russia with outstanding multi-billion debit notes for collect. her liabilities have reached 130 billion dollars - twice the indebtedness of the former USSR. So, what could be done? We have some reserves that could be channeled to repay debts: the sale on secondary markets of the promissory notes of third countries (Syria, Vietnam, Cuba and others) to the tune of over 70 billion dollars; the sake of Russian property abroad; the recovery through Interpol of tens of billions of Russian deposits in foreign banks. The sum total collected in this way will probably be short of fully meeting all the liabilities. Well, in this case the usually accepted procedure comes into play: the creditors will have to prolong the payment periods of the loans. Given a dynamic rise of Russia's economy, the creditors will have no doubts about Russia fully meeting its liabilities. It is our view, that implementation of the set of priority anti-catastrophe measures will create conditions for subsequent intensive economic growth.

Footnotes & References

  1. See, for example, Petrakov N. Ya. and Rotar V. I. Faktor necpredelionnosti i upravleniye ekonomicheskimi sistemami. (The Uncertainty Factor and Control of Economic Systems). Moscow, Nauka Publishere, 1984 (in Russian).
  2. Economic Report of the President, Appendix B. Washington, 1989; Sotsialno-ekonomicheskaye polozheniye Rossii (Russia's Socioeconomic Situation). Goskomstat RF (RF State Statistic Committee). (For 1990-1995).
  3. Ekonomika i zhizn (Economica and Life), 1995, No.41, p.1.
  4. Ibid. 1995, No.44, p.1.