Creating A New Russia

Commentary by Pete du Pont

Moscow - In 1991 Warsaw newspaper editor Adam Michnik defined the challenge of reforming Poland's economy from Marxism to the marketplace: "All of us know how to switch from a market economy to a planned totalitarian economy. Nobody knows how to switch from a totalitarian economy to a market economy."

The challenge in Moscow is the same: can the former Soviet Union transform the ashes of her Communist past into democratic capitalism for her future? Maybe.

It is hard to overestimate the toxic consequences of communism. Over 70 years, the social, cultural and economic framework of the old Russia was destroyed. Rising from this ground zero will be a long and difficult task, with formidable obstacles to overcome.

First, the new Russia must recreate the economic structures of a market economy: a sound currency and tax, and legal systems. As there is no middle class to manage the new companies and service providers, managers must be trained. Foreign investment must be recruited.

Second, corruption is threatening Russia's future. The vacuum created by the vanishing of communism was filled not by due process and the rule of law - Russia has no such traditions - but by criminal conspiracies. They are the flash point of Russian politics today. Economically motivated assassinations are common, and the mafia thrives.

Finally, Russia's people, like those of so many nations who have attempted to climb the economic ladder, start from poverty. The 1996 per capita annual income of Russians is about $1,800, with more than half the population living on less than $100 per month.

What is encouraging is how far Russia has come in the past half-dozen years. All the political freedoms are in place. Bananas are available in Siberia, quality goods of every kind are on the market shelves. Two million cars negotiate the streets of Moscow where only 200,000 were nine years ago. Inflation has fallen steadily, from 3,000% in 1993 to less than 15% today; ATM machines are springing up everywhere, and - thanks to George Soros - Russia's universities will soon be wired to the Internet.

At first glance, privatization of the vast Soviet industrial complex is nearly complete as well. Communist party leader Gennady Zyuganov grumbles that only 17% of Russian industry remains in government hands.

But the reality is quite different. Ownership of the privatized companies has shifted from the state to their former managers - "the Red Directors" - and citizen shareholders who used privatization vouchers to "buy" their shares. But since no capital changed hands in these transactions, the Red Directors have neither the money nor the management experience to run the businesses. So, except for the resource industries, energy, minerals and chemicals, there is no market economy in a Western sense.

Enormous structural challenges lie ahead. The military, miners, civil servants (like teachers) and pensioners are all due back pay. The collapse of the defense industry has left jobless ghost towns in the Urals. Khruschev-era housing is crumbling and still heavily subsidized. The tax code is a huge impediment to economic growth. It is arbitrarily enforced and scares off foreign investment.

Today there is both optimism and uncertainty in the minds of the Russian people. The defeat of the Communists in the 1996 elections is taken as final and irreversible. The Russian people could have rejected the Yeltsin reforms, and gone back to the old ways, but they did not.

The beginnings of a democratic system have been established. People can now work hard and experience the benefits of a better life. A middle class is beginning to prosper.

The uncertainty is a product of the rapid change of the past six years. There was no time of transition from the past to the present. As General Lebed says, "we went to bed one night communists and woke the next morning as something else." The old ways instantly disappeared, and the new are not yet in place.

There is uncertainty too about the economic future. For six consecutive years the economy has not grown, but contracted. Why is this recovery taking so long?

One reason is because the Communist abyss was broader, deeper and of longer duration than the USSR's other crises. In addition, the driving forces of Russia's current recovery are diverse. Stalin faced no Duma, no press, no independent economic actors. By command he could focus the entire resources of the USSR on the problem at hand.

By contrast, the New Russia's recovery in a market economy must be based upon thousands of small decisions made by millions of independent people.

It will take time, patience, and a passionate commitment to see it through. But Russia possesses enormous wealth, human and intellectual capital. So it can be done, if her people decide they want it done.