The economic problems confronted by Russia at the end of 1991 were in some respects similar to those faced by other countries before major periods of adjustment--the large Latin American economies in the early 1980s, the problems of economic reconstruction in Europe and Japan following the Second World War, and, especially, the countries of Eastern Europe as they move toward a market economy a year or two ahead of Russia. However, various factors point to a longer and more arduous transition period in Russia than in Eastern Europe. The broad policy approach in Russia should nonetheless be similar; it is as important to make rapid progress with macroeconomic stabilization measures and structural reforms in Russia as in Eastern Europe in order to create the conditions in which market mechanisms will eventually grow.
The essential systemic change in the transition to a market economy is trade and price liberalization. Demonopolization, through breaking up large enterprises, removing barriers to entry for new enterprises, and allowing free competition with imports, is an important complement to liberalization. But slow progress in this area does not negate trade and price liberalization.
Russia’s experience in 1992 shows that a necessary condition for effective macroeconomic stabilization is the imposition of hard budget constraints on enterprises. Accordingly, financial assistance from the Government and the central bank to enterprises must be strictly controlled to ensure both compatibility with inflation objectives and the creation of incentives for reform. Such assistance should be temporary, with targets for phasing out clearly established, and conditional on satisfactory financial privatization and restructuring plans for enterprises that qualify.
Russia’s need for external financial assistance in the short term is comparable to that faced by Europe and Japan at the end of the Second World War. It reflects the need to smooth the consumption stream of the population, restore the infrastructure, and finance enterprise reform and restructuring. Equally important, Russia must be willing and able to pursue economic policies that ensure that the external assistance has the desired effects. These include measures to achieve macroeconomic stability and rapid progress on a wide range of systemic reforms.