Following decades of central planning and systematic repression of market forces under the Soviet regime, the relatively peaceful dismantling of the old order in Russia has been a major achievement. However, the full complement of economic policies needed to solidify a market system has not yet been implemented. Stabilization in particular has so far proved elusive, as attested by the recent upsurge in inflation. Nonetheless, much progress has been made since late 1991, especially in the structural area.
The paper analyzes output, consumption, inflation, fiscal, and monetary trends. The output collapse was largely inevitable, smaller than indicated by the official statistics, and did not have a commensurate negative impact on household welfare. Following the jump associated with price liberalization, trend inflation in 1992-93 remained very high, oscillating between 10 and 30 percent a month. It slowed to single digit levels in the first half of 1994 but picked up in the fall. Fiscal and monetary policies gradually became tighter, as subsidies to domestic agents and other states of the ruble area shrunk and real interest rates were gradually increased. The sustained erosion of tax revenues forced adjustment on the expenditure side, notably in the form of sequestration. The paper also describes some of the disruptions that tend to mask the underlying trends, including seasonal variations, ebbs and flows of arrears, political turmoil, the mid-1993 monetary reform, and exchange rate crises.
A numbers of observers and policymakers in Russia initially doubted the merits of applying conventional macroeconomic wisdom to the relationships between money, prices, and output. Time series evidence is now sufficient to investigate these links econometrically. It is shown that money growth does indeed cause inflation in Russia. In addition, the data do not support the claim that there is a trade-off between output and disinflation. In any event, the painful lessons from high inflation in Russia and in neighboring countries are being learned, fostering a broader consensus on this set of issues.
Even on the structural side, progress, while genuine, has been very uneven. Slow improvements on the stabilization front have retarded structural change, and vice versa. Price and exchange rate liberalization as well as privatization have moved ahead fast, but enterprise behavior, and the business environment in general, have not improved in tandem. Some firms are adjusting energetically and stand a chance to survive and prosper in the longer run, but others continue to rely too heavily on rent seeking and state subsidies. Institution building is proceeding, but implementation generally lags. The transition process will likely remain chaotic and somewhat unpredictable for some time. But even though muddling through may not sound like an appealing strategy ex ante, it is, ex post, far from the worst outcome.