Cut Russia Some Slack: The Alarm And Dismay Are Misplaced

I was in Moscow and St. Petersburg recently, attending conferences organized by Washington's Cato Institute. It was my first visit to Russia for a few years, and what I saw surprised me: an economy poor by Western standards, to be sure, yet plainly making rapid progress; and a political system that, while messy and no doubt corrupt by the standards of the rich West, gives voice to dissent and is probably not much less democratic than, say, Italy's. The picture drawn by most Western commentators—of a kind of criminal anarchy seething beneath a top layer of sham constitutional government—just does not square with what one sees, or, for that matter, with the facts.

I recall a trip to Moscow I made in 1990, just before the Russian economy embarked on its first decade of "cowboy capitalism." The transformation since then is staggering. In those days, visiting Moscow was a deeply depressing experience. The brutality, cynicism, and incompetence—to say nothing of the bottomless intellectual poverty—of the Communist regime had by then been laid bare. What just a few years before we had thought to be a great industrial power stood revealed as a gigantic fraud. The Soviet Union's economy had been devoted to making just two classes of goods: weapons, and things nobody (not even the armed forces) wanted.

McDonald's had opened its first outlet in the city a few months before my visit—a sign of perestroika, the new economic openness. On a wet afternoon, I went along to watch the waiting line, hundreds of yards long. People were queuing in the rain for hours to spend a lavish portion of their meager wages on a hamburger and fries. And the only happy people in Moscow seemed to be those standing, soaked, in that line. Everybody else looked crushed by poverty and disappointment. You noticed that when drivers parked their cars, they would remove the windshield wipers and take them away. If they left anything detachable behind, it would be stolen within minutes, and wipers were especially prized.

Today, cars are parked with their wipers still attached—and with mirrors and hubcaps in place as well. The numerous outlets of McDonald's, Pizza Hut, and the rest are doing brisk business, but the lines no longer stretch out the door and down the street. At night, the streets are lit by shop windows; one passes bars and restaurants, and smiling, dressed-up people on a night out. The hopeless ground-down look has gone. People going to and from work look about as busy and preoccupied, as happy or as sad, and as well clothed and well fed as people in the big cities of any other middle-ranking developing country. And that, one needs to keep reminding oneself, is what Russia is.

Moscow and St. Petersburg are surely not typical of the country as a whole, any more than Manhattan is typical of the United States or London is typical of Britain. Russia still has plenty of misery and poverty—but so does every other developing country in the world. Russia has not leaped to capitalist prosperity in the past 10 years, but, despite everything one reads, its economy is heading in the right direction.

In the March/April 2004 issue of Foreign Affairs, Andrei Shleifer, an economist at Harvard University, and Daniel Treisman, a political scientist at the University of California (Los Angeles), rebut the conventional Western media take on Russia. Their article, "A Normal Country," seemed pretty convincing even before I made my trip. On seeing Moscow and St. Petersburg again for myself, I was all the more persuaded. The steady tone of alarm and dismay in the West about Russian capitalism, seen as an unmitigated disaster by so many foreign Russia-watchers, is quite misplaced.

As Shleifer and Treisman explain, the widely cited numbers for declining Russian output during the 1990s are based on several misunderstandings. The official figures from Goskomstat, the Russian statistics agency, say that Russia's output fell nearly 40 percent between 1991 (when Mikhail Gorbachev left office) and 1998. But the figures for 1991 were surely overstated: Over-reporting of production was standard in those days. Also, much of Russia's output in 1991 was, as Shleifer and Treisman put it, "military goods, unfinished construction projects, and shoddy consumer products, for which there was little or no demand after 1991." If this kind of output falls, the economic loss is small, because it was satisfying no genuine need to begin with. Some of the drop might even be an economic gain, since a lot of Soviet-era output was "value-subtracting"—that is, the finished products had less value than the energy and raw materials used in their production. Stopping that kind of output makes you better off.

The Goskomstat figures also fail to take account of Russia's rapidly growing informal economy. Shleifer and Treisman give an indication of that growth by looking at the demand for electricity, which fell by far less than the recorded decline in official output. Other figures also suggest that the true decline in output must in fact have been modest: Recorded household consumption fell by only 4 percent between 1990 and 2001, for instance. Recorded retail trade actually expanded slightly over that period. Average living space per person increased, and so did the proportion of households with radios, televisions, washing machines, cars, and so forth.

The timing of the decline in officially measured output, and of the far milder decline in electricity consumption, is interesting as well. Output fell most sharply before 1994—before, that is, the bulk of the economy had been privatized, and before the controversial loans-for-shares program of 1995 had even been designed (this misguided program, in effect, created Russia's new "oligarchs" by allowing loans to the government to be swapped for huge allocations of shares in enterprises). So the idea that Russia's dash to capitalism wrecked the economy—something that many Western commentators are only too keen to believe—does not stand up. Soviet Russia had no economy, in the Western sense. When Communism collapsed, the pretense of economic might collapsed along with it. Since the privatizations of the mid-1990s, the economy has mostly been recovering—very slowly at first, and interrupted by the emerging-markets financial crisis of 1998, but rapidly in the past two years.

The mistaken idea that Russia was a strong economy in 1990 and the eagerness to see capitalism fail go a long way to explain the current widespread misconceptions. Shleifer and Treisman argue that if one thinks of Russia as a middle-income developing country—which it was, in terms of per capita income, even in 1990—then its present difficulties look much more normal. Yes, Russia is far poorer than the United States is. It always was. At the moment, nonetheless, it ranks among the most promising middle-income developing countries. The answer to the question "Who lost Russia?" is not the International Monetary Fund, or the Clinton administration, or Boris Yeltsin's reckless economic reformers. Nobody lost it, unless you count the Communists.

If Russia's economy is doing better than readers of American and European newspapers might think, what about the country's politics? Again, by rich-country standards, things look bad. By developing-country standards, on the other hand, they seem about average. It is true that the government exercises influence or outright control over much of the media, and that Vladimir Putin has moved to strengthen the government's hand still further. This kind of sway would be regarded as outrageous in most Western countries (though not all: Italy's leader, Silvio Berlusconi, owns or controls the main television stations and much of the press). In many middle-income countries, ownership of industry, including the media, is concentrated in relatively few hands, and the families in charge take care to have friendly relations with politicians.

Putin's government does have an authoritarian cast, and things could deteriorate further. On the other hand, the popularity of his regime seems genuine: Nobody is claiming that the elections that recently entrenched his power were fixed, and it should come as no surprise that a recovering economy and Putin's emphasis on security are a hit with voters.

During my stay in St. Petersburg, I visited an international-relations seminar at a university with a group of Americans that included Charles Murray of the American Enterprise Institute and Ed Crane of the Cato Institute. As the visitors made their remarks, praising capitalism and deploring the legacy of Marx, the students lapped it up. Their principal concern seemed to be that Russia was being misunderstood by the West. Andrei Illarionov, one of Putin's advisers, gave an impromptu speech in English, describing Russian history in terms of phases of economic control and economic liberalism. Whenever the controls had been tightened, he said, the economy had tanked; whenever individual initiative and enterprise had been given a chance, the economy had begun to grow. The students nodded appreciatively.