Anders Åslund
This paper focuses on the main elements in the early Russian transition and draws conclusions on each of them for Russia while also suggesting what might be of relevance to Libya and offering tentative recommendations.
Executive Summary
Libya may be able to draw some lessons from Russia’s experiences in its early transition, from both what worked and what did not. Since Libya’s macroeconomic problems are far less serious than Russia’s were in 1991, Libya’s transition should be much easier.
Nevertheless, Russia’s experience could be instructive. Russia suffered from extraordinary macroeconomic instability, which Libya should avoid.
It took years for Russia to establish macroeconomic stability. It only occurred after it had given the Ministry of Finance control of all public revenue and expenditure and compelled it to check the budget deficit, after the central bank had grown strong and independent, and a market-oriented exchange rate policy had been established.
Russia solved its fiscal problems by adopting a simple tax system with few taxes with broad tax bases and relatively low tax rates. The IMF was crucial in Russia’s resolution of its macroeconomic problems. The greatest opportunities and the worst threats lay in the oil sector. Oil dominates both the Russian and Libyan economies.
The Russian lesson is that domestic oil prices must be liberalised early on to allow prices to be similar at home and abroad. As that was not the case in Russia, some people bought oil cheaply at low domestic state-controlled prices and sold it abroad at high international market prices.
Those traders later bought the Russian state. Russia broke up the national oil company early on and privatised the resulting companies. Economically, this was a success, but the new owners of the oil companies were never accepted by the Russian people or the government, which caused legal, economic and political havoc and which led to their renationalisation.
With hindsight, it would probably have been preferable to go slow on the privatisation of oil companies while trying to improve their corporate governance to check their performance and political power.
The greatest success of the Russian reforms was the early formation of a fully-fledged market economy by liberalising prices, markets and enterprise formation. The most successful part of the privatisation was the sale of small and medium-sized state-owned enterprises by regional and local authorities.
It was less important how they were sold than that the sales took place. During the first decade of transition the overwhelming share of all investments was financed from retained profits. No source of enterprise, neither domestic banks nor foreign sources, made a difference.
Foreign international financial institutions can basically do two things, offer advice and offer financing. The IMF can provide the government with the necessary financing for macroeconomic stability and sound macroeconomic policy and the European Bank for Reconstruction and Development (EBRD) can assist with some enterprise financing and good corporate governance of state companies.
A crucial Russian failure was not building an independent judiciary, which would have been vital for the establishment of real property rights. It should have been a priority.
Introduction:
The Relevance of Russia’s Experience to Libya Russia when it abandoned communism in 1991 and Libya today have many similarities that may make it worthwhile for Libyans to look at Russia and learn from both its problems and achievements.
However, there are also important differences. Key similarities between Russia then and Libya now are that both countries were centralised socialist command economies and that oil and gas were their main sources of export and tax revenue.
In both countries, the state owned the overwhelming share of the economy, especially large companies and the raw-material industry. Prices were predominantly but not completely controlled by the government.
On paper, both countries had extensive social welfare states. The similarities can be summarised in a few words: state control and oil dominance. The main difference is that Russia started with a catastrophic macroeconomic crisis. Politically, the situations were quite different.
Russia did not have serious secession problems, apart from Chechnya, a small territory in the south, while the establishment of a central government is a major concern in Libya.
In Russia, radical market economists stood against old-style state communists who wanted to restore the old system. Initially, there was no middle ground, neither economically nor politically, whereas ideological differences do not appear so polarised in Libya.
Russia had an all-dominant political leader in President Boris Yeltsin. In November 1991, he appointed an outstanding young economist, Yegor Gaidar, as his chief economist. He later rose to be acting prime minister. Gaidar, who published many books, provided the economic model for the Yeltsin government.
The Yeltsin government aspired to create a normal market economy with dominant private ownership. Its first aim was to stop hyperinflation to stabilise prices and the exchange rate, which was very difficult because of a lack of relevant economic knowledge and an absence of strong economic institutions.
A second aim was to liberalise the market, both prices and trade, to end shortages, which was much easier. The third goal was to privatise the dominant state enterprises as fast as possible to secure the market economy. The Gaidar government, which was dominated by economists, had no capacity to deal with the social safety net or the building of a sound judiciary.
Initially, it received no Western assistance because the West was hesitant in helping Russia to recover. The reason for the Russian government’s radical market economy choice was that Russia’s economic situation was truly catastrophic. It required radical action in one direction or another.
Russia was in the midst of hyperinflation, which brought about complete demoralisation. Nothing good could happen until it was stopped. At the same time, the Soviet Union suffered from nearly complete shortages during its last year. The shops were literally empty because the prices of essential goods were controlled at a low level while supplies were absent.
The government had lost control of revenue collection, public expenditure and the issuance of money. Therefore, both macroeconomic stabilisation and price and market liberalisation were vital.
The third priority was privatisation. This could not be done fast. Here, numerous ideas competed. The collapsing state was seen as a nobody. One idea was to give enterprises real ‘masters’ so that somebody took responsibility for them.
Another idea was that the state enterprises must not be given away to the industrial ministers or the state enterprise managers but to their workers or the citizens and a capital market should be initiated.
An important complication of the Russian reforms in the early 1990s that has not been well understood is that government power had collapsed, which had two important effects.
On the one hand, the government had great freedom to make strategic decisions, such as liberalising prices and trade. On the other, it had very limited capacity and could not administer complex reforms, such as medical, pension and education reforms. It was best for the government to focus on a few big decisions.
Some aspects of the Russian post-communist economic experience are relevant to Libya, but not all because of differences in preconditions.
This paper focuses on the main elements in the early Russian transition and draws conclusions on each of them for Russia while also suggesting what might be of relevance to Libya and offering tentative recommendations.
What Can Libya Learn from Russia?
It appears as if Libya could greatly benefit from Russia’s experiences in its early post-communist transition, partly because of what worked and partly because of what did not.
Fortunately, Libya’s macroeconomic problems are far less severe than those of Russia in 1991, which should make the Libyan transition much easier.
Libya’s inflation in 2020 was only 22 percent. Several other issues, however, seem quite similar, and here the Russian experience could be instructive.
Hopefully, this paper has outlined what Libya can learn from Russia’s successes and failures in its early transition from complete state control to a freer market economy.
The clearest success was the creation of a market economy through radical early liberalisation of prices, markets and enterprise. Similarly, the early sell-off of small enterprises was successful.
While Russia took some time to find its way on macroeconomic stabilisation, the value of a strong ministry of finance and central bank and of a simple tax system has become evident.
In other areas, Russia’s experience has not been positive. Whereas Russia’s privatisation of big companies, including the oil companies, led to economic successes, it was not politically sustainable.
The question arises whether it would have been better to just split the oil companies and keep them in state hands for some time while imposing strict corporate governance.
The maintenance of a state monopoly of gas has been worse, as it appears to have generated one of the greatest sources of corruption in the world. Russia’s failure in judicial reform is a warning to all. Stable economic growth can hardly be maintained without reasonably reliable property rights.
Finally, there are areas where Russia’s experience might not be very relevant to Libya. Hopefully, Libya will not face such a terrible financial crisis as Russia did in 1991-92. Russia opted for a floating exchange rate but the oil states in the Gulf chose fixed exchange rates, offering no clear policy suggestion.
Russia has succeeded in taxing oil wealth through export taxes and taxes linked to the oil price. It is not obvious that this is the best choice for Libya. The question is what form of tax collection is most practical and effective.
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Anders Åslund is a Swedish economist and a Senior Fellow at the Atlantic Council. He is also a chairman of the International Advisory Council at the Center for Social and Economic Research. His work focuses on economic transition from centrally planned to market economies
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