Russia’s Free-Market Revolution at 10: An Unmitigated Disaster

Ten years ago this month the communist government of Russia fell. Russia’s new leadership promised freedom and a dynamic economy but Russia instead has suffered an economic collapse possibly unparalleled in all of human history, despite tens of billions of dollars in Western aid. The grim Russian joke says it all: “What’s free-market Russia’s greatest achievement? It did in a decade what the Soviets couldn’t do in 70 years--it made communism look good.”

Since 1991 Russia has lost half of its Gross Domestic Product (GDP). By contrast, during World War II, when the Soviet Union lost 25 million people and tens of thousands of square miles of its territory were occupied by Nazi Germany, the Soviet economy declined by only 30%.

Russia’s GDP per capita is now comparable to that of Peru, Morocco and Jordan, and ranks below that of Mexico, Colombia, Iran, Turkey, and dozens of other nations. Russian GDP per capita has dropped from half that of the U.S. in 1985 (the year before the free market reforms began) to a mere 13% of it today.

Three-quarters of the Russian population lives at the subsistence level. Officially the unemployment rate is 12.4%, but even this figure vastly understates unemployment because it does not account for the millions of Russians who go to work every day even though they have not been paid in months or even years. Inflation, which ran at 2,500% in the early ‘90s, has wiped out most of the population’s life savings.

While crime in Russia was never as low as Soviet propagandists claimed, over the last decade Russia’s murder rate has skyrocketed to 22 murders per 100,000 people, more than twice the rate of the U.S. and many times that of most European nations. Many Russian enterprises are now controlled by mafia gangs, said to number 8,000, whose preferred method of free market competition often consists of assassinating business rivals. Russia groans under the weight of widespread corruption, fraud, and embezzlement, as over $150 billion of its assets have been looted and deposited abroad over the past decade. And though political and personal liberty have increased since Soviet times, according to Amnesty International, “Throughout the Russian Federation, torture and ill-treatment in police custody, in prisons, and in the armed forces continue. Prison conditions are cruel, inhuman, and degrading” (Amnesty Report 2001).

Life expectancy in Russia has fallen to 3rd world levels, below that of Mexico, Ecuador, Jordan, Thailand, and even the Dominican Republic. Disease is rampant, including killers unheard of in Soviet times, such as tuberculosis and cholera. With an annual death rate 30% higher than that of the late ‘80s, Russia is the only non-African nation in the world that is depopulating.

While Russia has enjoyed an economic uptick of late, largely due to the sharp rise in international oil prices in late 1999, the overall situation has been and remains grim. What happened?

For one, most of the free-market privatizations of Soviet enterprises were simply shameless property seizures by Soviet-era managers and bureaucrats which offered nothing, least of all capital, to the enterprises seized. In addition, Russian industries, inefficient and problematic even under the protection of the Soviet planned economy, have been completely unable to compete in the global economy. Nor should we forget that converting any country--particularly a large one--from one economic system to another is always a difficult task, whether the conversion is from socialism to capitalism or vice versa. And most Russians, accustomed to centuries of dictatorship and 70 years of a planned economy, were completely unprepared for the changes a free market brings.

Above all, however, is the reality that the free-market system often doesn’t work as well as Americans like to believe it does. Yes, it has provided a good standard of living for many (though by no means all) of those who live in the advanced capitalist nations of North America, Western Europe and Asia. Yes, it has produced countless technological marvels, as well as societies capable of respecting personal and political freedoms to a greater extent than ever before in human history.

But at the same time, in the vast majority of the nations of the world, free-market economies have not succeeded. Many nations with decades and even centuries of free-market economies, fertile land, and substantial natural resources have utterly failed to develop and provide a decent standard of living for their people. Examples include Argentina, Brazil, Mexico, Indonesia, South Africa, Nigeria, Kenya, the Philippines, and numerous others.

Leaving aside small countries like Singapore or Taiwan, only the very advanced free-market nations have ever achieved prosperity. In the heady days of 1991, Russians were told that capitalism would bring them the living standards of Germany or the Scandinavian countries. It should have occurred to them that they instead were far more likely to be saddled with the living standards of Mexico or Brazil. Free-market Russia has failed in good measure because, in most of the world, free market economies have failed. Maybe we should have told the Russians this 10 years ago, before they went to all this trouble.