Yegor Gaidar, the architect of what might be called Russia’s reform and opening, died last week near Moscow. As Boris Yeltsin’s acting prime minister, he implemented the “shock therapy” policy that led to the rapid privatization of vast sectors of the former Soviet economy.
The path of the Soviet Union and then Russia toward economic and political liberalization has often been contrasted with China’s approach. Where Mikhail Gorbachev and especially Yeltsin (at least at first) tended to favor quick, dramatic fixes, China’s approach has been one of smaller steps.
Successful economic problem solving, the story goes, comes from that gradual approach. By trying to do too much, too quickly, Russia’s attempts were doomed from the start. It’s an appealing argument on its surface, but there are enough differences between China today (or even in 1992) and immediately post-Soviet Russia as to make such a direct comparison meaningless. By the time Gaidar got his hands on the economy, incremental changes would have done little good. The problem was not that he did too much, but that too much needed to be done.
Gaidar inherited a bankrupt country. The Soviet Union’s gold and foreign reserves had fallen to US$30 million (yes, million) before its dissolution, and the country was unable to pay off its foreign debt with oil prices at record lows. Gorbachev’s reforms had been the very definition of too little, too late.
“If back then the Central Bank had the reserves that the Central Bank has now, some $52 billion, the communists would have never ceded power,” Gaidar said in a 2003 interview. “They ceded power because the reserves were at zero. They had no idea how to pay the debts, how to feed the people.”
His task of restructuring the Soviet economy was mammoth. The USSR’s GDP in 1989 was worth about US$4.1 trillion in current figures. For context, China’s economy was worth US$4.33 trillion in 2008 – and just US$1.6 trillion, in current figures, in 1989. Perestroika, introduced in June 1987, had permitted the growth of some private enterprise, but the economy remained overwhelmingly in the hands of the state.
It was also a time of incredible political upheaval. The Soviet Union was always an uncomfortable amalgamation of nationalities. An “indigenization” program in the 1920s and 1930s that strengthened and arguably even created national identities among different ethnic groups was followed by brutal crackdowns in the 1930s, particularly in regions like Ukraine. These areas didn’t waste any time in splitting from Moscow when given the chance. Their departure dealt great economic and political blows to the center.
Once reforms started, hyperinflation – unfairly blamed on Gaidar, but actually sparked by a recalcitrant central bank that began printing money to pay off its debts – was followed by a strict austerity program. Access to credit was tightened severely and taxes raised. The economic pressures worsened a schism within the government that ultimately led to a constitutional crisis and armed confrontation in 1993.
China’s economic planners have been fortunate. Certainly since the beginning of reform and opening they have never had to contend with a crisis so complete as what Gaidar faced, and they likely never will. Try to imagine a similar situation in China: its foreign reserves (US$2.2 trillion at last count) depleted, having lost 23% of its land area, unable to raise money to pay off its foreign debts, effectively no foreign support, a government wracked by infighting, no private enterprise to share the burden of supporting its citizens, and an openly defiant central bank. Anything is possible, of course, but this seems unlikely.
China has faced famines, political upheaval and economic chaos – sometimes simultaneously. But, through planning and a not insignificant amount of luck, at no point has it found itself so close to the edge that such drastic reform was immediately needed. China’s reforms have been incremental because the government has had the luxury of making them incremental. Gaidar did not.
After two decades of mismanagement and stagnation under Leonid Brezhnev, the barely alive Yuri Andropov and the nearly dead Konstantin Chernenko, Gorbachev had little choice and Gaidar even less. That may be Gaidar’s most useful lesson for Beijing – not that gradual reform is the best way to solve problems, but that it is the best way to avoid them.