Modernization without shock therapy
yasin_201
Translated by
Nils van der Vegte
October 17, 2011
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Original appeared in Vedomosti
Author: Evgeny Yasin
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Read the translator's introduction

Modernization, it is a theme that regularly returns to Russia. It always evolves around the question of how to transform the country from a situation in which it is lagging behind the rest of the world to a situation in which Russia is at least equal amongst the rest of the world. In Russia, it usually top-down instead of bottom up:

Peter the Great simply modernized from above by forcefully introducing European standards in Tsarist Russia. Stalin modernized the backward Soviet Union by forcing through a policy of collectivization and thus getting the resources for the industrialization. Likewise, Yeltsin forced upon Russia a modernization policy called 'The Washington Consensus', just like empress Ekaterina II forced the potato upon Russia. On the other hand, when Russia’s rulers tried a bottom-up approach, like Gorbachev tried with his democratic reforms in the last years of the Soviet Union, it could well mean the collapse of the state.

This debate now has returned to Russia. Because the current growth model of the Russian economy is not working properly anymore, the country’s elite has been looking for other ways. Putin’s first period can be characterized as a period of State Capitalism and certainly as a top-down approach to modernize. On the other hand, although this is still subject to discussion, we could see the Medvedev years as an attempt to start a more bottom-up process. Medvedev’s mission mostly failed for a variety of reasons, so it seems that another form of modernization is necessary.

Evgeny Yasin, former minister of economy under Yeltsin and currently research director at the National Research University Higher School of Economics, wrote an analysis for the Russian newspaper Vedomosti last Friday in which he critically examines both top-down and bottom-up models and gives a possible third alternative to these two. It may well be that we are looking at the ideological basis for Putin’s third term.

The expert community is currently discussing two extreme models for Russia’s modernization. The first model was witnessed in action during the years 2003-2005, when the government tried to modernize Russia from above by using authoritarian methods. This modernization ‘from above’ implies that it is the state which initiates changes, directing various resources both in business and in society to modernize certain areas of the Russian economy/politics which it deems important. All this takes place whilst maintaining and even strengthening the centralized decision-making system. Modernization from above is counterposed by the second model of an ‘uncompromising’ modernization from below; a decisive breakthrough by means of establishing the conditions for creative activities (by businesses and individual people) according to the basic premises of democracy. This second model directly links the success of economic modernization to immediate political reforms and the return of civil liberties. But what are the prospects of implementing these two extreme models? And also, could there be a third way?

Two extreme models

It is not useful to spent much time analyzing the results of modernization from above. For Russia this model has many shortcomings. Modernization from above may only succeed when: a) the country is backward and is still in the agrarian stage of development (pre-industrial), b) there is a significant potential for the import of technology from abroad, either by purchasing it itself or via foreign investment, or c) there are (foreign) markets to export its (cheaply) manufactured goods to. From points a and c follows that authoritarian modernization is a bad option for Russia.

The attempt at authoritarian modernization from above has led to the formation of a ‘triangle of distrust’ between society, business and government. More concretely, because Russian society lacks the tools of (public) control over the activities of the state, non-cooperative behaviour in society has become dominant and social capital has been eroded. This ultimately reduces the level of business activity and the chances of success of the modernization effort. In Russia, all of this has happened. Modernization from above does not work. Russia’s model of development is in fact a model of inertia. What is needed is the involvement of public resources (society) to achieve the goals of modernization.

Considerably more complicated is the scenario for a decisive breakthrough in the direction of modernization through the rapid construction of the complete set of basic democratic institutions, ranging from the rule of law to political competition. Despite all its attractiveness this scenario can’t inspire unbridled optimism either. To begin with, this scenario requires the presence of a group of politicians within the structures of power that would consistently implement the package of liberal democracy. The coming to power of a party with such values by means of elections is extremely unlikely. It is more conceivable that such a group could emerge in the current system as a consequence of a split within the ruling elite. This scenario however is associated with huge risks. Moreover, the latter option would not strengthen the legitimacy of this group in the eyes of Russian society (neither in the eyes of the more paternalistic sentiments, nor in the more liberal/business part of society).

Even if we assume that we can take the first step and that power would come in the hands of a liberal oriented group, the huge risk of undesired consequences remains. (translator comment: the author is referring to the wild 90’s). This scenario is fraught with a new setback, another installment of an authoritarian or close to a authoritarian regime. It would be great if another attempt to democratize and modernize Russia would succeed. Another failure however would be seen as the evidence that (liberal) democracy is not possible in Russia at all, that it inevitably does not lead to growth, but to decline of the economy and the welfare of the Russian citizens.

Evolution

In addition to modernisation from above or below, there is the option of gradual progress. The only question is: at what pace? To allow business and society to participate in the modernization effort (and to increase productivity), Russia should accelerate the development of the economy progressively (as opposed to a decisive breakthrough). It means a step-by-step change from ‘the state takes from society whatever it wants’ to ‘the state serves society’. Liberals and democrats should strongly push for development in this direction. This is the way how trust between the government, business and society can be increased.

Gradual progress and decentralisation are the defining features of this model. The ruling team should focus on the implementation of a corresponding policy.  These policies should be publicly declared and society should be allowed to make sure that these policies are followed by real actions and real results. This means that the ruling team should be changed. There is a need for new people infected with ideas for a transition to democratic modernization.

On the other hand, gradual progress as opposed to a ‘breakthrough’ will imply that representatives of the former team will remain present in power. There will be clashes between different views, conflicts between different interests. It is therefore important to begin with implementing measures that will not cause the most critical of conflicts, but at the same time will allow for the development of institutions necessary for a competitive market economy and democratization, activating larger and larger parts of the business community and society. This means one thing. Federal executive authorities should, step by step, restrain themselves and publically give up on some of its powers.

Suitable in particular is the rapid implementation of social reforms for housing, pensions, health care and education. It is therefore even preferable to start the more complicated and unpopular under the conditions of authoritarian rule, while offering the prospect of further democratization in a second round. Examples are:
Housing reform – The demonopolization of the housing construction sector, a transition from selling most of the newly build appartments to renting them out, the construction of affordable housing and the simplification of the property regstration procedure.

Pension reform – The introduction of mandatory pension contributions (from the start of a carreer) and increasing the retirement age.

Health care reform – The introduction of mandatory private healthcare insurance for everyone to pay for free medical services provided by the state.

Education reform – Completing the introduction of the USE (Unified State Exams) and launching a system of financial support from the state for (talented) individuals, promoting competition between institutes of higher education and closure or transformation of those ecucational institutes that do not conform to quality standards and/or do not attract sufficient resources.

The gradual progress from authoritarian to democratic modernization from below will also be most appropriate for the start of a new phase of refrom of local government and the empowerment of civil society. Along with the turn to state capitalism in 2003, significant changes took place in the institutions of federalism and self-government. Governors are now appointed. There were even plans to extent the ‘power vertical’ to the mayors. The centralization of finances has increased whilst the influence of voters on the lower levels of power has practically been reduced to zero. It is clear that democratization as part of the model for gradual progress should start precisely here, where the revival of democratic institutions will create a grassroots base without affecting the highest level of power. The fundamental issue is to give cities and municipalities, especially the more experienced and successful ones, the right to establish their own tax rules and collect local taxes and fees. This will mark the beginning of the transition to a competitive form of fiscal federalism: reducing the level of centralization, making local authorities more dependent on their voters than on their governors and the financial flows from the center.

Another important first-round reform concerns the rule of law. The judicial and law enforcement systems can be reformed relatively independently of other institutues with the caveat that people need to be better prepared to the changes in the rules of the game. The key moment should be a series of convictions of high profile officials from within these same institutes, found guilty of arbitrariness and the selfish use of law for the legitimization of violence.

Contradictions and compromises

Because the ruling team and society will consist of opposing groups – liberals and ‘siloviki’, doves and hawks, reformers and conservatives – a gradual progress from below will likely contain in trade-offs between these groups. Actually, the pace of progress will depend on the outcome of neverending concessions, manoeuvres and discussions, some of which will be open while others will be concealed from the public.  This, it seems, will be the price of the choice for a model of gradual progress, the biggest minus being that there will always be a threat of stagnation and reversal.

Any positive steps towards modernization and democratization, even if gradual, will likely be supported by a large part of the intellectual elite and civic organisations. Conservatives will oppose it, as they will see it as a deviation from tradition and narrowly defined national interests. The Left and the Communists will at first support the modernization from below because democratic institutions will enable them to achieve more, of what they call, social justice. But on many points, they will come to oppose the reforms.

Mass media will be very critical of the federal government for being slow, which many journalists will interprete as signs of uncertainty or elite infighting. Such criticism will often be unfair. The business community will react to policy changes with the usual scepticism and for a long time, as long as there is no convincing evidence of progress, they will not react positively and ‘risk’ investing capital. Economic progress may therefore also be uncertain.

The contribution of private business is critical. For a technological modernisation to succeed large investments are needed in those sectors of the economy that have a chance to become competitive on the global or otherwise domestic markets. These enterprises need to be equipped with the most modern technology, training and education for its employees, to achieve an increase of productivity to at least 50% of the current U.S. level. This requires strong motivation, confidence, as well as the preparedness to take risks and to plan for many years ahead. Legal guarantees and financial support of the state are not enough.

Oddly enough, if the state would opt for the model of gradual progress then in its second round changes could take place which are very similar to the model for a decisive breakthrough democratization, but the foundation on which these events may unfold will by then be much better prepared. Sooner or later, a minimal package of liberal democracy should be realised. It is a critial point on the road for any form of institutional modernization from below. It might be possible to divide it in phases, at first, for example, changes in the party- and electoral legislation, securing the ligitimacy of consecutive decisions directed to guarantees against the personification of power and so forth. After that the ‘lower classes’ will become part of the activities (politics), which up till now they could at best observe. 

The condition, that these measures of democratization will be preceded by gradual steps, may convince business and society of the fact that the authorities act with a positive plan in mind. People need to be prepared for their implementation and the likelihood of foreseeable negative consequences should be reduced.

I am deeply convinced that under current conditions the scenario for gradual progress with delayed democratization will be most optimal for our national interests. The supporters of liberal democracy have no other choice. It is the only solution which leaves hope for success. But for the upper elite, time is running out. Of course, the model of gradual modernization means that the ruling elite will have to make some sacrifices, both material and symbolic. The elite will also have to justify the rejection of past policies and the transition to reforms, but in the end, it is worth it! After all, this will not be the first time. Not long ago a thightening of the regime was justified by the need for stability, both economic and political, taking into account the danger of separatism and military action in the Northen Caucasus.  Today the task of modernization has come to the fore.  We now face other problems and it is absolutely necessary to make a new turn in the policy: the transition to a new model of economy growth. 

This article is part of the ‘Perm Contract’ series, dedicated to the development of a new social contract, based on the report ‘Scenarios for Russia in the long term’. The series have been prepared together with the Perm Economic Forum.