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Russia’s Transition to Capitalism Case Study


Background

Russia is known for its staunch socialist practices that give the state powers to control economic resources. However, modernization and Americanization practices have transformed not only the perception of Russia’s government towards the economy, but also the approaches used to interact with other countries. The evils of communism hampered development in countries that believed the state should control and manage economic resources (Spulber, 2003). Russia’s transition from a communist to a capitalist society was not an easy task.

What Went Wrong?

Russia’s transition to capitalism did not go as expected by this government and its people. Most critics in other parts of the world believed that the transition did not yield the desired results. The following reasons explain why it was not possible to achieve a smooth transition and accomplish the expected tasks.

First, lack of a robust system of property rights was the greatest drawback to the successful implementation of the transition policies. The state was the owner and controller of the major factors of production. Russia’s market system did not have an efficient and a reliable market system because of communist policies. Property rights stipulate what an individual can or cannot do with natural and man-made resources (Abdelal, 2001).

Russia did not have institutions like court systems to enforce agreements dealing with property rights. There were no qualified lawyers trained to pursue issues related to property and contract laws. In addition, the public and the state had limited understanding of the basic nature of private property and the transactions involved. Lastly, the widespread criminal activities in Russia could not give room for the successful establishment of clear and widely recognized property rights (McGee, 2010). Russia experienced the assassination of famous economists and lawyers that advocated the transition from a socialist to a capitalist economy.

Secondly, command socialist countries operated all financial institutions and dictated their terms of service (Spulber, 2003). The tradition of banking practices is not understood correctly, and this makes it difficult for these countries to transit successfully. They have communist approaches to banking, and this is very different from the known capitalistic practices. For instance, banks did not act in their capacity as independent institutions and decide whether or not to give loans to individuals or institutions. They did not have the power to determine the profitability and loan repayment abilities of their customers (Abdelal, 2001).

The economic planning process in command socialist economies was responsible for giving loans to individuals or institutions. Therefore, these banks were not used to capitalistic systems where they had all the powers to determine whether or not to give loans to individuals.

Thirdly, Russia controlled its economy by issuing decrees. It was easy for the government to establish policies to manage inflation because it controlled economic resources. However, Russians experienced a frequent shortage of goods, and this led to the accumulation of money as savings in banks. The Russians had a lot of money to spend when the country started its transition to capitalism, and this resulted in a tenfold shoot up of prices six months later.

Moreover, the Central Bank was used to writing cheques to bailout financial institutions whose costs went beyond their revenues. Russia decided to declare that all financial institutions that will not generate adequate revenues should prepare to go out of business (McGee, 2010). The abolishment of bailouts from the central bank caused many financial institutions and other businesses to collapse. It was difficult for Russia to watch as its enterprises went bankrupt yet there was the need to control inflation. In addition, it was not easy for Russia to control the inflation it created by bailing out failing enterprises; therefore, its economy was stranded, and nobody offered solutions to the crisis (Abdelal, 2001).

Lastly, most Russians were not prepared for the transition from a communist to a capitalist economy (Bruk, 2012). They believe that capitalism was a greedy and selfish way of making a few people rich and leaving the majority to suffer. The existing zero-sum view (one person can become rich only by exploiting and making others poor) was a major drawback to the transition (Spulber, 2003). Russians believed that all resources should be shared equally among all stakeholders and that the government should control the prices of goods and services regardless of their availability or costs incurred to produce them.

Who is Responsible for the Failures?

The state carries the greatest responsibility and blame for the difficulties encountered in transitioning from a command socialist to a capitalist market. The first elected President of Russia, Boris Yeltsin was vocal in advocating economic reforms in this country (Abdelal, 2001). However, the institutionalized socialist command structures could not allow him to navigate easily through the barriers set by traditional leaders.

For instance, his criticism of Mr. Gorbachev’s inefficiency to implement the Shatalin Plan was also criticized by other key stakeholders in the society. Russia’s independence gave President Yeltsin numerous opportunities to implement the plan and influence others to support him. In addition, his successor, President Vladimir Putin supported Yeltsin’s ideas. However, his claim that state power was weakened by the initial economic transitional practices became a significant drawback to the successful implementation of the Shatalin Plan (Spulber, 2003). The government failed to establish systems and train professionals to manage the transition.

This means that Russia was not prepared to transit from a socialist to a capitalist economy. Secondly, the Russians should be blamed for their reluctance to embrace modern economic practices. They feared saving money in banks and borrowing loans to boost their businesses. In addition, it was wrong for them to believe that capitalism would make some people rich while the majority will be left to suffer (Abdelal, 2001). Lastly, other countries are to blame for the failed realization of Russia’s economic transition goals. They watched and never offered economic or political assistance to ensure the transition succeeds.

What Should Be Done

It is not too late for Russia to establish institutions that will help it in transiting from a command socialist to a capitalist economy. The excess amount of money in circulation causes frequent inflation and makes it difficult for this country to transit to transform its economy. Secondly, there is the need for Russians to change their perception and attitude towards capitalism. They should understand that other countries have transitioned to a capitalistic economy, and nobody is ready to use archaic economic practices.

Lastly, Russia should strive to establish friendly relations with other countries. This country should stop creating adversarial ties with countries that may offer social, political and economic assistance to transform its economy. There is the need for Russia to work with friends and enemies in improving the welfare of its citizens.

References

Abdelal, R.E. (2001). Russia: The End of a Time of Troubles. Boston: Harvard Business School.

Bruk, T. (2012). In the Grip of Transition: Economic and Social Consequences of Restructuring in Russia and Ukraine (Studies in Economic Transition). Basingstoke: Palgrave Macmillan.

McGee, R. W. (2010). Accounting and Financial System Reform in a Transition Economy: A Case Study of Russia. New York: Springer.

Spulber, N. (2003). Russia’s Economic Transitions: From Late Tsarism to the New Millennium. Cambridge: Cambridge University Press.

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IvyPanda. (2020, September 13). Russia’s Transition to Capitalism. Retrieved from https://ivypanda.com/essays/russias-transition-to-capitalism/

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"Russia’s Transition to Capitalism." IvyPanda, 13 Sept. 2020, ivypanda.com/essays/russias-transition-to-capitalism/.

1. IvyPanda. "Russia’s Transition to Capitalism." September 13, 2020. https://ivypanda.com/essays/russias-transition-to-capitalism/.


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IvyPanda. "Russia’s Transition to Capitalism." September 13, 2020. https://ivypanda.com/essays/russias-transition-to-capitalism/.

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IvyPanda. 2020. "Russia’s Transition to Capitalism." September 13, 2020. https://ivypanda.com/essays/russias-transition-to-capitalism/.

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IvyPanda. (2020) 'Russia’s Transition to Capitalism'. 13 September.

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