by Anders Aslund, Peterson Institute for International Economics
Op-ed in the Moscow Times
December 29, 2009
© Moscow Times
One of the great heroes of our time, Yegor Gaidar, has passed away. In November 1991, after being appointed by President Boris Yeltsin as deputy prime minister, later acting prime minister and head of his reform team, Gaidar was responsible for transforming Soviet Russia into a market economy. He accomplished this Herculean task, and he did it peacefully. He belongs to history as one of Russia's greatest reformers.
In 1991, Russia was bankrupt. Yeltsin and Gaidar appealed to the West for financial assistance, but the West offered no support (except for humanitarian aid) for the country's market reform and democracy. This proved to be a moment of great folly in the West's policy that later alienated Russia. Gaidar and his team of reformers had to fight completely on their own.
Gaidar led the reform charge with intelligence and determination. His three main policies were radical price liberalization, fiscal stabilization and privatization. The price liberalization in January 1992 was preceded by tremendous social tension. People thought that the sky was the limit for deregulated prices because of the huge monetary overhang. The authorities feared a popular explosion. But no public protest occurred, although prices rose instantly by 250 percent. Gradually, shortages diminished, and goods that had not been seen for years reappeared in shops. A market economy slowly but surely was taking shape. In addition, Gaidar daringly cut military procurement by 85 percent, swiftly reducing the military-industrial complex that until then had been seen as a sacred cow in the federal budget.
Gaidar was firm in his principles. He justified his radical early price deregulation: "There were no reserves to ease the hardships that would be caused by setting the economic mechanism in motion. It was impossible to put off liberalization of the economy until low structural reforms were enacted. If we did not act decisively, in two or three months we would have an economic and political catastrophe, total collapse, and civil war," he said in December 1991.
His problem, however, was that the reformers never gained control over the central bank, which pursued an extremely loose monetary policy, blocking all financial stabilization. Prices rose by 2,500 percent in 1992. Strangely, Gaidar was accused of strict monetarism when the central bank's opposition to monetary constraint was the problem.
After less than half a year, a motley crew of communists and nationalists mobilized in resistance. They blocked Gaidar's reforms and in early December 1992, they rallied in the Congress of People's Deputies to have him ousted as acting prime minister. As a result, the reforms that Gaidar had started were put on hold. Russia completed its fiscal stabilization only after the financial crash of 1998, which was caused by loose fiscal policy long after Gaidar's departure. When Russia's budget deficit finally was eliminated, an average growth of 7 percent a year followed for almost a decade — from 1999 until 2008.
Life is not fair. Many Russians have blamed Gaidar's "shock therapy" for economic misery, seemingly unaware that the Soviet Union and its economy had collapsed before he initiated reforms. The same people praise Vladimir Putin for the great economic growth since 1999, forgetting that growth started long before his first presidential term. Cause precedes effect. After major transformations, time—in Russia's case several years—is needed before the effect is seen.
Gaidar rose to prominence in 1986 as the best and most erudite economist in the country. He set up his own Institute of Economic Policy in Moscow, where he had gathered the best and the brightest of Russia's young economists. Like Gaidar, they were the children of the preeminent Soviet intelligentsia. When I visited his institute in June 1991, it was evident that Gaidar had gathered the best Russian economic team possible to take over the government.
In September 1991, Yeltsin understood that Gaidar was the man that the country needed to lead its economic reforms and appointed many members of Gaidar's team to his government. Yeltsin later wrote: "It was high time to bring in an economist with his own original concept, possibly with his own team of people. Determined action was long overdue in the economy."
Gaidar was actually the only Russian economist able to conceptualize a viable economic policy in this total crisis. He was greatly inspired by his good friend Leszek Balcerowicz's radical market reforms in Poland in 1990. Soviet economics were ruefully backward, and even during the perestroika years it still clung to anachronistic elements of Marxism-Leninism.
No other economist came up with a comprehensive program. Neither ordinary Russians nor the elite had a clue what a market economy was. They preferred cherry-picking and did not understand the need for a consistent system. Without Gaidar, Russia could have easily ended up as Belarus with a Soviet-like economy (minus Soviet ideology).
At the time, Jeffrey Sachs, David Lipton, and I had the privilege of assisting Gaidar as his economic advisers. We went to Moscow in September 1991 and met with different groups of economists who were competing to join Yeltsin's government. Gaidar's team was head and shoulders above the others. He welcomed all the help he could get. It was a chaotic time when everyone was working around the clock, but Gaidar and his friends did what it took in a desperate situation.
In 1993 Gaidar briefly returned to the government. After forming the liberal political party Democratic Choice of Russia, he was elected to the State Duma for two years. He was elected to the Duma again from 1999 to 2003 as a member of the Union of Right Forces.
In the end, however, he was more of an intellectual and brilliant economist than a politician. His passion was to sit at his dacha and write books. In one of Gaidar's best books, "Collapse of an Empire," he analyzed how the Soviet Union had fallen apart. His greatest work, however, is "Dolgoye Vremya," a book about long-term economic growth that will soon be published in English. But he remained a prominent elder statesman as long as Yeltsin stayed in power. He was always a much-demanded speaker at prominent international conferences.
In Putin's increasingly authoritarian and corrupt Russia, however, Gaidar felt deeply uncomfortable and frustrated. Even many years after he left the government, he was still attacked as a villain by the official media, leading communists and nationalists. Labeled as a liberal and a democrat from the "ruinous 1990s," Gaidar was no longer allowed to appear on government-controlled television to defend himself. He was essentially beaten with his hands bound behind his back.
Yet as a prominent intellectual and member of the establishment, open opposition to the government was alien to him. Gaidar considered crudeness beneath contempt. Always kind, he had many loyal friends and a large family. During Putin's two presidential terms, the economic establishment paid close attention to Gaidar's advice, but few of his reforms were ever instituted.
After Gaidar left public service in 2003, he quietly wasted away. As a true Russian patriot, he had no thoughts of emigration, but he suffered every day. I last saw him in November. His pessimism about Russia's future was profound. Although only 53 years old, Gaidar was a marked man.
Op-ed: Putin Without Putinism February 8, 2012
Policy Brief 11-20: The United States Should Establish Permanent Normal Trade Relations with Russia November 2011
Book: Russia after the Global Economic Crisis May 2010
Book: The Russia Balance Sheet April 2009
Policy Brief 09-6: Pressing the "Reset Button" on US-Russia Relations March 2009
Paper: The Russian Economy: More than Just Energy? April 2009
Testimony: US-Russia Economic Relationship: Implications of the Yukos Affair October 17, 2007
Paper: Russia's WTO Accession November 21, 2006