NOTE: Free essay sample provided on this page should be used for references or sample purposes only. The sample essay is available to anyone, so any direct quoting without mentioning the source will be considered plagiarism by schools, colleges and universities that use plagiarism detection software. To get a completely brand-new, plagiarism-free essay, please use our essay writing service.
One click instant price quote
Despite making a recovery after the 1998 market crash, Russia remains weighted with numerous holdovers from the Communist era that keep its economy from taking advantage of free-market reforms. In short, Russia has not prospered under capitalism because it has not yet discovered it. In order to do so, the Russian government must engage in extensive reform in several key areas: improving the rule of law, creating stable monetary policy, and ending a policy of favoritism to particular businesses. Engaging in these reforms would lower the extremely high transaction costs of doing business legally, stimulating a wave of new investment and wealth creation within Russia, as well as encouraging investment from abroad. While the causes of Russias economic problems are numerous, the absence of a rule of law causes enormous unpredictability and uncertainty that is the primary barrier to economic growth. The regulatory mess caused by presidential decrees, legislative changes and numerous bureaucracies putting out contradictory rulings is just one aspect of this problem.
The court system, which is supposed to be a neutral arbitrator of private disputes, is highly publicized, and even worse, is used by the governments to silence critics and unfavorable companies. One of the major challenges to reform is the uncooperative nature of the bureaucratic apparatus in carrying out laws and policies enacted by the executive. While Yeltsin and Putin have generally been in favor of free-market reforms, the bureaucrats meant to carry out their policies are often rich oligarchs who stand to lose financially or politically from reform. To combat this, Putin has replaced most of the Yeltsin-era ruling cabinet with his own men, but it is unclear whether they will be any better than their predecessors. The lack of clearly defined and enforced property rights is another major problem. The communist-era criminal code has only been partially replaced, and each contract must be carefully examined to check whether it contradicts an ever shifting mess of regulations.
In addition, it is unclear what success the communists will have in the next election, so long term planning is very difficult because the future is so unpredictable. Despite an ambitions privatization program, many of the large factories remain state owned, partly because of the fact that their outdated and inefficient production would immediately and properly put them out of business under a free market. However, because the government has so much influence over the banks, it keeps funding these inefficient enterprises to earn the support of the many workers they hire. Many of the factories that were privatized, simply signed ownership to their communist bosses, and because of their pull with the government, stay alive by government aid.
Despite all the issues mentioned above, the biggest challenge to Russian economic growth is probably its monetary policy. The Russian central bank is a direct holdover from Soviet times and needs to change its policy drastically to adapt to a free-market economy. In a capitalist economy, private banks serve to store money and provide investment to business. Because banks lose their investment when a debtor defaults, they are careful to insure that entrepreneurs large and small have sound business plans and refuse to loan to companies whose profits are dubious. The central bank functions independently of private banks (ideally) serving only to manage the size of the monetary supply indirectly by open market operations, varying the discount rate, and setting reserve requirements. In a socialist economy, the function of the banking system is entirely different.
All banks are part of a single system to distribute funds from the central government to individual business and factories. Branch banks dont care whether any business is profitable or not because the credit risk of any investment is zero, since the government simply sends more money to an unprofitable factory instead of letting it go under. Private savings accounts are small or nonexistent because there is nothing to invest in, and no interest to earn from the investment, and event if there was money to be saved, there is usually nothing to spend it on in the stores. Instead of being independent, the central bank is simply an accounting organ of the state to determine which industry receives what funds.
Inflation however is kept low because all large purchases require permission from the state, exchanging rubles into other currencies is illegal, and outside the black market, there is nothing to spend money on anyway. When the USSR collapsed, the banking system was officially privatized on some levels, but remained much the same in function. Most banks remained either partially state owned or state controlled, even if officially privatized. These banks fund inefficient public and private enterprises with funding from the central bank, which simply prints new money to cover the expense. State workers receive new rubles for doing little or nothing. Of course, basic economic theory dictates that printing money without a corresponding increase in wealth is going to create huge inflation, which it did on a grand scale, with the ruble falling more than 20 % in value on some days. 1 One of the insidious effects of inflation is to transfer money from the money making companies to the recipients of new government money, diminishing the incentive of workers to get jobs in the private sector.
In an attempt to protect the value of the currency, the government made it illegal to exchange rubles for dollars, making them even more worthless because there was so little to spend the rubles on. In effect, the government was printing enormous amounts of money to keep inefficient state enterprises alive, but not allowing workers to spend any of the money so as not to devalue the currency. If the monetary policy of the Russian government is not bad enough, the International Monetary Fund directly supported it by funding the government with billions of dollars in loans. Because more and more money was necessary to support the old state enterprises, the foreign aid went directly into dilapidated old factories, which often were not producing anything at all, with most workers employed elsewhere, but registered as working at the factory for the state salary. As Russian reformer Gregory Yavlinsky said in 1993, "It has become clear that new Western credits are no longer a remedy for Russia, but a drug helping to maintain an unfit system. " 10 Inevitably, the ability of the Russian government to pay back loans steadily declined until it was forced to default in its debt in 1998.
The IMF failed to learn its lesson however, as it continues to fund inefficient and government favored enterprises all over the world, notably in South America, creating a false sense of economic stability that politicians use to stay in power and the IMF uses to prove its relevance until the country is no longer able to pretend to be able to pay back loans and engages in the familiar scenario of funding payments with inflation while trying to limit citizens ability to spend the new money. At no time is any investment in new, economically efficient infrastructure actually made, something Russians would do well to mind when asking for international loans. Historically, the inflationary policy of the new Russian government is typical of both Soviet and tsarist era central banking. 3 The nature of printing money to cover losses from inefficient state enterprises means that high inflation will be inevitable unless the government either confiscates private savings accounts or limits the ability to withdraw money from the savings accounts to drastically decrease the real money supply. The former has happened several times during the Soviet era, most recently in 1991, when Gorbachev allowed only a small amount of rubles to be converted into smaller bills, wiping out private savings of millions, and not surprisingly leading to the familiar sight of pensioners begging on the street, which the western media blamed on the effects of privatization rather than irresponsible monetary policy.
The 1991 savings confiscation destroyed any remaining confidence in the ruble or the banking system, leading to a mass conversion of rubles into dollars, or dollar ization. Today, Russians illegally hold over 40 billion in dollars, five times more than they hold in rubles, 1 and this despite ruble to dollar conversion being against the law. The difficulty in converting dollars to rubles combined with the inflationary instability of the ruble and the socialist era banking system is perhaps the primary factor in the huge underground economy. The solution to Russia monetary crisis is simple: the ruble must be made sound by making it convertible and establishing...
Free research essays on topics related to: russian government, economic growth, rule of law, savings accounts, central bank
Research essay sample on Policy Proposal For Economic Reform In Russia
