Vol 1, No 18
25 October 1999

Reflections on Russia R U S S I A:
More Aid, Fewer Strings
A new Western aid policy toward Russia

David M Kotz

Since 1992, some USD 55 billion in international assistance has flowed into Russia, including USD 8 billion in bilateral aid from the US, USD 14 billion from Germany and USD 23 billion from multilateral institutions.(1) Yet Western aid has not averted the economic disaster befalling that country. Russia's GDP has nearly halved in seven years of depression. A small group of fast operators has acquired great wealth, largely by unsavory means, while 55% of the population has been reduced to growing half or more of their food in small backyard plots.(2) As much as 80% of transactions are conducted by barter and other money surrogates.(3) The profound trauma that Russian society has gone through has produced over two million premature deaths since 1992 from elevated rates of alcoholism, suicide, homicide, infectious diseases and stress-related ailments.(4)

Recently, some have suggested that, had the West been more generous with its aid, the outcome might have been different. Others argue that giving more would only allow more to be siphoned off by corrupt officials, shady financial operators and organized crime figures. While the West could afford to give more, doing so is not the key to a successful aid policy. Neither does the solution to the aid problem lie in the design of more effective control methods to ward off the theft of aid dollars. Paradoxically, despite the probable theft of some international assistance funds in the 1990s, the means to a successful aid policy toward Russia lies with fewer, not more, restrictions on its use.

Western aid and the "Washington Consensus"

The problem with Western aid to Russia has been the tying of such aid to an unworkable economic policy. In order to get Western assistance, Russia has been required to follow a transition strategy, known as the "Washington Consensus," which means adherence to the trilogy of immediate liberalization, privatization and stabilization (the latter meaning contractionary fiscal and monetary policies).(5) While Russia's adherence to this strategy has been imperfect, it has hewed closer to the strategy, for a longer period of time, than most observers had expected, particularly with respect to privatization policy.

The resistance in some quarters to the possibility that the Washington Consensus policies might bear some responsibility for Russia's economic disaster calls to mind a time-honored tradition in American Presidential politics. When the presidency shifts from Democratic to Republican hands or vice versa, the new occupant of that office traditionally blames any economic troubles that emerge during his term on the misdeeds of his predecessor. However, by the end of the second four-year term, such excuses tend to wear thin. It has now been nearly eight years since the demise of the Soviet Union, and it is time to admit that the Western-inspired policies followed by Russia bear responsibility for what has happened there. It will no longer suffice to keep saying, "We didn't realize how rotten the Soviet economy was."

The idea underlying the Washington Consensus was that a publicly owned, centrally planned economy could be rapidly converted into a capitalist market system by privatizing enterprises and freeing them from state support and control. However, Russia's enterprises, designed as cogs in a central planning mechanism and saddled with many social welfare responsibilities, are not easy to turn into profitable capitalist firms. Rapidly privatizing state assets in Russia, with its vast wealth in natural materials and with no legitimate wealthy class to buy them, was bound to set off a brutal and corrupt scramble for that wealth. It is not surprising that the winners of this sordid competition are figures more interested in sending their assets abroad than in developing productive economic activity at home. Sudden liberalization brought high inflation that distorted economic incentives while opening the economy to foreign competitors before Russian enterprises had a chance to restructure and reform. Contractionary monetary and fiscal policies assured a deep depression and deprived enterprises of funds necessary for modernization and restructuring.(6)

Russia's transition polices have stimulated an outflow of capital estimated at USD 140 billion since the beginning of 1992.(7) The inflow of Western aid pales beside the flood of capital leaving the country. Russia would have been better off with no Western aid at all if, in the absence of the policy strictures that accompanied aid, it would have been able to prevent the flight of capital.

The West did not just insist that Russia follow particular economic policies. It also sought, rather openly, to pick the officials to carry out those policies. The West backed a small group of ardently pro-Western, and pro-American, figures who earned the Western media title of "economic reformers." This group has not aged well, picking up more than its share of corruption charges. They are widely viewed in Russia as not just corrupt but incompetent. However, whatever the merit of the former charge, the latter one is misplaced, in that no amount of competence could have produced good results with a policy unsuited to the conditions of the country to which it is applied.

Lessons from history

The West in general, and the United States in particular, has made the classic mistake of seeking to impose a particular economic model, believed to be successful at home, on a country with a greatly different history, culture and pre-existing economic structure. A brief look at history holds a useful lesson in this regard.

After World War II, the Soviet Union imposed its own economic (and political) model on the states which it controlled in Eastern and Central Europe. The problems and distortions resulting from this eventually undermined the Soviet Bloc. By contrast, the United States, despite possessing enormous influence over its allies (and defeated former adversaries) in 1945, took the route of providing generous economic aid to them with few policy strings attached. Britain nationalized industries right and left. Germany developed its "social market" model with a generous welfare state. Japan pioneered industrial policy including strict controls on domestic and international capital flows. Somewhat later, South Korea, despite being totally dependent on the US for its survival, was allowed to develop its own variant of the Japanese model.

All of the above countries, except perhaps Britain, experienced significant economic success in the postwar decades. Each country followed an economic strategy developed by indigenous leaders who understood the relevant features of the country's history and culture. In each case, a reasonable economic strategy emerged out of the political process of the country concerned.

One cannot claim that a hands-off approach to aid-giving always succeeds. But one can argue that a hands-on approach - that is, aid conditioned on the acceptance of a foreign economic model - is virtually guaranteed to fail.

China: a contrasting example

It is notable that, in the recent experience with economic transition from state socialism to a market system, the only clear success to date - China - is based on a home-grown model of transition. Not requiring outside financial or political support, China has been free to devise its own eccentric path to a market economy. Nearly directly opposite to the Washington Consensus wisdom, China retained state controls on the economy for decades, loosening them only gradually; privatized few enterprises, instead encouraging the development of new, nonstate, market-oriented enterprises; and followed generally expansionary fiscal and monetary policies, including large public investments in state enterprises and in infrastructure. This path has produced rapid economic growth every single year since it was launched twenty year ago. China's GDP grew at an average annual rate of 9.5% from 1978 to 1998 (increasing more than six-fold), perhaps the best macro performance of any country in that period.(8) By contrast, the supposed success stories of the Washington Consensus, such as Poland and the Czech Republic, can only boast that the deep depression did not last so long and was eventually followed by a recovery.

A new aid policy

It is not too late for the West to be helpful in solving the devastating economic problems facing Russia. The best way to help would be to make a fundamental change in Western aid policy toward that country. Instead of requiring adherence to any particular economic model, the West should offer generous economic aid with very limited strings attached.

The choice of a strategy for economic recovery and transformation should be left up to the Russian political process to determine. Elections to the Duma are coming in December with the Presidential election to follow six months later. The unfortunate spectacle in 1996, when the West intervened in Russia's presidential election to favor one candidate, should not be repeated.

An indigenously developed economic strategy is not guaranteed to succeed in Russia, but at least there is a chance that it will. Russia has many able economists, who may not speak English, but who know something about the Russian economy and society. It is time to stop blessing "our man in Moscow" and let the Russians solve their own problems. Not only is this far more likely to succeed, it would avoid the blame for any further failure being laid at our doorstep, with all the political dangers that entails.

Few strings attached does not mean no strings attached. It is entirely reasonable to require as a condition of aid that the Russian government respect the human rights of its people. It is also reasonable to receive an accounting of the use of aid funds to ensure that they are employed in the manner intended. However, adherence to a particular economic model should not be required. Russia should have the right to make its own choices - between laissez faire and state guidance of the economy, between private charity and a welfare state, between an export-oriented development strategy and one based on its internal market, between private business and public enterprise. These are not matters of human rights, and countries should be free to make their own choices.

Russia would benefit greatly from two specific types of aid. One is relief from its crippling foreign debt, much of which was inherited from the Soviet Union. The West should be willing, at the least, to postpone repayment on a large part of that debt for a transitional period of five or ten years, allowing Russia to apply its export earnings to other purposes in the interim. Second, the West should provide more technical assistance to aid in the modernization of the Russian economy.

It is sometimes forgotten that Russia should not need a large quantity of international aid. This is a country that usually runs a trade surplus, due to its raw materials exports. It should be able to purchase most of what it needs from abroad. It could do so if the outflow of capital were stanched. The West should not complain if Russia takes strong steps to accomplish that end. Perhaps the current Russian money laundering scandal will prepare the way for Western acceptance of, and cooperation with, some kind of capital export controls by Russia.

Russia should be no less free to choose its path of recovery and redevelopment than was Britain, Germany or Japan fifty years ago. What has changed is the absence of a common enemy - the USSR - that once compelled American leaders to see the wisdom of accepting different economic models among its friends and allies. Standing now as the lone superpower, the US suffers from a tendency to feel omnipotent and to imagine an ability to shape other countries in one's own image. This temptation should be resisted and wisdom reasserted in Western aid policy.

David M Kotz, 22 October 1999

The author is Professor of Economics and Research Associate at the Political Economy Research Institute, University of Massachusetts at Amherst


1 US Central Intelligence Agency, Handbook of International Economic Statistics (Washington, DC), 1998, Table 77, and 1996, Table 128. The data cited cover 1992-97. Figures for aid disbursed for 1998 were not available at the time of this writing.

2 The figure for self-provision of food is from a survey reported in RFE/RL Newsline, vol 3, No 28, Part I, February 10, 1999.

3 This estimate was for the fall of 1998, reported in Stanislav Menshikov, Eurasian Commonwealth and Eastern Europe: Monthly Report, November, 1998.

4 Mark G Field, David M Kotz, and Gene Bukhman, "Neoliberal Economic Policy, State Desertion, and the Russian Health Crisis," in Dying for Growth: Global Restructuring and the Health of the Poor, Institute for Health and Social Justice, Monroe, ME: Common Courage Press, forthcoming 1999.

5 Other names for this transition strategy, each conveying a slightly different meaning, include shock therapy and neoliberalism.

6 A more thorough critique of the Washington Consensus as applied to Russia can be found in David M Kotz with Fred Weir, Revolution from Above: The Demise of the Soviet System (Routledge, 1997), chapters 9-10.

7 Institute of International Finance, Capital Flows to Emerging Market Economies, September 25, 1999, p. 10.

8 International Monetary Fund, World Economic Outlook Database, September 1999.



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