NO SENSE THROWING GOOD MONEY AFTER BAD RUBLES
Russia has taken two giant steps toward becoming a really nasty place. Politicians are turning toward some fascist-nationalist-authoritarian model and away from democracy. And in economics, Moscow is turning its back on stabilization and reform. Expect the worst: We may be witnessing a replay of Central Europe in the interwar years.
The large electoral support for Vladimir Zhirinovsky, a demagogue who cherishes a fascist image and leaves no doubt that he wants to put the world to the torch, shows the extent of the Russian electorate's disaffection with reform, democracy, and decency. Zhirinovsky, with no idea of how to get there, promises greatness, power, and prosperity for all. His time has not come quite yet, but he will gain as the economy worsens.
Disappointment with economic reform has led to the exclusion from the new Cabinet of Yegor Gaidar, Russia's brilliant economic reformist democrat, along with other reformist democrats. Boris Yeltsin, unwilling to push reform, vacillates. The reformists are out, and the statists are in. One of the few winners is Viktor Gerashchenko, Russia's longtime central banker, who runs the printing presses for the benefit of state enterprises and the old-time power structure.
The hope that Russia might brave the long and difficult path to a democratic free-market economy can be shelved for a long time. Russia has five immediate problems:
-- Nationalism within and without. A few minor civil wars are being waged inside the Russian Confederation, and there are plenty of rivalries with the former republics. Moscow's repeated references to the need for protection of Russian minorities in these states echo Hitler's warnings in the 1930s. And where will the first Anschluss occur? Presumably in the Baltic states.
-- Politicalinstability. A lack of stability is the common thread in Russia's unpredictable election results: an electorate whose taste ranges from czars to punks, a Parliament without a center of gravity, a President whose views on democracy won't stand up to scrutiny, and insufficient support for democratic reform. A young democracy faced with severe economic problems almost always fails, and Russia is no exception.
-- Inequality. There is a vast and growing gap between the nouveaux riches of Moscow, flush with Mercedes and BMWs, and the destitute millions who feel they are the victims of a reckless market play.
-- Lawlessness. There is a no-man's-land between the state and the market, where decentralization is incomplete, institutions are missing, and the daily question is whether reform will move forward or return to square one. Ripping off the state is fair game, the law of the jungle applies, underworld gangs function as private enforcement agencies, and the dollar rules supreme.
-- Inflation. Current inflation rates of 10% to 30% per month are the staging ground for hyperinflation, which, if it comes, will create a political and economic vacuum that's sure to suck in authoritarian rule. In the aftermath of World War I, German hyperinflation--and that of Austria, Poland, and Hungary--set the stage for Nazi rule.
Russia's economic problems and the political risks that go hand in hand with them are unique. They are not the problems of the Czech Republic, for example, nor of coastal China. We must remember that Russia is inward-looking--and that makes all the difference. Coastal China is outward-looking, the Czech Republic on Germany's border always has been, and so are the Baltic republics. Along with their outward orientation, China and the Czechs are producing with a focus on world markets. Russia, by contrast, is suspicious of the world, reluctant to embrace an export strategy, and trapped in an imploding internal market.
Reform is another point of contrast. In China, it means brand-new plants that create rapturously welcomed industrial jobs for workers who previously had none. In Russia, it means undoing inefficient enterprises, with large-scale loss of jobs and economic insecurity. The process is highly politicized. Since reform almost invariably aims for higher productivity, which means shedding workers in privatized companies, workers predictably and understandably resist. They vote to stop privatization and, instead, get credits from the central bank to finance wages in enterprises that can't cover costs or make profits.
China's transformation offers dynamism and prosperity, while in Russia, the way forward often seems less attractive than taking a break or even moving backward. Like Russia, the Czech Republic needs modernization. But there, the task is carried out by massive foreign investment in plants and immediate opportunities in export growth.
There is little the West can do for Russia. Fast disbursement of International Monetary Fund monies and other aid will make little difference. Our best investment is to support reform in China and thus gain a strong partner in market economics--one that could help stabilize the world if Russia crashes.RUDI DORNBUSCH