risis” spooked fund managers into withdrawing from most “emerging markets.” World oil prices have fallen dramatically, seriously impacting Russia’s exports and balance of trade, Russian tax collections continued to disappoint and, in the few years since economic reform commenced, no significant, viable world class industries have yet emerged in Russia. The Russian Government couldn’t ease the Asian economic crisis or raise international oil prices, and development of competitive world-class businesses within Russia, if it is to happen, will take time.What lessons should Russia’s leaders learn:If the socialist economy no longer functions, the government should try to disinflate as rapidly as possible. A delayed disinflation will be much more painful. If the government is confronted with delayed disinflation, it should cut budget deficits radically. The illusion of being able to finance the deficit out of a short-term portfolio should be abandoned. It should be understood that hardening the budget constraint is important not only for raising budget revenues but also for allowing market mechanisms to work and thus for increasing the efficiency of the economy. So what is it that Russia can do to assure that it continues to progress towards its rightful place as a world economic power? At the very least Russia’s political leaders must: Understand that the policy of seeking ever more cash from the West is not a policy that will develop Russia politically or economically. In short the Duma must accept responsibility for its crucial role in Russia’s future. Short-term political ambitions and partisan hopes that the failure of “Yeltsin’s reforms” will lead to greater political advantage for the opposition in the Duma must yield to the reality that international lenders will not keep lending to Russia forever. And most importantly, take immediate, positive steps to encourage long-...
