[Congressional Record Volume 140, Number 48 (Thursday, April 28, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: April 28, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                    REFORM IN RUSSIA: PLUS OR MINUS

                                 ______


                          HON. LEE H. HAMILTON

                               of indiana

                    in the house of representatives

                        Thursday, April 28, 1994

  Mr. HAMILTON. Mr. Speaker, the United States has a strong and direct 
interest in the transition to democracy and market economics in Russia 
and the newly independent states. There has been considerable debate 
recently as to the extent of reform and whether it is adequate: whether 
the glass is half-full or half-empty.
  In order to provide a factual basis for this discussion, I asked the 
staff of the Committee on Foreign Affairs to develop a list of the 
positive and negative developments on reform in Russia.
  I am inserting this in the Congressional Record in order to 
contribute to the congressional and public debate over this critical 
foreign policy issue.

                            Reform in Russia


                            central control

                                 Pluses

       Sufficient departure from Soviet socialism such that a 
     return to a command economy would be difficult
       Elimination of the central element of Soviet socialism--
     central planning and central distribution of industrial 
     materiel.
       Elimination of the preeminent position of defense in 
     resource allocation.
       90 percent of prices freed.
       State role in food distribution \1/4\ of its former size; 
     the state will purchase only nine types of agricultural 
     commodities.
       Enterprises no longer depend on Moscow for decisions or 
     resources.

                                Minuses

       Energy prices are still set administratively, with crude 
     oil prices at one-third of world prices.


                             privatization

                                 Pluses

       Consumers now make 70 percent of their purchases from 
     privately-owned businesses.
       7,500 large enterprises (35 percent of total) sold to the 
     public or employees. In comparison, Poland and Hungary, where 
     overall reform is further advanced, have privatized \1/3\ of 
     state enterprises.
       87,000 small firms transferred from state control.
       8.1 million housing units (30%) turned over to individual 
     owners.
       270,000 private farms.

                                Minuses

       Few former or current state enterprises have streamlined 
     and adapted to a market economy.
       The number of registered cooperatives and proprietorships 
     (200,000) has stagnated since 1991.


                              legal system

                                 Pluses

       Beginning of establishment of a legal system necessary to 
     underpin a fully functioning market economy.
       Creation of a legal basis for bankruptcy proceedings.
       Patent and copyright laws have been written, and 
     international conventions joined.

                                Minuses

       In spite of passage of antitrust laws and bankruptcy laws, 
     there have only been 10 bankruptcies. The economy remains 
     highly concentrated. The antimonopoly committee has little 
     enforcement authority.
       There is little respect for written contracts; property 
     rights are not clearly delineated.
       New laws are inconsistent and not widely available.
       Organized crime is a rampant legal and social problem in 
     Moscow, St. Petersburg, Yekatarinburg, and throughout Russia, 
     and has become a disincentive to entrepreneurs.


                            financial system

                                 Pluses

       Introduction of modern financial institutions includes:
       Large number of commercial banks;
       Ability of enterprises to purchase and sell hard 
     currencies;
       Burgeoning agricultural exchanges; and
       Development of stock markets.

                                Minuses

       Many commercial banks are owned by large enterprises that 
     use them to gain access to credit.
       Stock market is still at an infant stage.
       Most exporters are required to sell half of hard currency 
     earnings for rubles at the market rate.
       Capital flight is high.
       There is little bank regulation; banks can be formed with 
     little seed capital; a clearing system is in its infancy.
       Small business has difficulty securing credit.
       Banks generally finance only trade and middlemen 
     operations.


                            monetary policy

                                 Pluses

       Rudimentary development of Western monetary and fiscal 
     policy.
       Tough monetary policy and structural changes to the economy 
     (privatization) have caused inflation to decline from 21 
     percent in January to 10 percent in February and 9 percent in 
     March.
       The ruble is stable vis-a-vis Western currencies; internal 
     ruble convertibility means a more efficient allocation of 
     resources.

                                Minuses

       The Government and Central Bank still allocate a large 
     portion of credit, mainly to prop up state enterprises. These 
     credits are contributing to a high rate of monthly inflation.
       Pressures from economic interests for subsidies are likely 
     to rekindle inflation.
       Credit creation and an inflationary monetary policy will 
     undermine sound fiscal policy.


                             fiscal policy

                                 Pluses

       As pledged, the government submitted in April an austere 
     budget, with the budget deficit held to 7 percent of GDP.
       Because the second tranche of IMF lending ($1.5 billion) is 
     tied to the budget, there is some expectation that it will be 
     approved and implemented.

                                Minuses

       The Duma has required revision of the budget, with the 
     deficit raised to 9.5 percent of GDP to provide more funds 
     for agricultural and social spending.
       Tax rates are high and unstable.
       The overall tax burden, combined with bribes, can take as 
     much as 70-90 percent of small business profits, which leads 
     firms to operate informally and to alter their books.


                            trade/investment

                                 Pluses

       Foreign trade has been decentralized.
       Export quotas and licensing now apply to only a few 
     commodities.
       The import tariff regime is largely transparent, 
     nondiscriminatory, and relatively free of non-tariff 
     barriers.
       The removal of major obstacles to foreign investment has 
     led to growth in the number of foreign firms.

                                Minuses

       Frequent changes in import duties, and a sharp rise in 
     average tariff rates, are used to protect domestic industry.
       Few investors are prepared to make significant investment 
     commitments because of the absence of necessary commercial 
     laws and an inhospitable political and economic climate.


                            political system

                                 Pluses

       Progress in political reform includes:
       A relatively free media;
       The development of national political parties;
       The adoption of a new constitution, which gives Yeltsin the 
     power to continue reform; and
       December 1993 elections that were generally free and fair.
       Hardliners elected in December and brought into the 
     government are continuing many of the reforms.
       The new parliament is more receptive to a cooperative 
     relationship with Yeltsin than the previous parliament.

                                Minuses

       Political parties are splintered and coalition-building is 
     weak.
       There is concern over Yeltsin's authoritarian tendencies 
     and accumulation of power, and concern over how a successor 
     to Yeltsin could abuse the considerable powers of the office 
     of the President.
       December 1993 elections increased the voice in parliament 
     of the extreme flank of the opposition--Zhirinovsky and 
     former communists.
       Significant fighting between the President and the 
     Parliament continues.
       The Russian government often does not speak with one voice, 
     and the President often appears disengaged from involvement 
     in his own government.

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