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  • Paltry U.S. economic aid has hurt Russia's chances of democracy

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    Paltry U.S. economic aid has hurt Russia's chances of democracy

    By FREDERICK R. STROBEL

    © St. Petersburg Times,
    published June 24, 2001


    President Bush, meeting earlier this month with Russian President Vladimir Putin, found himself dealing with a quite different head of state than either Bill Clinton or his father faced. That the head of Russia's former Communist secret police has risen to power should be no surprise to anyone closely following Russia's economic and social progress in the years since the official end of communism in 1989. And there are further ominous signs are that the country is drifting back toward a totalitarian, perhaps even a militarist, state.

    Almost equally disturbing is that the United States might have prevented this from happening.

    Russia's new free market economy stumbled badly in the 1990s. According to a Barclays Bank of London report, the nation's total gross domestic product plummeted from $1.1-trillion in 1990 to $185-billion in 1999. In the face of this collapsing economy, American and Western economic aid to Russia has been paltry. For this, history will judge harshly both the inaction and the ill-conceived nature of America's Russia policy during the Bush and Clinton years. And little appears to be changing with George W. Bush.

    While more enlightened Russia experts in the early '90s argued for a sort of Marshall Plan for eastern Europe, nothing of the sort occurred. What Russia received was $2.3-billion in bilateral aid from the United States -- much of it to dismantle its missile system -- and about $22-billion in loan packages from the International Monetary Fund and $12-billion from the World Bank over the decade.

    By contrast, the Marshall Plan to rebuild the economies of both our European allies and foes after World War II disbursed $13.3-billion in non-repayable grants and technical assistance -- the equivalent of $90-billion in today's dollars. In today's dollars, England received $23-billion, France $19-billion, Italy $10-billion and Germany $9.5-billion. All of the countries had well-established tax collection, legal, banking and commercial-law systems still in place, and individually were countries with a population about half the size of Russia's. Russia, however, had few of these institutions, having gone from Czarist rule to a brief democracy to the Soviet takeover of 1917. Further, it had virtually no tradition of democracy.

    The American parsimony in this regard looks even worse when we note that annual American defense spending, largely due to the end of the Soviet military threat, fell $95-billion (in inflation-adjusted dollars) during the decade, and that the federal government enjoyed a $237-billion surplus last year.

    How could this all have happened? How could we have ignored the lessons of the Marshall Plan?

    There are several explanations. First, trade -- not aid -- became a major tenet of foreign economic policy beginning in the Nixon years of the early 1970s. Since then, the American economic philosophy has continually moved away from government solutions in favor of private sector solutions. This usually works well in a country with well-established laws and institutions. But what Russia needed was help to build these systems. What it got was not enough in both technical assistance and money.

    Thus it was left to private economic advisers, such as Harvard's Jeffrey Sachs, who after some success in advocating free market shock therapy in Bolivia and Poland, became former Russian president Boris Yeltsin's senior economic adviser. But it didn't work in Russia. Years under the communist system left the country ill-equipped to deal with free markets, and the result was a sort of crony capitalism where many former Communist officials, the best educated and connected of the population, became rich and the middle class melted away.

    Second, there was too much reliance on loans from the International Monetary Fund and the World Bank. Many of these loans were tied to economic reforms -- such as privatization of state industries and cutting the size of the government -- and the faith that the free market would cause a burst in Russian economic growth. The problem was that such loans had to be paid back, and that encouraged dismantling the already weak government infrastructure in place. Consider this budgetary comparison: Next year, Florida's budget will total $48-billion for a state of 15-million people. Russia's 1999 federal budget was $26-billion for a nation of 146-million.

    Today the consequences of such economic failure are all too evident. A former KGB director is head of state, and democratic freedoms are being seriously curtailed.

    In April, the Putin government arranged for the state energy monopoly, GAZPROM, to take over NTV, the only private nationwide television channel. The station had vehemently criticized his policies in Chechnya and had attacked the government's actions following the sinking of the Russian submarine Kursk. Editors and writers of newspapers associated with the station were replaced by more government-friendly employees. Earlier this month, the Putin government ordered more than 900,000 Russian scholars to submit reports on their contacts with foreigners, reviving a KGB-directed practice that had ceased in 1991 when the Soviet Union collapsed.

    One of the major accomplishments of the post-World War II Marshall Plan was that it promoted democratic institutions and economic integration among the nation states of Europe. Certainly, the former Soviet bloc countries were an obvious laboratory. Recently, Russia's economy has shown signs of recovery, somewhat helped by the rise in oil prices. But, with 40 percent of its citizens living in poverty, it has a long way to go. Let us hope that Russia does not choose to supplement its recovery with military spending and a renewed Cold War mentality.

    -- Frederick R. Strobel is the William G. and Marie Selby Professor of Economics at New College of the University of South Florida. He can be reached at fredstrobel@home.com.

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