Why the Transition failed: Towards a Political Economy of the Post-Soviet Period in Russia

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Why the Transition failed: Towards a Political Economy of the Post-Soviet Period in Russia-.

Introduction: Significance of the Failure of the ‘Transition’

The thesis of this article is that there has been no transition to capitalism in the post-Soviet space and that there has been no transition because there could be no transition. The pre-conditions for a move to capitalism have been absent throughout this time. We have been witnessing a continuing disintegration of the previous system leading into a disintegration of the society itself through national independence, civil war, emigration, growth of criminal enterprise and the exclusion of ever greater numbers from direct participation in that society. Every society must have a social form, which we call its social system and if that social system is disintegrating without replacement, it follows that the society itself must begin to disintegrate. This article is an attempt to theorize and so understand the nature of the ‘transition’. It does not attempt to uncover yet more empirical details, something that is amply dealt with by quality newspaper and periodical articles. Instead the article tries to take part in the process of discussing the salient features of what might be termed a ‘frozen transition’ or ‘continued disintegration’.

The failure of the Former Soviet Union to move decisively into a capitalist future has played a crucial role in the evolution of the global capitalist system in two respects: one ideological and the other economic. Ideologically, the post-1989 triumphalism has proved ephemeral. The failure of the market to provide a higher and qualitatively better standard of living for the residents of the FSU has been of epoch making significance. The local populations no longer look to capitalism, if they ever did, as a solution to their problems. The Western working class and the third world peasants and workers are aware of this failure and hence remain potential recruits to the cause of socialism. This was already true before the economic crisis around the devaluation of the ruble in August 1998, although those events reinforced anti-capitalist sentiment.
Economically, the dismal economic record of the FSU, and indeed of much of Eastern Europe, has meant that the earlier hopes that these countries could provide a market for the goods and an opportunity for the surplus investment funds, now sloshing around the developed countries, have been dashed. The decline of the military sector in the developed countries, following the end of the Cold War, has made the hunt for an alternative investment outlet a priority. Today China is regarded in much the same light as the post 1989 USSR. It lacks, however, the educated workforce, the relatively more sophisticated consumers and the apparent receptivity to capitalism of the FSU. The Communist Party of China may prove to be the true Capitalist Party of China but there is still considerable doubt that it will go the whole way to capitalism. The question of China’s future remains open and with it the whole question of the direction of global investment. 1
The collapse of the South East Asian economies and Japan has now raised the more general question of whether any economy, other than those of North America and Western Europe, can develop a capitalism which is relatively independent of the metropolitan powers. Before 1989, the view that capitalism had underdeveloped the third world appeared at best partial. Since then and particularly since 1997, that thesis has been powerfully rehabilitated particularly since Eastern Europe has not been industrially regenerated. The USSR had been an industrial power, with the all the faults of Stalinist industrialisation. It was clearly inferior to Western capitalism. Today its successor appears to be on the path to large-scale de-industrialisation, becoming a raw materials producer. This end is unlikely but that does not alter the trend.
In this context, the effect of the East Asian crisis on Russian and the CIS has been the final blow to any pretensions of successful transition. The attempted IMF bailout of Russia in the third quarter of 1998 must be regarded as a desperate measure to prevent Russia and much of the FSU falling into an abyss of riots, insurrection and possible mass starvation. The devaluation of the ruble could only lead to higher food prices, bank bankruptcies and the entrenchment of the former USSR in a non-monetary economy, while, paradoxically, the Russia continued to export around 20 billion dollars to the West. The absurdity of the West proposing to supply over 22 billion dollars in two years when Russia was exporting twice that amount to the West was lost on no-one. The IMF is a virtual prisoner of the process in the FSU, rather than the FSU being a prisoner of the FSU. Indeed, when Russia threatened to default on its debt to the IMF, the latter agreed to lend it the precise sum required to avoid default.
The impact on the West, and particularly Germany, is incalculable. Russia triggered the currency and stock market crises of August-September 1998 but it did not cause them. There were already sound reasons for the collapse of overblown stock markets and currencies. Articles in the press never tired of pointing out the small size of the Russian economy and the tiny extent of their stock market, meaning that economic problems of Russia could not really affect the West. While the argument was essentially correct as a technical argument it omitted two things. Firstly the very large debt, over 150 billion dollars, owed by Russia to the West on a long term basis. Secondly, the collapse of the transition to capitalism made capitalism itself questionable and hence more unstable.
The limited revival of the Russian economy beginning in 1999 consequent on the massive devaluation of the ruble combined with the rise in oil prices has stimulated some optimism among the marketeers2. Although industry has grown, barter remains dominant and investment is a small fraction of the level of 1990. The fundamental tendencies of the transition remain. In reality, however, the physical liquidation of the towns of Chechnya and the unbelievable cruelty used to defeat Chechnya itself only demonstrates that the truth that a disintegrating system, which has no replacement, will lead to the dissolution of society itself.
Russia is already providing fertile ground for theorists and sociologists to consider the nature of societal disintegration. We are familiar with the disintegration of the Roman Empire but not with a contemporary example of where a society so disintegrates that the individual is so forced to fend for himself that he has to go back to small plot cultivation to survive. I would argue that such disintegration is occurring because the working class cannot constitute itself as a class, while no capitalist class can constitute itself either. The fall of Stalinism is itself irreversible. The science fiction future of a no man’s land of isolated social entities now appears real. For critics of capitalism, the future now appears even more barbaric than the last century not just for the former Soviet Union or Eastern Europe but for the whole world. An alternative more optimistic scenario is also possible, of course, in which the working class and intelligentsia do move to a democratic socialism but, while that is my view, it is held by very few.
Against the trend, Simon Clarke has demonstrated that the private plot does not play a crucial role in the income of the average family.3 That leaves open its role on the margins and for particular families. His conclusion is more hopeful in that it does away with the picture of a nation of atomised peasants, but it does not remove the picture of a society whose fabric is tearing.
Hence the failure in the former Soviet Union looks like playing a central role in the future of capitalism in 3 respects

  • Ideologically, in disproving the superiority of capitalism itself, creating a demand for an alternative to both capitalism and Stalinism.

  • Economically, in the West, in first contributing to rather than in solving the problem of the ongoing surplus of investment funds in the West but then, paradoxically, in contributing to the opposite process of liquidating financial instruments of both public and private lenders.

  • Economically, in the East and in the third world more generally, in compelling the native residents to find an alternative to a failed transition to capitalism.

The Major tendencies or laws operating in the so-called transition.
In this article, I adduce a number of laws or tendencies apparently operating in the FSU.

The fundamental law is one of continued disintegration. Every society operates through a particular system, which may be a mode of production, socio-economic system or formation or a temporary social system. What is crucial is that there be a fundamental social relationship through which it operates and ensures the stability of the form of the society. The old Stalinist system crucially lacked that fundamental relationship. As a result, the form of the society through which it existed was itself unviable. (Its form, in a sense, was the form of no form.) By comparison, Capitalism has the law of value, in Marxist terms, or the market in orthodox terms. Stalinism, on the other hand, functioned through the direct centralised organisation of the society using bureaucratic/administrative means interacting with direct force. Atomisation was its counterpart at the micro level. This is not the place to repeat my arguments on why the USSR was unviable and what brought it to an end because I am trying to discuss its successor.4

The essential point is that the dissolution of the Stalinist system removed the direct centralised form and also reduced the level of atomisation of the society. It thereby removed its sole means of integration. As long as the society was organised and people were atomised the society could function, however much people were opposed to it. Once the central planning apparatus was removed and the role of the secret police diminished, the integrating mechanism within the system and so within society itself began to dissolve. In other words, the system began to disintegrate and the society with it. Capitalism or the market provides an alternative means of integrating the society but it has not been introduced. The concept of disintegration of the system and hence of the society is, therefore, the key to understanding the different aspects of the former Soviet Union.
This disintegration is one which proceeds logically to the level of the individual unit or even the individual person. Its first obvious manifestation was the way in which the national units of the former USSR proclaimed themselves independent. Thereafter regions and cities played with being autonomous from the centre of the newly independent nations. However, even factories and enteprises have been compelled to operate as autonomously as they could in order to survive.
At the point of the dissolution of the old system the components of the different entities in the society were standing in stark opposition one to another. Production stood opposed to consumption, industry to agriculture, investment to current production, management to labour, men to women. These poles have not ceased to be antagonistic one to the other and precisely for that reason the entities in which they are involved have tended to disintegrate. The disintegrative process itself has provided a temporary resolution.
In all the instances cited above the poles themselves have suffered a decline. In the case of the population both men and women have lost jobs, but the position for women has deteriorated considerably further than that for men in that proportionately more have lost jobs, and suffered a decline in income. The result has been to disadvantage women more than men and so make them more dependent both on men and on the political system. The conflict is thereby temporarily resolved because women have less opportunity to pursue the conflict and less desire to do so under conditions where the men supporting them are also in grave economic trouble. Under present day conditions total production is under half what it was, so that even Soviet type goods can be an object of desire, particularly where the population do not have money to buy goods, most particularly imported goods. Soviet type goods may not have been able to be sold under late Soviet type conditions but where it is better to have an inferior, or even a vastly inferior good rather than starve or go without, the Soviet type goods find a market today. This is particularly the case when the poverty of the countries of the disintegrating system leads to a massively depreciating currency and so to the relative cheapness of home produced products.
We can understand the emergence of barter through such a disintegrative analysis. The overall tendency has been one of disintegration to the atomised unit. The exact unit has moved, from the nation-state, to the enterprise to the final individual person or family. In the latter case, further disintegration is impossible. Indeed, it is not hard to detect in the way many families or individuals have turned to their own private plot to get whatever food that they could cultivate, in order to survive, even if it is neither enough nor an everyday occurrence. In addition, some proportion of the population has turned to individual selling of their own goods supplemented by other acquired items in order to survive. Others have become petty criminals. Many have resorted to working in more than one job. This is subsistence existence and not any form of accumulation nor the basis of any new system. Where the individual or unit operates on a subsistence basis they cannot get the exchange necessary to acquire other goods. Hence some form of barter becomes a necessity. This relationship is in itself haphazard, changing from individual to individual and from one day to another.
In the case of enterprises, each unit is forced to operate on its own individualised basis, unless it wants to completely restructure itself along capitalist lines. Since that involves the loss of a large proportion of both management and workers, and possibly even the loss of the enterprise itself, each unit continues to try to exist as best it can. Since the enterprises are not based on profits or an excess of revenues over expenditure, under present conditions, barter succeeds in maintaining a declining entity, where money would not. Of course, as pointed out by observers,5 it pays the enterprise to use barter to avoid taxes and other money forms but in the end the reason boils down to the fact that their survival demands it. The enterprise stands directly opposed to the state apparatus in its collection of taxes and imposition of various other rules, without any integrating mechanism. It, therefore, hides its production as best it can and pays criminals to protect it.
In other words, the disintegrative process has led to a drive towards the autonomy of every unit and barter is one way of maintaining that autonomy. In reality, the autonomy existed in opposition to the organisational drive of the centre in the old system. But the administrative or organisational drive of the centre did limit that autonomy. Without the so-called planning apparatus that limitation is absent and the old forms can expand. As a result, the old relation between enterprises continues but without the more generalised ‘planned form’. This victory for the individual unit cannot become an entrepreneurial form unless the social relations themselves become value relations. Labour must become abstract labour and if that is impossible, the market is impossible and hence the enterprise is forced to go back to a pre-capitalist form.

The Role of International Capital

The law of value or the market does not automatically impose itself, unless the social relations are conducive. The IMF seems to agree in its own initimable and fetishized way, as the following quote implies.: “Widespread graft and a culture of nonpayment—with the government itself, at central and local levels, repeatedly failing to meet its obligations to public sector wage earners, pensioners, and suppliers—have eroded the social fabric. The lack of political consensus and commitment to the reform process caused the situation to deteriorate until the accumulation of debt and erosion of confidence made it untenable.and make further progress with structural reforms, but in the absence of further, sustained fiscal and structural adjustment the external position will remain vulnerable.”6 The IMF authors thus also give the impression that while there is a structural problem it is basically in the mind. Provided the culture of corruption and non-payment can be overcome and there be some consensus among the politicians, the market can be installed, reforms be successful and Russia bloom. In other words, they realise that the ordinary workers are opposed to the markets because such market reforms have been against their interests but it is implied that such workers are misinformed and that if only they supported the market their standard of living would rise. It has taken a decade for the august IMF to realise that there are real obstacles to the reform but even now the market is regarded as eternal while the non-market features of Eastern Europe appear as enforced by fanatical dictators.

The point, however, is that International Capital has played a crucial role in facilitating this disintegrative process. Although Capital has been trying to replace the Stalinist system with capitalism, it has not succeeded. Instead, the old system has continued to disintegrate in parallel with the injection of a parasitical finance-capitalist sector. Finance does not in itself develop capitalism. Financial and merchant capital have existed for thousands of years without the evolution of capitalism itself.
It is, therefore, another law governed regularity that the same decadent finance capital which had gone to war in 1914 and fallen before the Russian Revolution, should be unable to replace Stalinism. It is not hard to project a massive injection of several trillion dollars into Russia over 10 year period, which would both fuel a world boom and turn the former USSR into a major industrial capitalist nation. There were indeed, and still are, voices which called for a Marshall plan for Russia and Eastern Europe. 7 It is clear that if sufficient capital had been supplied to replace Soviet machinery in key industries and enough money provided to pay good unemployment benefits to those rendered redundant, FSU industry would have been competitive on a world scale and workers would have been less discontented. Whether that would have been enough to surmount the transition is not clear. Such a formula would have given capitalism some base and the failure would not have been as clearcut as it appears today. Why then has capital not made the necessary investment and perhaps preserved itself for another 50 years?
There are two parts to the reply. The first is embedded in the above IMF reply, where the continuing decline is seen as a series of pragmatic failures. In other words, the dominant form of modern capitalism is finance capital and hence it naturally transferred operations to that region as soon as possible. Since finance capital is above all short-termist, it could only view Soviet industry as an incubus to go the same way as East German industry, so leaving the former USSR with only an extractive industry and a hypertrophied Russian finance capitalist branch of United States capital. The rise and rise of parasitic and criminalized finance capital is a natural, pragmatic response to Russia being thrown into the maelstrom of modern capitalism.
Nonetheless, finance capital is also abstract capital and as such fully capable of planning a strategy for capital as a whole. That it did not do so must mean something. It seems to me that we must understand that modern capital is afraid of developing industry unless they have necessary control over the workers. It appears as if Stalinism collapsed at the very time when capitalism could not provide the “Marshall Plan” so necessary to the revival of the FSU. Everywhere, capital is in retreat, destroying industry with the insane slogan that financial services are just as good as industry for a modern economy. Some, less intelligent members of the capitalist class and their economists may actually believe this slogan. Others realise that the continuation of the post-war boom was unsustainable because the workers would necessarily demand control over production and so the society. The USSR fell just at the time when capitalism could not absorb it, except as a doormat.
This does not mean that Western Capitalism engineered the fall of the USSR in order to turn it into a supplier of cheap raw materials and a limited market for Western goods. Such is the view of Edward Herrman8 and Michael Hudson. Herrman argues that it is wrong to state that Clinton’s short or long term goals have not been achieved in the former Soviet Union as the goal of the West was never democracy but rather to ‘make the death of socialism irreversible’ and turn Russia into a client state. As the USSR was not socialist by any reasonable criterion, socialism could not be overthrown. Presumably Herrman is arguing that the West wanted to remove the Stalinist regime and prevent any future move to socialism. That does not seem unrealistic but if that was its goal, it may have failed. Stalinism is irreversible but the discontent of the workers of the former USSR may well be channelled towards a demand for socialism, given the clear failure of the market. This move against the market is a predictable result of the destruction of industry in Russia itself and hence if the above was the aim of the West, then its goals were conflictual and hence could only fail. One is driven to the conclusion that the aims of the West were pragmatic and ambiguous. They wanted the destruction of Stalinism and the implantation of the market. Further than that there was no clarity. They assumed that the introduction of the market would mean that Russia would look like the West economically, if less developed.
The naivety of the approach of International Capital was shown by its attitude to East Germany whose industry was wiped out by a combination of an overvalued exchange rate and privatisation. The effect was to turn East Germany into a permanent basket case which has been subsidized to the tune of 150 billion DM per annum for almost 10 years. That in turn destabilised Germany as a whole, creating a special problem for the EU. It is impossible to believe that the West wanted this result.

The Goals of the Reforms

By starting with the attitude of International Capital, I have raised the whole question of the goals of the reforms. In the early period of the transition the goals seemed so clear that few asked what they were. It seemed clear that the aim was the market plus democracy and the two were often assumed to be automatically joined in a kind of unconscious tribute to Marx’s theory of historical materialism. To this apparent aim was added the need for speed in order to ensure irreversibility. There was no historical analysis of the nature of the market or of democracy. They were simply assumed to be natural, necessary and morally sound goals. If the Soviet Union was not the evil empire, it was necessarily inefficient, warlike, oppressive and exploitative and the market was of necessity superior. Even those who questioned the efficacy of the market and criticised the West for its democratic limitations generally saw the goals in this light because they separated the market from capitalism as some kind of ahistorical mechanism.

Berezovsky has obviously learned something of capitalism from the Stalinist textbooks that he read. 9 He argued in an interview with Newsnight that big capital rules. Martin Wolff of the Financial Times clearly does not think that Big Capital rules, as he says that if that is the case the future for Russia is dismal.10 The market has only existed in its full form under capitalism and cannot exist in any other way, in spite of the now largely discredited market socialists. The role of capital may be nuanced and often indirect but that does not alter the point that in a market profit is crucial and those who control those profits are critical to the society. The implication of the marketeers, however, was that the market requires competition and competition needs a large number of firms, none of whom can influence the price. Hence their goal was that of the destruction of the existing large Soviet type enteprises and their replacement with a multitude of small firms. Profit rules but through competitive small to medium enterprises. There can be no doubt that many economists, academics and international bureaucrats have taken this view. It is the dominant attitude in most of the Western official and semi-official organisations dealing with the former USSR.
In times to come, academics will wonder how there could be such people. Our society is not of that type and one can ask whether it ever was. Although, one can find a few industries approximating to this utopian picture, the dominant industries-the Car/Automobile Industry, the Pharmaceutical Industry, the Computer Industry and the Arms industry and are all dominated by a few giant firms. The small to medium firms which often supply these industries are subject to or controlled by their buyers. Almost 50 years ago Paul Baran argued that the economists’ worship of the small firm arose out of their intermediate position in the society.
In short, the goal of the Western organisations was to introduce a Utopian market, whereas the goal of capital itself was more pragmatic. It was to seek out and find sources of profit. It had no objection to establishing local industries but it often had no way of making them profitable as we saw in the case of IBM and Philips which both withdrew from production in Russia. There was no overall goal to destroy Russian industry, even if it looks as if that has been achieved.
In other words, behind the rhetoric of the importance of the transition to the market, large corporations and finance capital operators saw an opportunity to make money. That, after all, is their function but the project has largely failed with the potential exception of the raw material producers. The reasons for the failure is discussed below.
So Herrman and Hudson are wrong in that there was no pre-existing goal of simply taking over the Russian economy or turning Russia into a client state, even if some capitals might have wanted to do so. The fact that Russia is a client state and its economy is devastated has to be explained in other ways. Essentially they are wrong because they fail to see the contradictions in the nature of the old system and consequently in the transition itself. They are right, however, in pointing to the reality.

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