The Transition to the Market and Corruption in Post-socialist Russia

Abstract

The end of the State Socialism in Russia was greeted with near universal enthusiasm. The Western public and the people who had endured the economic absurdities of the Soviet system expected economic performance to improve dramatically and the country to turn overnight into a well-functioning and prosperous market economy. Such optimism was loosely based on an `invisible hand explanation': as in Adam Smith's classical example of `the butcher, the brewer or the baker', agents pursuing their own individual interest would produce an unintended bene®t for society as a whole. In practice, this idyllic picture did not quite materialize: the economic system is under great strains and Russia is far from being a well-functioning market economy. According to an index of `economic freedom' recently constructed by the Heritage Foundation, Russia ranks 117 in a list of 150 countries. This index measures how well countries score on a list of ten factors, including trade policy, taxation policy, level of privatization, monetary policy, property rights, antitrust regulations, and the extent of the black market. Not only is Russia at the bottom end of the list, but its position has worsened over the years. The authors of the index point to the strong correlation between economic freedom and development, the implication being that Russia is not likely to prosper economically. This index measures how much `market economy' (or `capitalism') there is in a country. Other indicators show that standards of living have dropped since the beginning of the transition and economic disparities increased substantially. Much of the health-care system has collapsed, mortality rates have risen alarmingly and life expectancy has fallen. Russia has not yet reaped the bene®ts of capitalism but it has lost the safety nets of socialism.