Transformational Recession

Abstract

The transformational recession in Russia was one of the deepest and longest in the postcommunist countries. Various explanations of the transformational recession are discussed, and an alternative explanation is suggested. The first reason for the output collapse is the adverse supply shock after deregulation of prices associated with greater distortions in the industrial structure and external trade patterns on the eve of the transition. The second factor is the adverse supply shock caused by the collapse of state and nonstate institutions in the late 1980s and early 1990s, resulting in chaotic transformation through crisis management. The third factor is poor economic policies, which included bad macroeconomic policy and import substitution industrial policy. Finally, the speed of reforms (economic liberalization) initially affected performance negatively because enterprises were forced to restructure faster than they possibly could (due to limited investment potential) but improved performance when the economy recovered.