Streetwise Professor

November 28, 2007

Post-Soviet Inflation

Filed under: Economics,Politics,Russia — The Professor @ 11:34 am

This article on Grigory Yavlinsky contains the following bit of conventional wisdom:

But Russians might be afraid of more change, and many people consider the word “democracy” to be a negative one. The “democracy” of the 1990s was difficult for most Russians. Privatization resulted in hyperinflation, unpaid wages and the disappearance of social security. Incomes and savings disappeared while, at the same time, a new class of wealthy Russians arose and profited from the sale of national companies. Expectations for democratic development were suffocated. “People do not think in terms of the future. They think in terms of yesterday’s fears,” Yavlinsky said to Novye Izvestia.

The statement that “privatization resulted in hyperinflation” is just plain wrong. Wrong, wrong, wrong. This plays into the Putin-era revisionism about post-Soviet Russia.

As Yegor Gaidar’s new book shows in detail, post-Soviet hyperinflation was a direct consequence of the myriad failures of late-Soviet economic policy. Facing dire economic circumstances, the Soviet government used the printing press to finance the government, and at the same time it maintained strict price controls. The result was acute shortages of everything. Unable to buy things at the official prices, people hoarded their rubles, and built up huge bank accounts. When prices were freed after the collapse of the USSR, the “ruble overhang” resulted in a huge spike in prices.

The inflation already existed in the USSR–it was just suppressed. There were massive quantities of rubles chasing few goods, but sellers couldn’t raise nominal prices accordingly due to draconian price controls. The shadow price of bread, soap, and everything else was far higher than the official price. The freeing of prices just caused the nominal prices to catch up with the shadow prices. People’s bank accounts weren’t wiped out–what good is money in the bank if there is nothing to buy? The real purchasing power of rubles in the dying days of the USSR was far smaller than the purchasing power measured at the official prices of goods–which no one could actually purchase, which sort of contradicts the whole idea of purchasing power. The rise in nominal prices post-USSR was a reflection of Soviet economic failure, not the failure of liberalization. It painfully disabused people of Ruble Illusion–the misguided belief that the rubles in their bank accounts were actually worth something. Unfortunately, the people actually responsible for debasing the ruble have largely escaped blame, while the liberalizers who forced people to face reality have been tarred instead.

So the privatization gets blamed for what was really the abject failure of Soviet economic policy. And privatization’s alleged failure, in turn, rationalizes current anti-market government policies. What a tragedy. Careless recycling of tired conventional wisdom about post-Soviet economic catastrophe, like the paragraph quoted above, is deeply pernicious. Journalists should be much more careful. Like Mark Twain said, it’s not what you don’t know that gets you in trouble, it’s what you know that just ain’t true.

By the way, I plan to write a brief review of Gaidar’s book in a future post. Basic verdict: good read, very informative, but a little repetitive.

And a hat-tip to SWP reader, commentator, and SWP Technorati “fan” (my OAO, in fact)–Dmitri–who, made me aware of Gaidar’s book. Thanks!

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