1
a:/Hokkaido
What Type of Capitalism for Russia?
David Lane
With the advent of President Putin, the reconstruction of
the former state socialist societies under post-communist
governments has proceeded for over ten years and the period oftransition has turned to one of consolidation. During thisperiod, the command economy has been destroyed and in its placea market mechanism has installed, prices of commodities andlabour are determined by the market, the currency is negotiable
on world markets enabling the economy to become a constituent
part of the global economy, privatisation of previous state
assets has led to over 60 per cent of property being privatised.
The economy is set in a mould of capitalism, the President,
however, has to construct policies to make capitalism work. The
argument of this paper is that the economic formation inheritedby Putin is not the most appropriate one for Russia and thatpolicy should move towards a more explicit form of organised
market state capitalism.
The most general definition of modern capitalism has been
given by Max Weber.
For him, modern bourgeois capitalism is'identical with the pursuit of profit and forever renewed profit,1by means of continuous, rational, capitalistic enterprise' .
There are of course, other types of capitalism - for Marxists,monopoly and finance capitalism and imperialism.
The major
distinction for Weber was between 'political capitalism' andmodern capitalism. In the former, opportunities for profit arederived from 'the exploitation of warfare,conquest and theprerogative of political administration' 2 profits are madefrom various forms of political domination. Modern bourgeois
capitalism is based on the private ownership of the means of
production and the continuous accumulation of capital derived
from profits received through the market. For both Weber andMarx, capitalism was a function of class interests derived fromownership which had developed over centuries, culminating for
Marx in the class conflict which brought in bourgeois society.
Since the time of Weber and Marx, moreover, different structural
types of capitalism have been defined, the three major types
being: competitive market-led capitalism (Anglo-American),nationally coordinated negotiated social-democratic economies(Denmark, Sweden), and negotiated corporatist market economies(German-Japanese). These will be discussed in more detail below.
In the case of the post-communist countries, capitalism had
to be introduced from above. The revolutions which had broughtthenewelites
to
power
were
essentially'rejective
revolutions' 3 which had 'rejected communism and Soviet power'
but were not predicated on class or social forces with a visionof an alternative social system. The early political leadershipof the post-communist states had no idea of the type ofpolitical and economic system which should be constructed on the'ashes of communism'.
In the early years of transformation in Russia, radical
reformers like Chubais and Yavlinski wanted to reconstruct theeconomy on the model of the USA. They turned therefore to theWest and asked for policy advice on how to construct a2capitalist economy and democratic type of society. The mostfavoured model
was what has become known as the 'Washington
consensus' 4 . Advisers from the West advocated a transition toan Anglo-American type of capitalism. This involved theintroduction of markets for commodities, assets and labour, a
low level of government intervention in the economy, exposure toforeign competition, monetary stability and a free exchange rate.
Privatisation of economic assets was to be introduced to create
a self-motivated business class.
The stock exchange would
become a crucial institution channelling investment to companies
to meet consumer market demand. These policies would preclude
the reproduction of the Communist administrative class which, it
was claimed, would replicate the institutional features of statesocialism.
The adoption of Anglo-American neo-liberalism was arational strategy for the new radical reform leadership: it
legitimated destroying the political and economic base of theold ruling classes as well as the formation of competing units
on the domestic market; global competition would promoteeconomic efficiency and industrial restructuring on the basis ofcomparative advantage.
State activity was to be minimal, its role was to set therules in which neo-liberalism was to operate. This particularly
meant divesting state ownership and a lack of intervention in
the market with respect to the protection of national economic
interests.
The ruble had to be negotiable on world currency
markets, and tariffs had to be minimal to allow foreigncompetition. Such an 'institutional design', moreover, ruled out
other forms of capitalism such as that which had developed inGermany, Korea, Japan and Scandinavia.
There were three major policy objectives:
1. To put in place irreversible changes. Any hardships would
have to be introduced at the beginning when support for change
was greatest.
The changes would be such that, if disillusion
with reform set in, the costs of moving back to the old system
would greatly outweigh any possible short-term improvements.
2. To open windows of opportunity. These would give rise torole-models, and expectations of what capitalist and democraticsociety would bring. This is particularly where open economic
markets to the West came in.
3.
Reform policies should be put into effect quickly andsimultaneously. The most favoured policy was for a Big Bang .
The idea being that it would be better to have all the negative
effects of change occur at one time when support for reform was
greatest.
Essentially, privatisation of assets, the opening up of theeconomy to foreign competition (thereby enriching consumer
society), the creation of competitive political parties andcivil society would make the political ballast in support of the
new system. If you could create economic prosperity in terms ofa market society, then stability, prosperity and politicaldemocracy would follow. The intended model is summarised below.
THE INTENTION: COMPETITIVE MARKET-LED CAPITALISM
KEY COMPONENTS
Driving forces: internal political elites, foreign advisers and3institutions (IMF), (intended) competitive market-led forces
Institutions: initially state committees, (intended) private
business, stock exchange
Ideology: consumerism (lacking)Basis of solidarity: new civil society (lacking)
Culture: new competitive electoral process, new supportive
capitalist culture (business class, consumer society)In the period 1990 to 1993, in all the post-communist
countries significant reforms took place along these lines. The
major elements of neo-liberal policy have been adopted: freeexchange rates, relatively low tariffs, price liberalisation,
opening up of internal markets, privatisation of assets, anemphasis on monetary regulation and a considerable weakening of
the state's economic activity.
The OutcomesHow successful in creating modern capitalism have been theformer communist countries of Eastern Europe and the USSR? What
were the outcomes of these policies?
Let me briefly consider
the economic outcomes in the former communist countries ofeastern Europe and the USSR.
The first five years (1989-1995) of transition werecharacterised in all thepost communist countries by severe
5transformation recession . Only Poland which had declined to 80
per cent of its 1989 figure in 1991 had recovered to nearly 100
per cent by 1995. Hungary came next, with a maximum decline to
80 per cent of the 1989 level and by 1995 had recovered to 82
per cent.
Severe depressions had occurred in Russia: GDP
declined to 58 per cent of its 1989 level by 1995 and Ukraine
had fallen to 40 per cent. By way of comparison, the decline of
GDP in the Great Depression the USA in 1933 (1929 = 100) was
only to 70 per cent and in the Second World War6 GDP declined in
the USSR to 75 per cent ((1942 compared to 1940) .
Even 10 years of transition had not significantly improved
the situation for most of the post-communist countries. By 1998
only Poland and Slovenia, had surpassed the 1989 levels andthese by not much -only 18 per cent higher in Poland. They were
followed by three other countries which had recovery rates ofover 90 per cent: Slovakia, Hungary and Czech Republic. Much
less successful are the countries of the former USSR. Nearly all
having GDPs of less than 60 per cent of the 1989 level. Russia
and the Ukraine with massive7 falls to 55 per cent and 38 percent of their previous levels .
Not only has gross domestic product declined, but also theinequality of income distribution has increased markedly andthere has been a significant rise in levels of poverty. The ginicoefficient is a measure of income inequality, the higher thecoefficient, the greater the inequality; a coefficient of 0
would show a completely equal distribution of income.
Beforetransformation, income inequality was fairly modest andrelatively constant between all the countries. After thecollapse of state socialism, however, inequality became more
regressiveinallcountries(except
Slovakia)
andthedifferential between countries increased significantly.
For Russia, in 1987-88 the index was 22 in whereas in 19935, it had grown to 48. Similarly in Ukraine, the growth was from4
21 to 47; at the other end of the scale more modest rises
experienced
by Hungary - from 21 to 24 and Czech Republic from19 to 28 8 . In all the unequal societies, real income decreased,
between the two time periods, by between a third and a half, andinequality rose: in Russia the top quintile increased its share9of income from 19.45 per cent in 1988 to 39.52 per cent in 1993 .
There has been a steep increase in poverty. According todata collected by Milanovic, in eighteen central and east
European countries, before the transition, there were 14 million
people in poverty (4 per cent of the population), this figurerose to 168 million or 45 per cent of the population in 1993-510.

5

Less than $120 per
month

BEFORE 1987-8

AFTER 1993-5

14 MILLION PEOPLE

168 MILLION PEOPLE

Per cent ofPopulation

4 per cent

45 per cent

TABLE 1. LEVELS OF POVERTY
18 Central East European countries.
Source Branco Milanovic. Income, Inequality and Poverty during
Transition from Planned to Market Economy.
World Bank: Washington DC 1998. p. 45.
Map 1 [hard copy only] shows those countries combining
high inequality and high levels of poverty on the one hand andthose with low levels of both on the other. These countries arealso the ones which had relatively unsuccessful levels ofrecovery and are also characterised by higher levels of
unemployment and crime.
Structural Changes in Polity and Economy
How then are these outcomes related to the move to capitalism
and to democracy or polyarchy? Transformation was to herald ashift in organising principles: politically, from hegemonic
party control to political pluralism and polyarchy andeconomically, from central planning and state owned assets tothe economic market and private property. In scope, this was a
revolutionary transformation.
To measure the success of building capitalism in terms ofthe movement to a market and to a pluralist or polyarchic type
political system, I have utilised data from two sources whichclaim to monitor economic and political developments. These arebiased towards the values of Anglo-American societies. Whilethey might be criticised as a measurement of 'real democracy'
they are good enough for our purposes. They tell us how far neoliberal ideals have been reached.
The Fraser Institute's Economic Freedom of the World 2000
Index 11 ranks countriess on a 10 point scale (0 the least free,
10 the most free) 12 . This index is quite sensitive
to different
elements in the development of market capitalism. 13 It measuresthe magnitude of price controls, exchange rate controls and thesize of the private sector. The extent of14 private sector shareof GDP is regularly monitored by the EBRD . On the developmentof political pluralism, the Freedom House Index has devised two
measures of 'freedom' in terms of levels of political rights andcivil liberties. Political rights include the prerogative ofadults to vote and compete for public office and for 'elected
representatives to havea decisive vote on public policies'.
Civil
liberties
includetherightsto'developviews,
institutions and personal autonomy' independently of the state15.
The results are shown on Table 2 which combines countries byextent of political transformation and economic transformation.

6

7
TABLE 2. POLITICAL AND ECONOMIC TRANSFORMATIONEXTENT OF
POLITICAL
TRANSFORMATIONGREATRomania

PARTIAL

Mongolia
Macedon

LITTLE

BosniaYugoslCuba
VietnamNO DATA

Hungary
CzechRep
Estonia
LatviaLithuanSlovenia
PolandSlovakia

Bulgaria
UkraineGeorgia
RussiaCroatia
Armenia
Moldavia
N.KoreaTurkmenBe
larus

Tadjiki
KyrgyzUzbekist
Kazakhst
Azerbaij

China

LITTLEPARTIALGREAT
EXTENT OF ECONOMIC TRANSFORMATION

To facilitate discussion, I distinguish three different
sets of countries.
First, the top right hand corner: Poland,
Hungary, Czech Republic, Slovenia, Lithuania, Latvia and Estonia
which have relatively successfully extricated themselves fromstate socialism. These countries have founded pluralistic
political regimes, have restructured their economies in the
direction of private ownership and marketisation and, in doingso, have achieved modest though positive rates of growth.
Second, is a group of countries which have extricated themselvesfrom state socialism but only share some, but not all, of thefeatures of Western type societies. They have been relatively
unsuccessful in achieving a transition to capitalism. They haveencountered severe economic and social deterioration. These
include the countries of the former USSR which have experienced
high levels of poverty, excessive income differentials and low
levels of per capita income. Russia is typical of this group.
They also have weak pluralistic political structures. We may
also note that some have managed partial and great economictransformation(e.g.
China)
withvery
littlepolitical
transformation.
Map 2 [hard copy only] shows a distinctive geographicalpattern to these changes. The more successful countries allborder on the NATO and European states of West Europe.

8
How then can we explain these differences? Why have somecountries done relatively well and others disastrously badly?
And finally, what policy could be adopted to improve theconditions in the transition failures, particularly Russia?
There are three major explanations of these differences.
1. Faulty implementation of system change.
2. Initial conditions and political geography
3. Failure of system transfer.
1. Faulty Implementation of System Change
The first argument is put by those who supported the neo-liberalpolicy in the first place.
Their argument is that the policy
was basically correct but that the implementation of systemchange was faulty. Consider Russia as an example of transition
failure. The main arguments here are those put forward by Anders
Aslund (a former economic adviser) and Joseph Stiglitz (formerly
chief economist at the World Bank).
Aslund's argument is that in the transition failures, suchas Russia and Ukraine, liberalisation was only partial. In the
successful eastern European countries,'The credo of radical
16
reformers appears empirically robust' . Aslund argues that pricedecontrol was only partial and allowed managers to extract rents
from the difference between controlled internal and free export
prices. Economic policy then promoted rent seeking. Enterprisemanagers in the Soviet system were able to secure privilege forthemselves and, following 'elite enrichment from the Soviet
collapse, madeit extremely difficult to impose a radical market
reform...' 17 'Corruption or state failure, as opposed to market
failure, appears
to be the fundamental problem of the transition
countries' 18 . Rent seeking then dominated the transition period
in these transition failures, and rent seeking institutions wereable to buy politicians. 'Crony networks' between business andthe state prevented the development of a proper market system.
Stiglitz's position is that the form and extent ofprivatisation were premature. His prognoses was that the methodof privatisation of property was a major cause of transition
failure in Russia. Stiglitz's argument is that 'if privatisationis conducted in ways that are widely regarded as illegitimate
and in an environment which lacks the necessary institutional
infrastructure, the longer-run prospects of a market economy may
actually be undermined. Worse still, the private property
interests that are created contribute to the weakening of thestate and the undermining of 19the social order, throughcorruption and regulatory capture' . As there was no legitimate
sources of private wealth to accomplish privatisation, thegovernment allowed private entrepreneurs to create banks whichthen lent private parties money with which to buy enterprises.
'Robber baron' privatisation consequently took place.
The allocation of property did not lead to the developmentof a capital market which in turn did not allow allocation ofassets to proceed in an efficient manner. Managers remained incontrol and impeded capital-market regulation and competition.
The new controllers rationally stripped assets of companies
rather than 'redeploying assets in a way that would provide thefoundations of wealth creation'20.

9
Enlarging on Stiglitz's approach, the ownership share offinancial companies
in Russian industry in 1999 amounted to only
10.4 per cent 21 .
Non-financial companies owned the assets ofcommercial banks, rather than the other way around. An
implication here is that non-financial companies, with a stakein or owning a bank ('pocket' banks), could transfer profits
abroad leading to significant national capital loss. While thebanks provided money changing facilities, they did not create
deposits for the accumulation of capital in Russia.
On thecontrary, they facilitated capital flight. Official estimates ofcapital exports (for 1998) are 3,999 million dollars inward
investment, compared to 15,194 million dollars outward payments22.
Western estimates confidently claim that foreign capitaloutflows are much larger than those declared: Fitch IBCA in 1999
estimated that 136 billion dollars
of capital was exported from
Russia between 1993 and 1998 23 . Another (conservative) estimate
by the Central Bank of Russssia is that capital flightcame to14.1 billion dollars per annum during 1994 to 199824.
While the reasons for transition failure differ, theconclusions are similar: mistaken and badly managed policies led
to rent seeking. A kind of 'political capitalism' suggested byWeber occurred precluding continual investment and accumulation.
a successful transition to modern capitalism has not occurred.
My own view is that this explanation is too narrow. The
reform leaders in Russia attempted to carry out the neo-liberalpolicy and did so as far as was possible under the circumstance.
The measures of reform were successful in some respects: they
secured a high level of irreversibility. The planning mechanism,
the dominant communist party, the ideology of statism have all
been destroyed.
The costs of going back will outweigh any
short-term benefits. Russia cannot move out of the constraintsof the international capitalist system. The problems oftransition were well known: it is not surprising that pricereform and privatisation failed and led to political opposition.
Asuccessful
economic
policycannotbeconstructedindependently of the political and economic interests in acountry.
Consider the effects of the introduction of Aslund's hardbudget constraints (bankruptcies) to create efficiency.
Loss making factories and organisations (excluding small
businesses) came 25 to 41.6 per cent of the total number of26.
factories in 2000 . They made a loss of 131,336 million rubles
Over 50 per cent of coal and agricultural enterprises, and 64
per cent of personal services enterprises made losses 27 .
Bankruptcy, the neo-liberal option, on the scale involved in
Russia is not a political option.
It would create social
instability which in turn would undermine the regime.
2. Initial conditions and political geography
The second explanation considers individual acts of policy
to be inadequate, and asks how policy makers took thesedecisions in the first place. They see policy as the result ofdifferent constellations of factors in different countries.
This argument emphases the initial conditions and political
geography to explain the phenomena. Those central European
countries which are adjacent to the West and are small - Hungary,
Slovenia, Czech Republic - have all done relatively well.

10First,
geographicalproximity
to
the
West
enabledinstitutional diffusion to spread more rapidly to the central
and eastern European countries. They are able to readjust theireconomies to a capitalist market and consequently they received
the highest shares of Western direct investment which, in turn,compensates for the decline of their own economic base.
Geography is an important explanatory factor.
They have also
been drawn to NATO and European Union membership. There is agreater reciprocity of interests between them and the West. The
conditionality requirements necessary to join these politicaland military blocs acted as incentives to change and to accept amore stringent neo-liberal economic policy.
Second, there is the affinity between their previous
history and political culture. These east European countries
were previously more bourgeois and anti-communist - thecommunists had a much smaller social base before Sovietization.
They had a self-defined history of being part of the West. The
value systems were more conducive to the implant of capitalism
and liberal democracy. Hungary and Poland had a tradition andpolitical culture opposed to communism and Russian hegemony.
Surveys show that support for state involvement in the controlof economic institutions was much less than in Russia andUkraine. Far greater support for the transition than in Russia
and Ukraine - communist parties (or their surrogates) did muchworse in the first elections after the collapse than in theother countries.
Third, economically, state socialism was
unsuccessful in Hungary in the period immediately prior toreform and support for communism was weak: in both Hungary and
Poland there had been significant
political demonstrations
28
against the Communist governments . Hungary and Poland had bothbegan economic reform well before the collapse of communism. In
Hungary, from 1968, the New Economic Mechanism increased theautonomy of enterprises and, as early as 1974, legislation
allowed joint ventures to be established. The Law on Enterprise
Councils of 1984 decentralised the public
sector and delegatedproperty rights to the enterprise level29. By 1987, 35.8 per centof Hungary's exports (value terms) were with developed
capitalist countries - the highest of any of the state socialist
societies, and the same was true of imports of which
41 per centoriginated from developed capitalist countries 30 . An economic
reform had already preceded a political reform. Poland also had
developed trading and commerce with the West as far back as the
Kania regime. Poland also had never collectivised agriculture
and this left in place a larger number of people withentrepreneurial outlook. The population was therefore more prone
to accept radical changes.
In the successful countries, the initial conditions thenwere more conducive to a move to capitalism whatever paradigm ofchange was adopted.
They also had the incentive to join NATOand the EU - which the heartland states of the former Soviet
Union had not. It is not obviously the case that the Washington
Consensus would have worked any better than any other paradigm.
The conditions however in these countries were better adapted tothis policy. It may be that success was despite, rather thanbecause of, the neo-liberal model which was adopted.
The transition failures had many institutional features11
which impeded a swift, successful transition to capitalism.
First, communism was more strongly embedded in slavic
republics of former the USSR. They had had their own indigenous
socialist revolutions and had experienced over eighty years ofstate planning and party control.
In eastern Europe,
traditionally the communist parties were weak and the communist
system arose out of the conditions following the militarypresence of the USSR after the Second World War.
Second, Russia and Ukraine are very large countries Russia is still the largest country by area in the world, andunder state socialism had an integrated and comprehensive
economy.
It is much more difficult to adjust and integrate
their moribund economies into the world order on conditions
defined by the world market without significant dislocations.
The new capitalist institutional structures, such as the legal
system and the stock exchange, were not in place and could nothave been adequately formed in such a short period. During theearly period of radical reform, the role of the state severely
wasweakenedasaconsequenceofpolicytopromoteindividualistic capitalism. It is true that China has adapted,
but China has kept in place important elements of the socialist
command economy as well as the dominant ideology and hegemonic
party.
Third, transformation created a vicious circle.
The
expected window of opportunity did not open. Transformation has
turned out for the worst, therefore people don't see a positive
capitalist alternative. They too are excluded from NATO and had
no chance of joining the European Union. Hence the stimulation
effect does not apply. Social factors differed greatly comparedto the eastern European countries. There had been no bourgeoisie
within living memory and one had to be formed from heterogeneous
social groups. Public distrust of this alien class was
exacerbated by the form of privatisation. The new bourgeoisie
was not widely viewed as legitimate (Stiglitz's point).
Consequently, prior to the collapse of communism, elites
exhibited great internal conflict. There was much disagreement
about the values and institutions of the communist system.
These differences became manifest when transition failed.
Lack of economic growth, decline in welfare, large scale
unemployment have led to disenchantment of a large proportion of
population. Consequently, capitalism lacks social support among
important segments of the population.
The legacy of statesocialism is an important variable. Where it had been more
successful (or seemed retrospectively to have been more
successful), it had greater support which continued into thetransition period, especially when transition failed.
3. A Failure of System Transfer
The policy failed because it did not take account of major
political, economic and social conditions in the countries ofthe former USSR. The third explanation is one of general policy
failure rather than ineffective implementation. It is here thatthe initial conditions come into play. The institutional
structure of capitalism - the banking system, financial
institutions, legal framework could not be built at the
breakneck speed which was attempted.
The readjustment to theworld economy led to grave internal dislocations.

12
Policy informed by the Washington consensus was far too
narrow and ethnocentric a policy. In adopting a neo-liberalmarket system it has exacerbated the tendency of competitive
capitalism to disorganisation. The economic effects of neoliberalism have been quite catastrophic in terms of wealthcreation. These cannot be explained merely in terms of wrong
footed processes of privatisation and insufficient marketisation.
Neither can the excuse of inadequate institutions and political
opposition be accepted.
The difficulties of instituting
privatisation and a securities market were well know before
transformation and should have been taken into account in policy.
Privatisation, it is contended, was largely politically andideologically motivated - to put in place a capitalist class andto make going back to a statist system impossible.
Anders Aslund's recommendation for greater marketisationand greater exposure to world market pressures would lead to afurther decline of Russian industrial production. International
competition is good for strong economies, but not for weak ones.
The history of all developing countries, including the present
developed ones, shows that without considerable state supportand encouragement they will not grow. This applied particularly
to the leading exponents of neo-liberalism, the USA and UK, theearly economic histories of which both included an active tariff
system against superior outsiders, the theft of patents andinvention and the instigation of unequal
treaties against third
31
parties to support their own industries .
The neo-liberal model ignored the legacy of Russian state
enterprises. Enterprises are embedded in the former system of
welfare. They provide unwaged employment due to political andeconomic constraints. They are also a source of welfare support,
the loss of which would have serious social and politicalrepercussions. The policy of a minimalist state has led to theincapacity of the federal government to collect taxes andenforce laws in the republics and regions of the country.
The upshot of policy is that a system which systematicallyand continuously promotes the accumulation of capital has notbeen established. Indeed, export of capital has characterised
the economy. It is a form of political capitalism, rather than amodern wealth creating one.
The Future Capitalism in Russia: A State-led Scenario
In seeking greater stability for the future, the footprint ofstate socialism may 'fit' into a pattern of cooperative stateled capitalism.
In the discussion of transformation tocapitalism in the post-communist countries, it is surprisingthat so little mention has been made of non Anglo-American formsofcapitalism.
The
major
contenders
arethesystemscharacterising Germany, Japan, and the Scandinavian countries.
It is to the formation of capitalism in these countries that I
think President Putin must look for solutions to Russia's
problems.
Consider the peculiarities of evolving capitalism in Russia.
First is the role of financial institutions and theinterlocking ownership of holding and subsidiary companies.
Interlocking companies rather than individualistic shareholdings
are dominant economic (and political) forces. Second is thepower of management in the control of companies. Management not13
only owns considerable assets but is strategically positioned incompanies to provide leadership. The management interest,
inherited from the state socialist system, is far more confident
in pursuing a hegemonic role.
This is the major politicalinterest in Aslund's account, but is conceived of negatively.
Third, one must consider the political and ideological factor the orientation inherited from state socialism is a corporate
one. The state is assumed to have a legitimate role in promoting
employment and comprehensive welfare. The legacy of communist
public provision is an important factor giving rise to
expectations of state provision of welfare and employment.
There are great similarities here with aspects of thecorporatist systems of capitalism in Germany and the social
democratic ones in Scandinavia. Under Swedish-Danish capitalism
there is strong cohesion between state, company and society.
Companies have a clear 'obligation' to stakeholders - toexisting shareholders, to management, employees, and the stateis a major partner. There is a weaker dominant classconsciousness, trade unions have greater salience in the society.
The state has a paternalist role and comprehensive welfare stateservices are provided, many directly by public services.
Employment is high andinclusive with the state having an active
32role in job creation and achieving a high proportion of womenin the labour force.
Politically there is little politicalcontestation and the highly de-ideologized social democratic
party is hegemonic. Equality is a strong value and economic
freedom is severely constrained.
KEY COMPONENTS OF SOCIAL-DEMOCRATIC CAPITALISM
Driving forces: State/Trade Union led
Institutions: Social-democratic parties
Culture: equalitarian welfare-state, full-employment society
Solidarity: social compact between stake holders
Under German-Japanese capitalism, there is firm cohesion
between company and society.
There is high interdependence
between owners, state, management and employees.
Labour has
rights and short term dismissal is unlikely. Business iscompetitive, though there are strong employers associations andinterlinked company ownership particularly by banks. Class
consciousness among the dominant class is strong. The state isan important provider of welfare.
Politically, in Germany,
there is contestation between social democratic and Christiandemocratic parties but they are de-ideologized and accept theparameters of competitive capitalism. Economic freedom ismediated by wider welfare concerns.
KEY COMPONENTS OF 'COOPERATIVE' CAPITALISM
Driving forces: Bank/business led
Institutions: State/business labour consensus
Culture: national stake-holders
Solidarity: stake-holder society, welfare provision
In the conditions of post-communist societies, these are
not templates which can be automatically transferred. However,they are building bricks from the old regime and do suggest

14alternative
andmore
appropriate
formsof
capitalist
organisation. Rather than building anew on the ashes of the oldregime, I contend that one has to build anew utilising as best
one can assets of the old regime. These countries point to amodel of 'cooperative' capitalism, with financial institutions
and other companies having considerable stakes in the holding
companies, and management having power over strategic decisions.
The state, moreover, has potentially a greater role incoordination. President Putin's policy, as discussed in otherchapters in this book, is moving very much in this direction. To
overcome the tendency towards rent-taking and to increase levelsof accumulation, the state has to take a greater role in the
direction of corporate investment and the economic risks
involved.
Coordination in all modern economies is based on a
combination of market, state, competitive and cooperative
economic institutions. A possible scenario for the stability ofRussia is an economy with a limited market economy, a regulative
state and cooperative economic institutions in which management
has an important place and in which ownership is in the hands ofinterconnected state and private businesses and financial
institutions.
This kind of state-led capitalism might ensure
accumulation. Not only will the state directly channel economic
rents earned from export-oriented industries such as armaments,
precious metals and energy, but also private and semi-privatecompanies will indirectly be financed through state institutions
and banks. A state-led development policy would involve support
for space and nuclear industries, computer soft-ware, arms
production, aircraft. State could also support low labour costindustries such as textiles which would supply the home market.
KEY COMPONENTS OF [PROPOSED] CORPORATIST RUSSIA
Driving forces: State
Institutions: Stakeholders: industrial management, leading
capitalists, political elites, workers' collective
Culture: Nationalist
Solidarity: Social compact, welfare state
Such a policy is not without critics. Internally, a freemarket ideology and policy is advocated by the Ministry of
Finance, the Ministry of Economy, the Ministry for theManagement of State Property and is supported by the IMF andother leading Western governments, particularly the USA. Also
successful companies in export industries, such as oil, areassociated with radical market reformers in the government.
Their interest lies with a global economy, foreign markets andexternal capital investment. In this context, outside politicalactors 33become a major determinant of the direction of economicchange. The 'conditionality' of support by international
agencies such as the IMF and the European Union is usually interms of a neo-liberal form of economy.
At a more theoretical and general level, major criticismsof this approach comes from those who hold that a one-way
convergence is taking place between the different types ofcapitalism I have considered. The direction of convergence istowards the competitive Anglo-American system. The globalisationof capitalism is inimical to a state-led negotiated form of

15
capitalism.
It is claimed that cooperative-type economies of
the German type do not lead to innovation. The growth ofcountries like Germany and Japan has declined in the 1980s and1990s and at the beginning of the twenty-first century they are
restructuring in the direction of competitive capitalism.
Moreover, cooperative capitalism, it is contended, is a sure way
to promote economic decline. The Thatcher reforms have not only
been copied on a transcontinental scale, but have been
continued
by the Blairite Labour government in the UK 34 .
Globalconvergence to a market-led capitalism, it is argued, is now
under way and cannot be stopped without substantial costs todomestic economies. The political and economic space for stateled as well as 'cooperative' systems is limited.
The
international
financialorganisations
andinternational
political gatekeepers, such as the IMF, OECD, World Bank andEuropean Union, are able to impose their conditions on emerging
countries. The argument here is that state-led corporatism is
not efficient and is severely constrained by the forces ofglobalisation.
These arguments, I believe, are 'overdetermined'. While
there certainly
are trends towards convergence, there are also
35
divergencies . Production in an economy as large as Russia is
local in character and regional companies and political actors
have considerable scope for action independently of the global
economy. With the exception of the extractive industries, theglobalisation of finance has had little effect on Russian.
Governments may oppose free trade if it is not in their economic
interests and maintain tariffs in support of home industries. As
Joseph Stiglitz has pointed out, the developed countries demand
trade liberalisationand the elimination of subsidies while
maintaining trade barriers and subsidies for their own products36.
The main advantages for adopting a model of organised
market capitalism in Russia is that it may be able better tocope with competition on a world scale. Greater regulation (suchas in the recent history of France) may lead to more effectively
organised restructuring.
The legacy of communism leaves highinvestment in human capital which is a considerable asset intransformation. The recent history of existing welfare states,
such as Sweden and Denmark, is mixed with regard to development
and competition. It certainly is not a foregone conclusion that
their days are numbered.
My own conclusion is that a state-led corporatist economy
is by no means perfect but is the best system for Russia.
However, state-led corporatism is by no means perfect. As
Winston Churchill said about democracy: It is 'the worst form ofgovernment, except for all those other forms that have been
tried.'
Similarly, state-led corporatism in Russia, is theworst form of economy, except for all those that have been tried.

1.

Protestant Ethic p. 17. [Find full ref]2. H.H. Gerth and C.W. Mills, From Max Weber. London: Routledge
1949, p.66.
3.
This phrase has been popularised by Leslie Holmes, PostCommunism: An Introduction. Cambridge, Polity Press 1997, pp.1314.
4 . John Williamson, 'What Washington Means by Policy Reform'.
in J. Williamson (Ed.), Latin American Adjustment. How Much has
Happened? Washington D.C. Institute for International Economics.
1990.
5.
Source: World Bank, World Bank World Development Report.
Oxford University Press 1996. p. 26.
6.

World Bank, ibid.

7.

Transition Report 1999. London: EBRD 1999. P. 23.

8. Branko Milanovic, Income, Inequality and Poverty during theTransition from Planned to Market Economy. World Bank:
Washington DC. 1998. p. 41.
9....

Milanovic, p. 160.

10....

Milanovic, p. 67.

11 ....
www.fraserinstitute.ca. Another index, using a five
point scale is that of the Heritage Foundation, see G. P.
O'Driscoll,Jr., K.R. Holmes, M.Kirkpatrick,2000 Index of
Economic Freedom, Wall St Journal, Heritage Foundation, 2000.
12 ....
This index considers government consumption as aproportion of total consumption, the ratio of transfers andsubsidies to GDP, the number, composition and share of output bystate-operated enterprises, government investment as a share of
total investment, the use of price controls, the rates of top
marginal tax thresholds, duration
anduse of military
conscription, growth rate of money supply, level of inflation,access to foreign currency bank accounts, exchange rate controls,
risk of property confiscation, risk of government cancelling
contracts, revenue derived from taxes on international trade,variation on tariff rates, share of trade sector covered by nontariff restrictions, size of the trade sector, percentage ofbank deposits held in privately owned banks,share of total
domestic credit allocated to the private sector, determinationof interest rates by market forces, access to country's capital
markets by foreign capital.
Summarised from Appendix 2,
Explanatory Notes and Data Sources.
13.. Philip G. Roeder has also constructed an index of national,
democratic and capitalist transformations, 1999 see: Philip G.

Roeder 'The Revolution of 1989: Postcommunism and the Social
Sciences'. Slavic Review, vol. 58, no 4, 1999, pp. 743-755. His
economic data are derived from The Heritage foundation and WallStreet Journal index, Bryan T. Johnson, Kim R. Holmes andMelanie Kirkpatrick, The 1999 Index of Economic Freedom
Washington DC 1999.
14.... EBRD, Transition Report 1999 (EBRD: London 1999). p.24.
In interpreting these data, one should note that in somecountries, privately owned companies may still have considerable
state ownership, especially in large-scale industry.
15 ....
Freedom House, Freedom in the World 1998/99, Website
www.freedomhouse.org.
I have reversed the rankings given by
Freedom House to make symmetric with the economic ratings: hence
the higher the rank the higher the level of freedom.
16 . Anders Aslund, Building Capitalism: the transformation of
the former Soviet bloc. Cambridge: Cambridge University Press,
2002. p.4
17.

Aslund, op.cit. p.69.

18.

Aslund, p. 443.

19 .
Joseph Stiglitz, 'Whither Reform? - Ten Years of theTransition'. Reprinted in Ha-Joon Chang, The Rebel Within.
London: Anthem Press 2001, p.132.
20.

Stiglitz, loc cit. p.134.

21.
See David Lane, 'The evolution of post-communist banking',
in David Lane (Ed.), Russian Banking: Evolution, Problems,
Prospects. Cheltenham UK and Northampton MA, USA 2002, p.18.
22. Sotsial'no-ekonomicheskoe polizhenie Rossii (jan-apr 1999g).
M. 1999, p. 153.
23 .
'Robbery of Nations', by J. Thornhill and C. Clover,Financial Times (London) 21 August 1999, p. 6.
24 .
See Claudia M. Buch et al, 'The political economy ofbanking reform and foreign debt', in David Lane, Russian Banking,Cheltenham: Edward Elgar, 2002, p.211, fn. 5.
25....
p.295

Goskomstat Rossii, Rossiya v tsifrakh 2001. Moscow 2001.

26.. ibid. p.295.
27....

ibid. p.295

28....

Taking the index of real wages of manual and non-manual

18
workers, it fell from 100 in 1980 to 96 in Hungary in 1985 andto 81 in Poland, in Czechoslovakia there was only a slight riseto 101. Statisticheski ezhegodnik...1988. p. 81.
29 .. Laszlo Urban, 'Hungarian Transition from a Public Choice
Perspective' in A. Bozoki, A. Korosenyi and G. Schopflin, Post
Communist Transition: Emerging Pluralism in Hungary. New York:St Martin's Press 1992. p.92.
30 .
Statisticheski
ezhegodnik
stran-chlenov
ekonomicheskoy vzaimopomoshchi 1988, Moscow 1988, p.342.
31 ..
Ha-Joon Chang, Kicking Away
Press. 2002. Especially Chapter 2.

sovetathe Ladder. London: Anthem

32. For a mote detailed discussion see: David Coates, Models of
Capitalism, Polity Press 2000. p. 96
33 .
As Michel Camdessus has put it: 'I cannot emphasisestrongly enough that Russia cannot afford to take this[corporatist] route', loc cit.
34. David Coates, 'Models of Capitalism in the New World Order:
The UK Case'. Political Studies (1999), vol. XLVII, p.658.
35 . Further discussion see: H. Kitschelt, P. Lange, G. Marksand J.D. Stephens, 'Convergence and Divergence in Advanced
Capitalist Democracies' in H. Kitschelt, P. Lange, G. Marks and
J.D. Stephens (Eds), Continuity and Change in Contemporary
Capitalism. Cambridge University Press 1999, pp. 427-460.
36.

Joseph E. Stiglitz, Globalisation and its Discontents. 2002.