J.Pozuelo-Monfort, MSc candidate in economic development at LSE.
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Mitchell Orenstein (1998)
· The problems of Russia – its overnight transformation into a world center for narcotics distribution and money-laundering.
· Well-ordered market economies depend upon strong, legitimate, and liberal state institutions.
· Russia may never bounce back to a law-abiding equilibrium if corrupt, criminal structures are established during the current “Wild East” period of capitalism.
· This article will argue that the dominant method of neo-classical economic reform in the world today –shock therapy- has actually contributed to the prevailing atmosphere of lawlessness in contemporary Russia.
· Shock therapy’s methods of lawlessness from above cannot engender respect for rule of law from below.
· Neo-classical economists have come to agree that strong legal institutions facilitate development. If this emerging consensus is correct, then economists need to seriously reconsider the fundamentals of their previous transition strategies. If building liberal state institutions is crucial, then why support deep cuts in public sector wages for judges and police? Why advocate and participate in the use of extra-legal means to achieve radical reform?
· You can continue reading more of Orenstein’s thoughts by following this link.
J.Pozuelo-Monfort’s comments:
Russia represents how the west made repeated mistakes with the so-called shock therapy, that aims at establishing capitalism in former communist countries in a way that does not incorporate representatives of the society, in a way that imposes more than seeks a consensus, in a way that demonstrates its inefficiency and wrong-doing.
Neoclassical capitalism does not work without strong institutions that are able and capable of securing law and order, of securing equal rights for each individual. Neoclassical capitalism does not work without a serious and paced transition from a rudimentary, bureucratic system, to a market economy. Neoclassical capitalism is not the de facto standard and Russia proves, one more time, that democracy is beyond capitalism, that the rights of the people are before te monies of the more powerful, that the hungry investors from the west should wait, should have mercy, should allow developing countries to move up the ladder, before entering the financial markets of emerging countries agressively, before short-term speculating against currencies, against commodities.
Let’s once and for all put the people first. A controlled transition is more a guarantee of success, that an accelerated transition that only drives to the misallocation of resources to the more greedy and better positioned oligarchs.
Let’s once and for all put the people first. The people.

· In an essay published last year, Aslund showed why he thought a rapid move to free markets would stamp out crime. Aslund argued that the root causes of crime in Russia are economic.
· Political-sociologists working in the Weberian tradition. In their view, crime represents a failure of state institutions, not of markets. Crime can only be prevented by strong state institutions, which are not likely to be created by market demand.
· Two prominent scholars writing in the Weberian tradition argue explicitly that Russia should have focused on building its democratic state institutions before launching a program of radical market reform exactly because, in the Weberian analysis, strong states necessarily precede well-ordered markets.
· The problem goes beyond Russia. It goes to the very heart of shock therapy, a strategy for radical economic transformation that has been implemented across post-communist Europe and Latin America since 1985.
· The Russian experience demonstrates the need for a broader examination of neo-classical theories and practices regarding the state.
· In every case since 1985, when it was first employed in Bolivia, shock therapy has cause either major constitutional changes or declarations of states of emergency that suspended normal democratic procedures.
· In Poland shock therapy was passed by parliament in 1989 but, as support for the program waned, shock therapists requested special powers and a new constitutional allow them to continue reform without parliamentary approval. The request was rejected and Poland’s shock therapists were forced out of government in 1991.
· Subjecting state decisions to the will of a legislature necessarily brings a wider range of interest groups into the policy process and expands the number of players competing for influence. It is precisely for this reason that neo-classical economists opposed leaving economic reform decisions to the legislature: they expected that a small group of reformers, acting as disinterested technocrats, would be more likely to undertake economic reforms which would further the common good.
· Furthermore, economists have not understood that excessive concentration of power in the executive produces extraordinary opportunities for rent-seeking, rather than action in the “common good”.
· People now speak of the Latin Americanization of Russia, apparent in politicized “free” markets working to the advantage of a tiny cabal at the top that ruthlessly protects its wealth and power, tremendous and growing inequality of income, a quasi-democratic political system based on the authority of a single president who disregards democratic procedure, and an increasing inability to collect taxes.
· If excessive concentration of power undermines legal institutions over the long term then it is necessary to reconsider the utility of shock therapy – a strategy of economic reform that prioritizes markets above all else even the integrity of democratic legal institutions.
· The Czech transition was built on a bargain between liberals and social democrats within the first Civic Forum governments of 1989-92.
· Neo-classical economists were never completely unfettered or given free reign. They instead had to strike a bargain with social democrats in the government, who were concerned with the social impact of the program, before their economic policies would be considered. The hybrid social-liberal program that was finally passed by parliament in September 1990 and implemented in 1991 differed significantly from shock therapy in its political approach. The main differences can be summarized as follows:
· Social-liberalism tries to establish long-term viability for reforms in a parliamentary system, instead of relying on presidential support to push reform through in a single breakthrough moment.
· Social-liberalism emphasizes the importance of building political parties, rather than isolating reformers from politics.
· The Czech strategy for transformation was always explicitly parliamentary.
· The parliament wanted to send a message to the population that the most treasured protections of socialism would not be abandoned.
· The genius of law-based democracy is that it encourages a broad base of interests to reconcile conflicts in a transparent manner from the beginning.
· Parliamentarism has worked better than presidentialism in the achievement of economic reform because it reduces inequality and the chances for rent-seeking by promoting transparency and long-term policy consensus. Reform by law works better than reform by decree.


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