Introduction
Western policy advice, especially from the IMF, has been a major component in Russian policy making since 1992. The assumptions that underpin this advice, both those held by the IMF itself and those held by Western governments, the G7 and the USA in particular, have been key platforms for policy proposals within Russia. These assumptions and the paradigms associated with them have also erected evaluative markers by which reform success has been judged. Thus sketches or charcterisations of the Russian political-economy matter.
This paper discusses a new economic model of Russia that emerged in 1998 and is likely to have significant influence on academic thought and on the area of Western policy advice and decisions. I will first elucidate three major strands of theorising about the source of Russia's problems and then explicate the 'virtual economy' as put forward by Gaddy and Ickes in 1998[1]. This will be followed by an assessment of the model in relation to other work and policy advice that has been put forward regarding Russia. This is important to do as the model integrates a number of observations about Russia's problems that have been made from different disciplines and as such is likely to be of persuasive influence in Western policy circles.
In 1992 the Russian Federation inherited effectively over $100 billion in debt from USSR. Increasing the weight of this burden since then has been continual economic contraction, with the exception of one small and debatable blip of growth in 1997, while new debt has been added. The debt burden, even allowing for the rescheduling of much of the Soviet era debt, has combined with a shortage of investment capital and a steady run of capital flight to provide a constant lever for Western influence in Russian policy making. This leverage has been increased in the past few years due to a dramatic rise in the Russian economy's reliance on foreign funds to prop up its currency and budget deficit.
The crisis of the ruble in August 1998, which has so far led to roughly a four fold decrease in its value, and to the collapse of the Russian banking system, was sparked by a vast overexposure to short term domestic and international debt. This debt built up spectacularly through 1997-98 as the government substituted ever higher paying bills and securities for failures to collect revenue and reduce spending[2]. At the same time the crisis in Asia and its effect on global energy demand reduced the export earnings of Russian economy.[3] By August interest bills in foreign currency threatened to exhaust reserves within a matter of weeks and the government introduced a moratorium on payments, including on US$10 billion in foreign currency, which has effectively become a default, although no-one dares call it so.[4]
As a major supplier of loans, and the only institution even remotely likely to be able to finance Russia out of the current mess, the IMF has been able to frequently insert itself, if only by proxy, into the development of Russian policy. At present, in what is almost a Latin American moment, Russia apparently stands at a crossroads where it must either unwillingly accept very specific IMF demands in return for the money needed to stop it becoming an international pariah, or it must turn back towards the autarkic economy that characterised its communist history. In fact it will probably find a dusty path that leads somewhere between these crossroads, trading, as it has done in the past, on its perceived international political importance to persuade Western governments to pressure the IMF to cut a better deal.[5]
However, regardless of the how, ifs, or when this next phase of Russian reform and financing begins, there can be little doubt that Western perceptions of the Russian economy, and the policy prescriptions that flow from them, will play an important role. At the same time it must also be noted that these perceptions and characterisations are themselves by no means a consistent whole, and indeed have been subject to wide debate and revision in the last two years, especially since the August collapse.
Because it has played such a major role the IMF has been a target of attacks from both the left and right. In addition other high profile early advisors to Russia, in particular Jeffrey Sachs, have been pilloried by all sides for the failure of shock therapy in Russia[6].
The initial architect of Russian reform, Yegor Gaidar, has suffered a similar fate within and outside Russia. The ways in which these people and institutions got their analyses wrong, and their own defense of their analyses, make up the field of discourses on which new or more developed characterisations and models of Russian politics, economy, and political-economy, are being built. The remainder of this paper makes some general observations about these various discourses and their implications and then specifically examines the likely impact, and to some extent persausiveness, of the newest economic conceptualisation, the notion of Russia's 'virtual economy' as put forward by Clifford G. Gaddy and Barry W. Ickes.
What I have attempted to do in this section is to distill the various writings addressing the question of Russian transformation into three strands of writing based on the concerns and conceptual tools which orient them. I should stress that these are very general constructs drawn from impressions from a wide range of reading in the area over the last few years. They are put forward primarily for illustrative purposes to aid later analysis and evaluation of Gaddy model. They are thus by no means totally comprehensive or hermetically sealed. In my use of the latter term I am referring both to the problems addressed, those primarily concerned with politics for example may still bring in economic aspects and so on, and the self-definitions of the writers themselves, thus one may find economists actually writing outside the economic paradigm and so forth.
With their call sign of "transition" and its "can do", if somewhat hubristic, connotations, economists have been the most prominent Western profession involved in analysing and developing policy for Russia. The initially dominant economic approaches tended to have two underlying presumptions. The first was that transition would itself be a difficult but not too long process, and secondly that macroeconomic understandings imported from Western models would work successfully to both understand the transition process and to implement it. Thus the early stress was getting the macroeconomic fundamentals right, in particular monetary stabilisation and the reduction of the public sector through privatisation. If these could be accomplished it was assumed that restructuring and capital accumulation would follow as the opportunities and other indirect signals sent by the market steered individuals and institutions towards changed behaviours. The above certainly seems to be a fair summation of IMF advice up until the end of 1993 and even into 1994.
As time has gone on, and the Russian transition has mostly stagnated, economists have engaged in numerous revisions, not to mention recriminations, to account for the problems. Macroeconomic approaches obsessed with stabilisation as the main priority have continued to be central to the debate, with a great deal of paper committed to both lauding successes in this area and explaining failures. The latter are usually attributed to that bugbear of economists' models, political distortions or even irrationalities. However, leaving aside actual problems of stabilisation the general concern has been with the (lack of) resumption of growth.
Two lines of argument normally emerge here. The more serious one usually focuses on two things. The first focus deals with specific macroeconomic crises, in particular the fiscal deficit and the need to alleviate it at both the revenue and expenditure end. The second focus is on the continuing microeconomic problem of an absence of restructuring among enterprises, particularly industrial ones, in the Russian economy. The second line of argument tends to be more obsessed with the pervasiveness of corruption and the "distortions" entering the economy by way of rogue legislators and administrators at all levels. While the concerns are valid this strand is often more overtly ideological and emotive in content. It frequently appeals in a covertly emotional way for Western policy to "get tough" on the Russians by refusing them money until they "get tough" on themselves.[7]
However the seachange in the economic paradigm applied to Russia has really come in the last couple of years and it most defining feature has been a rediscovery of the importance of institutions as both agents of change and agents of resistance to it.[8] Points about the importance of institutions were being forcefully made by political scientists from 1989 and by policymakers and analysts on the ground such Grigory Yavlinsky at the start of Russian reform.[9] Only recently however have economists singled out institutional reform as a major source of the failures, or distortions, of previous macroeconomic policy and begun addressing Russia's economic problems in light of this.
Consequently current economic characterisations of Russia tend to stress as a source of problems not just issues of monetary stabilisation, fiscal responsibility and privatisation, but also problems frequently outside the purview of Western liberal macroeconomics. These include understanding the growth non-monetary transactions (NMTs), the failure of the banking system, federal and regional competition, and the fiscal crisis of the state and its interrelation with the corruption of public servants. Policy solutions canvassed normally still rely on macroeconomic tools - after all the IMF remains the main agent of Western policy influence and its brief is specifically encouraging macroeconomic policy which promotes free markets - but they tend to be more closely interested in understanding and overcoming institutional failure and encouraging institutional renovation.
The following proposals have all been canvassed in the past twelve months by various participants in the debate.[10]
- A need to regulate the banking sector;
- A need to reduce tax revenues as an incentive to encourage firms to return to the monetary economy;
- A need to increase tax revenue (especially in cash) to bring down the deficit and force firms away from NMTs;
- a need to reform the taxation system in order to make it less onerous/more efficient/less corrupting;
- a need to reform the judiciary in order to enforce laws protecting minority shareholders;
- a need to reform the civil service and its areas of regulation so that is less corrupt and capable of rent-seeking.
Of particular concern to many economists has been the notion that transition in Russia is threatened with a permanent stall due to the reassertion of the command economy through a series of linkages articulated through the NMT economy. This process or system is something Aslund has called 'baterisation'[11] and it is the primary focus of the virtual economy thesis addressed below.
The characterisations of Russia's problems and the formulations of possible solutions that have come from political science can be cut four ways (See Figure 1.). First they can be divided between concerns with institutions and institutional reform and concerns with the persistence of cultural patterns and their capacity to undermine (economic) policy directed change. Second they can be sliced between those focussed on economic success as a way to stability and those concerned with issues of stability through democracy. Obviously most analysts incorporate aspects of all of these but the weighting of them is likely to be different, as are assumptions about their interrelatedness. Perspectives from political scientists (along with those of the sociologists below) have tended to play the role of Cassandra in the transition debate. They have been good at locating the reasons why the, primarily economics driven, policy pursued in Russia has failed, but are not so strong on proposing policy solutions to the problems they locate.
Figure 1. Four defining concerns of political science approach
On the institutional front many of the problems referred to above as recent issues for the economists were already central issues for those concerned with the politics of Russia. However, while the phenomena are similar the language and emphasis tends to be different. As with the economics discourse there is considerable variance within political science as to just where the problems lie and their degree of intractability. I shall simply set out below some of the major problems that are commonly located by participants within the discourse. All of these can, in their various incarnations, straddle the divide mentioned above between concerns with democracy and concerns with economic transformation.
* perhaps the most prominent issues are those around corruption and the clan networks which are its product and promoter. The rise of the oligarchs on the one hand is linked on the other with what has been almost a privatisation of the state through the corrupt practices of rent-seeking officials at all levels. These twin but related processes are frequently portrayed as the principle sources of the crisis of the state. It is this crisis of the state, not just fiscally but in terms of the erosion of its sovereign power, that is central. For the state is the central institution par excellence, and its failure undermines and perverts the course of transition. From the political science perspective markets are neither natural nor self-sustaining, they require oversight, regulation and protection if they are to survive and flourish.[12] The Russian state is both incapable as an institution of doing this and to a large extent is run by people who do not wish to do this.
* flowing from this are general governability issues, for example state - regional relations and the unholy mess of overlapping laws, regulations and taxes they create. Political scientists will be quick to point out that the nirvana of liberal economic policy, the withdrawal of the state from economic life to create a private sector, means nothing if it is only effected at the federal level whilst 89 regions continue to spend half of government revenue and a substantial number continue to supervise production in their area in the old command style.[13] This is a point economists have recently picked up on.[14] Overall, a state which cannot enforce its laws smoothly and consistently cannot create a viable playing field for reliable and growing sets of market transactions.
* other institutional deficits that have been highlighted include the lack of a developed party system which might serve as basis for policy development and the development/enforcement of accountability; the lack of civic and legal institutions generally which could act as a check on elite behaviour; the specific weakness of trade unions and parliaments and; the threats to press freedom posed by political and criminal influence, especially, but not only, in the provinces.
The other, non-institutional, focus is upon the role of culture in Russian political and economic behavior. Writers with these concerns overlap with the sociological discourse elaborated below. The most forceful point made here usually concerns the continuity with Soviet, and even traditional Russian, economic behaviour and values. This is used to explain the persistence of command economy type relationships despite macroeconomic, legal and political reforms. Frequently mentioned are the roles of patronage and paternalism as sites of resistance to change or providing avenues for avoiding it, for example via networks of former communist officials who combine political and economic clout to avoid laws or extract subsidies.[15] Furthermore a lack of democratic and republican values and practices have been cited as undermining any growth in the accountability of officials.[16]
At the specifically economic level much has been made of barter as growing out from old habits of the Soviet economy. In particular the semi-autarkic and patronage ridden regional industrial economies, persisting in NMTs dominated by barter arranged through intermediaries, are seen as a combined continuation of the almost feudal party boss system that grew up under Brezhnev and the shadowy tolkatchi world that oiled the wheels of the command economy.[17]
This suggested continuation of feudal/absolutist/patrimonial values is also brought into discussion of central politics because of its apparent susceptibility to a reduction to court intrigues. This is seen as largely due to the formidable appointment, dismissal, and decree powers of the President. A preoccupation with access to the President and his reaction to proposals and dilemmas can be seen as a continuation of the Soviet and even earlier Tsarist political culture. The political and economic systems remain highly reliant on decision making at the very top for their dynamism and correction.
From this point of view overcoming Russia's problems is highly dependent on a transformation of Russian culture understood as both ways of thinking and ways of doing. Of particular overarching importance is the perceived Russian non-respect, or even lack of familiarity, with rule of law. This concern ties this strand of the political discourse back into the central focus of those concentrating on institutional problems. Modern institutions are constructed from sets of rules which create boundaries and expectations around sets of human interactions. As was famously pointed out by Harry Rigby, and reiterated constantly by Mikhail Gorbachev as leader of the Soviet Union, Russia lacks this tradition of rule of law. From the cultural point of view the administrative introduction of changes cannot be successful without a modification of cultural values to those which accept the boundaries laws provide.
Sociological concerns and characterisations overlap considerably with the political ones listed above, but with different emphases, while they also address some different phenomena. Sociological concerns can be expected to have a bias toward questions of social stability or instability as part of the larger picture of social reproduction. If economists have been deeply concerned with policy issues centered around the issue of transition, and political scientists have been preoccupied with barriers to, and inadequacies in, that transition, sociologists have been more fixated upon the (great) transformation itself. Both what has transformed and what has not. Their inquiry is thus perhaps more descriptive than prescriptive or critical. However, Russian problems at the forefront of sociologists concerns could be expected to include:
* problems of class and interest group formation, in particular the effects of impoverishment and Soviet hangover (in terms of the persistence of the corporatist Communist trade unions and the Communist party) in leaving the Russian labour movement weak in organisation and representation. Added to this would be the effects of crime and slashed government spending on, respectively, small business development and the professional middle class. With all of these groups economically debilitated they can be expected to play little role in providing sufficient political will or organisation to bring the elites of Russia to task. Institutions such as the Duma are degraded and to some degree dysfunctional because politicans within them are neither captured by, nor sensitive to, continually articulated demands by these interests. Thus, for example, the political problem of institutionalisation of parties founders on the social rock of unarticulated or disarticulated social groups.
* another aspect of sociological inquiry interests itself in the fragmentation of Russian elites and cites lack of elite cohesion as a source of failure of the Russian state and the political and economic system generally. Drawing particularly on the work of Higley and Burton great emphasis is placed upon the importance of elite settlement after a crisis to rebuild a stable system.[18] Thus the failure of the political, business and regional elites to find a shared vision regarding the role of law, apportionment of revenue or the balance between public and private mitigates against setting in motion a successful democratic state.[19] From another perspective the success of members of the nomenklatura in transforming their power into the new "democratic" and "market" forms also accounts for the persistence of the old culture.
* a third sociological concern is with the networks and culture of corruption. The word 'kleptocracy' has been used to characterise the contemporary Russian polity, capturing allusions to the failures of rule of law, widespread kompromat and the use of kompromat as a political weapon, the abuse by officials of their position for bribe-taking, and the widespread fraud and asset stripping being undertaken by management. It is noted that the penetration of criminality is not just into social practices but also into culture, which in turn feeds back into problems of rule of law, institutions and market behaviour.[20] Frisby has also suggested that this phenomenon can be tied back to the general cultural disclocation economic and political change has wrought. She points out that a cohesive elite would be the prerequisite for erecting values which could underpin a law based order.[21]
Three Strands, No Thesis
All of the three strands above offer important insights into contemporary Russian problems and all of them also provide conceptualisations and characterisations by which the present-day Russian society and system might be understood. However it could not be said that any of them yet enscapulate a full blown theory of the Russian system. That is to say a theory of interdependence that ties the problems being experienced to; (a) the interests that are dominant, (b) to the relationships between these interests, and (c) to the articulation of those relationships in culture and ideology. At best they try and provide a theory concerning transformation, a description of the directions processes have moved in and the forces which have steered or diverted those directions. It may be that a larger theory is of little use or perhaps even relevance with regard to Russia, comments that Russia as yet has no system are not uncommon.[22] Yet it does seem to be arguable that at the very least transition in Russia has stalled or even that transition has now become condition. Inasmuch as this is so new ideas are called for and theories or models which provide comprehensive explanations of what Russia is and why it faces the problems it does are likely to be met with attentiveness. This is especially so if they also specifically incorporate a base for policy development. It is in light of this that I move to a description and discussion of the "virtual economy" thesis.
The Virtual Economy Thesis
The phrase 'virtual economy' to describe the Russian situation really began to be popularised in the wake of its use in the "Report of the Inter-Agency Balance-Sheet Commission" which was released in December 1997 and commonly called the Karpov report after its author. The "virtual" being referred to was the phenomenon of the size of the non-cash economy the report detailed. In a survey of 210 large industrial enterprises it revealed that they conducted 73% of their business via non-monetary transactions (NMTs). Moreover when they paid taxes it was rarely in cash, for example, of the average of only 80% of taxes owed actually paid a mere 8% were paid for with cash.[23]
The report concluded that "An economy is emerging where prices are charged which no-one pays in cash, where no-one pays anything on time; where huge mutual debts are created that also can't be paid off in reasonable periods of time; where wages are declared and not paid; and so on...[This creates] illusory, or virtual earnings, which in turn lead to unpaid or 'virtual' fiscal obligations, [with business conducted at] non-market or 'virtual' prices."[24]
To some extent it may have seemed there was nothing very new in this. The return of the ubiquitous Soviet soft budget constraint after the initial '92 reform, first in the form of loans and subsidies and later in the shape of wage, tax and inter-firm arrears, was not a new story. The Karpov report coined/applied a catchy phrase and provided a considerable amount of detail but the phenomena itself was not new. What Gaddy and Ickes did with their virtual economy thesis however was to go beyond observing the phenomenon and try to model it. They produced a series of propositions in their two articles which go a considerable way towards (a) providing an explanation for what is happening; (b) locating the trend that is stemming from it; (c) suggesting what sort of policies might address it.
So far there appear to have been three articles outlining this theory of the virtual economy by Gaddy and Ickes, two of which are used here.[25] The article which appeared in the September - October 1998 edition of Foreign Affairs was a re-issue of an earlier paper by them circulated from the Brookings Institute. A short piece by Clifford Gaddy apparently based on it appeared in the Los Angles Times in July and argued against the provision of further IMF bailout for Russia.[26] Thus this paper on the virtual economy had itself attracted considerable attention in policy and journalistic circles even before its publication.[27] The article has a policy oriented, critical, even ideological, overtone as is often typical of Foreign Affairs pieces. It is put together for a not entirely specialist audience and it is arguing for a paradigm shift. The other Gaddy and Ickes paper 'A Simple Four-Sector Model of Russia's Virtual Economy' appeared in draft version in May on the Brookings Institute Web site. It is I believe to be forthcoming in the journal Post-Soviet Geography. This paper is specialised and focussed much more on working through the logics of the Russian economy.
The significance of the virtual economy thesis is that it attempts to completely recast the paradigm of the Russian political-economy, especially with regard to what I have labeled above the liberal economic approach. What had been seen by liberals as a reasonably straightforward procession from one economic system to another, albeit with more mess and delays than expected due to irrational traditional forces, forces which would ultimately be thrust aside by the logic of the new system, is now redrawn by Gaddy and Ickes as the resistance/existence of a new alternate system that possesses its own logic. While their focus is primarily economic their model of the economy incoporates interests and the logics which arise from them. Together these work to create the apparently bizarre Russian world of crime and corruption, non-payments, institutional failure, and wildly disparate government policies. A world however now revealed as having a rational and self-reinforcing basis. On the basis of this analysis Gaddy and Ickes assert that (a) Russia is not actually moving toward a market economy but rather away from one; (b) that Russia has a new kind of economic system with its own rules and own criteria for success and failure; (c) that this economy is deep, robust and popular and has its own agenda aimed at self-preservation.[28]
At the heart of the virtual economy thesis is a relatively old idea about Soviet economics that has surfaced several times, namely that a large percentage of Soviet firms, most now privatised Russian firms, were/are actually value subtracting rather than value adding enterprises. This is to say that the value of the goods they produce is actually less than the labour and capital in the shape of raw materials that goes into producing them.[29] We know they are value subtracting because their products cannot find a market or can only find a market at a price below the combined cost of the raw materials and labour (in terms of wages) that went into them. If a large percentage of firms still operating in Russia are value subtracting rather than value adding this has a number of implications for the economy and for economic policy.
In particular it raises the question of how do the value subtracting firms in question continue to survive if the value of what they produce is less than the combined value of the inputs into it? The answer in a market economy would be that they don't, at least not in the long term. They might attract loans or subsidies to keep going in the short term but eventually they would go under, they would become bankrupt. However, in Russia this has not been the case, a bankruptcy law was introduced quite early in the reform process but it has very rarely been enforced. Gaddy and Ickes note that there were more bankruptcies in a month in America than for the whole of 1997 in Russia.[30] Yet with the consolidation of stabilisation and the end of easy money in 1994 the subsidies and loans that many of these firms had been relying on dried up so the question is where did they go? The answer is into the world of NMTs.
Commander and Mumssen divide NMTs into four groups:[31]
i. Barter where the transaction involves goods for goods
ii. Money surrogates, mainly commodity or financial veksels - primarily promissary notes issued by enterprises, banks or government with specified maturities and discount rates. These come from two types of issuers, those seeking to overcome liquidity problems and those who issue them in lieu of default.
iii. Offsets or zachety where the dominant transaction involves debt for goods (commonly used to clear obligations between firms and tax authorities, or between firms and utilities or govt).
iv. Debt swaps, sales and rollovers
Gaddy and Ickes mainly discuss barter and tax offsets but their observations could apply equally to all NMTs. Apart from their assertion that the NMT economy is growing they also argue that it has a number of quite specific effects which policymakers must take into account before drafting policy.
First the use of NMTs overstates the size of the economy. Debates about the true size of the Russian economy have been continuous for most of the reform period. While most of us work from Goskomstat everyone must assume the figures are more prone to error than in a stable and developed Western country. The biggest dissenters on the figures have usually argued that they are too low; citing under-reporting for tax purposes, the ruble cash and dollar cash economies and the black world of crime and corruption as sectors which are unreported. Given that Russia is an economy where a large amount of firms and employees don't even bother to register for tax such ideas seem reasonable.[32] Goskomstat itself allows 25% extra for the shadow economy.
Gaddy and Ickes however argue the other way: using information from the Karpov report and other surveys they note NMTs as making up somewhere over 50% of transactions in the economy.[33] The question which has to be asked is how much is this substitute for money, which goes onto the national books at its set price value, actually worth? Gaddy and Ickes go to Karpov and other sources to weigh the final cash value of the NMTs. Their figures are that veksels average 20% of 1 cash ruble (i.e. 20% of their face value), a barter deal averages 40% and tax offsets average around 50%. [34] This has two immediate implications, (a) the economy's on paper figures (the virtual economy) are going to look considerably better than real figures based on value realised would be; (b) the planned budget in real terms is only half the size that it is in the virtual variant. So the economy and budget are both smaller than they appear.[35] This obviously has important implications for those who would call for either more taxes or less expenditure.
The second observation is the effect this distortion produces in terms of what might be called the circulation of value. Gaddy and Ickes simplify the economy to a four piece model; households (whose source of income is labour), the value adding sector (mainly raw materials industries, their constant example is Gazprom), the value subtracting sector (they denote as manufacturers) and the government. Working through the logic of the virtual economy they show that because the manufacturing sector is a major employer but does not produce value the value in the economy can only come from raw materials. Yet the government, the employees and the raw materials sector (RMS) all have a claim on the non-value producing (NVP) firm in terms of payments or taxes. If the RMS and employees are owed the value of their materials and labour and nothing was added in the production process there can be nothing for the government except presumably a tax on the employees wages. But if the firm actually detracted value then it can't pay its first two creditors, the RMS and its employees, let alone any demands the government might make. Bankruptcy looms.
However NVP firms get around this by resorting to NMTs. In barter transactions this means they place a paper price value on their good which indicates a profit or value added. If the good cost 50 rubles of raw materials and 50 rubles of labour they may put the price at 150 rubles. This of course increases the demands on them because they now owe the government tax as well on their 50 rubles "profit". The resultant tangle say Gaddy and Ickes eventually results in the original value of the raw materials returning to the household sector but it must do so by a series of arrears, offsets and barter before arriving in the shape of cash or government services.
What happens is this. Having failed to create any value and having increased its debt by attracting tax the NVP firm pays everybody some cash now and promises the rest later or in kind. Payment in kind of goods that are not wanted or cannot be used results in a value subtraction for whomever ends up with them, employees, other firms or the government (i.e. the good priced at 150 rubles ends up traded or used at a cash value of say 80 rubles, a loss of 20 rubles of the value in raw materials and labour that went into it). Thus the real struggle is to be paid in cash. NVP firm employees paid in cash and on time are not losing value, but likewise the cash not paid to the state or the RMS because it was paid to the NVP firm's workers is likely to create value subtraction for the employees of these sectors who will have pay in arrears or be offered goods in kind. If the cash is paid to the state as taxes and workers in the NVP firm are given arrears or goods they suffer an effective reduction in their wages and no guarantee that the state or RMS will specifically redirect the value collected back from the NVP firm to them. Thus the different sectors of the economy are not co-operating to produce value, rather they are largely engaged in a struggle over the distribution of value from one sector of it!
Following on from this the third point Gaddy and Ickes make is that raising taxes, or rather improving revenue collection, a perennial demand from the IMF, will actually result in an increase in wage arrears and NMTs. Moreover, a demand such as the one made at the beginning of 1998 and being striven for again in 1999, to increase the percentage of tax taken as cash rather than as NMTs, will actually just increase the NMTs in other sectors, especially wage arrears, with resultant social and political effects. Gaddy and Ickes also detail a number of other economic drawbacks to the system, notably its inefficiency in resource allocation in both private and public sector terms.[36]
This is a rough sketch of the purely economic side of the virtual economy model. What takes it closer to the realm of an actual political-economic theory that can begin to tie together the strands mentioned at the beginning is its observations about the interlinking interests the NMT world sets up. The politically and sociologically innovative side of the thesis can be extrapolated from its argument that all the actors involved in this alternative economic system actually have an interest in keeping it running and collaborate to do so. The reasons given for this are both cultural and interest specific.[37]
NVP firms obviously have the strongest interest in the virtual economy of NMTs since it keeps them afloat. They have at least three sorts of leverage available to them:
a) They have the chain of debts they have built up with other firms, their workers and the government and upon which they have issued promises to pay. In the absence of effective bankruptcy laws and a court and legal system adapted to them debtors actually have an interest in allowing the firms to continue in the hopes of getting at least some return.
b) They have personal "relational capital" to trade on and this is part of the continuing culture of economic activity anyway. Moreover NMTs, because the accounting on them is so lax, provide ample room for corruption and kickbacks to political or entrepreneurial members of the NMT chain. Material interest and the reproduction of cultural patterns both receive explanation here.
Governments' interests (federal, regional and local) are actually not that dissimilar from the NVP firms. They have an interest in collecting something rather than nothing, and their corrupt officials can benefit from the possibilities NMTs offer. Also, since the tax revenues have not met expenditure, governments have themselves resorted to NMTs to meet their own obligations, something which further perpetrates the system. This is particularly noticeable with federal government tax offsets. Moreover the alternative to the limited social welfare and occupation the NVP firms provide is an expansion and renovation of the social welfare system, something expensive to contemplate and represented by weak ministries in any case.
As to the value producing sector, they are seen as being the ones at the mercy of the system. Since they neither run the state, nor for the most part are of the private sector, they have no choice but to yield to continual demands from the other sectors. Gaddy and Ickes conceive of Gazprom as "earning" the right to sell some of its product for cash in the world economy as the price of subsidising so much of the Russian economy and government.[38]
For ordinary Russians in households their perception is that there is little alternative to the current system, from which they at least receive some value. Moreover the lax running of the economy does provide opportunities for extra work on the side. A crackdown on the NMT sector may leave them facing unemployment and possibly geographic dislocation.
There is also a general added incentive for all players except the government, though including perhaps government officials. This is that the avoidance of cash is a sensible move if one wishes to disguise income from either the government to avoid tax or from those criminal elements that may practice extortion upon you.
To summarise, the virtual economy thesis suggests that NMTs now constitute an alternative non-market economy which, while inefficient, has its own logic and its own actors. Moreover from a policy point of view the thesis suggests that (a) it is pointless to keep putting money into Russia since it will be sucked into a vortex of value subtraction and theft (the latter due to the looseness of accounting standards NMTs promote); (b) an increase in tax collection is not a solution to fiscal problems since it will simply result in households being squeezed in wages; (c) the government has less to spend anyway because the economy is smaller than was thought; (d) corruption, crime and incompetence have not been (irrational) barriers to transition, these are distorted perceptions caused by the virtual economy being looked at in market terms.
Evaluating the Virtual Economy thesis
The virtual economy thesis is a new and quite powerful exposition of the workings of the Russian economic system and how it links into the political system. Working from it a number of observations about systemic effects upon the cultural world would also be possible. If accepted it substantially redraws a number of assumptions upon which public policy in Russia is based and it has specific prescriptions and obsevations regarding key aspects of Western policy, most especially the provision of loans. I propose to conlude this article by briefly raising some criticisms that could be made against it by way of evaluation. However it should be stressed that the two articles upon which this paper is based are to an extent only preliminary work themselves. Gaddy and Ickes have produced a stimulating model but there is undoubtedly still more work they and others would wish to do on it. Thus in a sense both the model and these criticisms should be regarded as preliminary.
The first question that needs to be asked of the thesis is an economic, even econometric, one. How do we know that the firms involved in barter are subtracting value in the way the model says they are? An econometric answer to this is beyond the scope of this paper and the capabilities of this author. It is however worth noting that at least one clear prediction can be taken from this model, that as cash collection rises as a percentage of tax collection pressure should start to build for an increase in wage arrears in the non-government sector.[39] This is because the limited amount of cash in the system will be flowing towards government and the other sectors will have to make do with less. At the beginning of 1998 the Russian government pledged as part of its IMF set conditions to cease taking tax revenues through barter and offsets and Gaddy and Ickes claim an increase in wage arrears became apparent in the first half of the year.[40]
The August '98 crisis meant a return to offsets and barter and a fall in cash tax payments. However, again under pressure from the IMF, cash tax revenues have gone up in the first months of 1999. If this trend continues an observable crisis of arrears should become observable in other parts of the economy. If sufficient figures breaking down these arrears are available more evidence to support the virtual economy thesis may be found.
A second question would be regarding the reasons for NMTs? The implication of the virtual economy thesis is that avoidance of detection as a value subtracter is the main reason for the NMTs. However, a look at the wider literature reveals a number reasons put forward for NMTs and this needs some consideration. In an extremely detailed recent paper, based on a wide survey of over 300 Russian firms, Commander and Mumssen put forward a number of reasons for why firms engage in barter.[41] Some of the results from the Russian Social Barometer also hint at the complex and often cultural reasons for firms pursuing non-market rational strategies including NMTs.[42] Case studies have also provided insights which suggest that labeling all NMT reliant firms unviable would be an oversimplification.[43] For purposes of brevity I will constrain my comments mainly to results and observations made by Commander and Mumssen.
These authors give twelve differing reasons for why firms might become involved in NMTs, some of which they weigh higher than others. The reasons themselves can be reduced to three categories, tax incentives, the liquidity squeeze arising from a capital shortage and inadequate banking system, and the disorganisation and network effects provoked by the transformation process itself.[44] One of the main scenarios their study paints is that the rise of NMTs was a perfectly natural response to the lack of credit in the system. Thus while Commander and Mumssen are mindful of the vast inefficiencies NMTs create, including political and economic barriers to restructuring, they also note that despite the various reasons for firms engaging in barter there has been a chain effect bringing many firms into this economy. Because there is now a chain of NMT relations based upon liquidity problems the effect of a crackdown on NMTs would be a virtual sudden credit squeeze. This would result in widespread social and political dislocation and the loss of viable as well as non-viable firms.[45] In short this subtle empirical inquiry into the NMT economy would recommend a cautious policy approach rather than an all-out declaration of war on the NMT economy as an alien and hostile entity.
This said it should also be noted that Commander and Mumssen's findings empirically supported a number of propositions put forward by the virtual economy thesis. In particular the heavy reliance on utilities (raw materials) by industrial firms in order to stay viable and the important role of relational capital. Their study also confirmed that barter was far more widespread in the manufacturing sector and that there was a relationship between NMT exposure and lack of restructuring.
Moving away from the economics of it we should finally ask to what extent does the virtual economy address the concerns raised by the political and sociological strands mentioned at the beginning of this article? The most overt political and sociological observation put forward by the thesis is the level of cohesion Gaddy and Ickes sketch into the system. Rather than being a society fraught with fragmentation the virtual economy would assert a level of interlocking interests that reinforce and reproduce each other. Thus the inadequacy of new institutions or the failure of behavioural change could be explained with reference to their being almost no-one of any influence in the system who actually wants them. Indeed they are often a threat and an imposition. The positives such a perspective has to offer is a possibly more realistic account of the actors in the Russian system and their interests. A political-economic as opposed to purely economic perspective becomes possible.
One critical concern that can be raised is in direct contra-distinction to this strength. Namely that the model runs the risk of being too comprehensive. The logic of interests is drawn so tightly that this picture of Russia is vulnerable to a re-run of the problems earlier experienced with the totalitarian model of the Soviet polity. Russia emerges as an alien and hostile alternate economy which exists simply to destroy (economic, as opposed to political or cultural) value created in the West. Moreover, its stability is encompassing and allows little room for change. While the virtual economy model could perhaps serve to locate contradictions of interest and thus sources of change the general thrust of the argument is the other way. As with paradigm of totalitarianism the virtual economy appears as a self-replicating and closed system.[46] I doubt that such an understanding is Gaddy and Ickes' intent or analysis but the above could be easily extrapolated as an ideological position from the thesis as it currently stands.
On a less dramatic tack it might also be observed that the very width of the model, its capacity to explain political and social phenomena in terms of economic logic does, while broadening the economic discourse, also renew it. A central avenue of critique being made by political and sociological observers has been the failure to address issues of institution building, democratization and cultural change. Coming from this critique the public policy suggestions have tended to focus on slow microeconomic reform and the growing of a market economy that can produce an alternative and prosperous destination for the workforce. This amounts to a different direction to the hitherto reliance on macroeconomic policy and indeed administers an admonishment to it. However by re-explaining much of the political and sociological phenomena in economic terms Gaddy and Ickes could be, probably contrary to their own intentions, rejuvenating a macroeconomic approach. The dominant policy tools and institutions are macroeconomic so there is a definite danger that, inasmuch as the virtual economy thesis influences policy, it will be simply as another reason for an all-out macroeconomic assault on NMTs in order to rescue the fiscal situation.
Conclusion
The virtual economy presents an economic picture of Russia that challenges a number of predominantly economic orthodoxies. It suggests that transition has actually become condition and that much of the macroeconomic approach to Russia is premised on a misunderstanding of the nature of its economy. It also provides the basis for a political-economy of Russia by discovering the reasons for many of the phenomena observed by political scientists and sociologists within a network of economic interests and relationships. From a policy perspective it locates NMTs as the heart of a new and anti-market system and suggests institutional and cultural changes are needed to overcome this and return Russia to a path of transition.
However the implications of its policy advice to the West are for the moment negative, basically disengagment at the level of most influence, the provision of money. There is extra work to be done estimating the probable impact of political and economic changes in light of the model if it is to provide a basis for successful policy advice. Moreover, it is not yet clear the extent to which value subtraction is the basis of the NMT economy and more work needs to be done in evaluating empirically the internal cohesion of inter-sectoral behaviour the thesis sets out. Regardless of these issues the virtual economy does provide a new a stimulating paradigm for analysing the Russian experience and it points directions to a number of new lines of inquiry. For this reason at the very least it is likely to remain influential.