Real-life Case Study: Russia in Crisis
Economic Systems
In 1991, when the Communist system in Russia collapsed, many Russians rejoiced at the prospect of living under a freer political and economic system. Many specifically looked forward to living in a Western-style free market economy.
During the next decade, Russians experienced an economic crisis. Although economists had predicted that switching to a free enterprise system would be difficult, few predicted how traumatic it would be.
Corruption The confusion caused by the sudden upheaval of both the political and economic systems opened the door for crime and corruption on an enormous scale. Some businessmen and politicians took advantage of the nation's inexperience with a market economy and abused their power by robbing the nation's assets.
Many Western businesses saw the collapse of Communism as a business opportunity.
Financial Problems Russia's gross domestic product fell sharply until 1997. The nation had to devalue its currency and postpone payments on loans owed to Western nations. Hardest hit of all have been Russia's citizens, many of whom survive on incomes of less than $40 a month. Retirees were squeezed when prices increased much faster than the value of their government pensions.
Success in Sight Despite these problems, Russia's economy has improved considerably since 1998. As the devaluation of the ruble made foreign imports more expensive, consumers bought more locally-made goods. A new president, Vladimir Putin, brought political and financial stability to the government.
Growth has been uneven. The streets of the capital, Moscow, shine with fine restaurants and fashionable stores while the rest of country lags behind. Much of the nation's good fortune is due to exports of oil and natural gas, leaving Russia vulnerable to price changes on international markets.
Russia has not yet succeeded in building a stable, modern free market economy. Officials actively discourage start-ups by imposing unpredictable regulations and occasionally demanding bribes. Insolvent businesses can still stay afloat because of the elaborate system of bartering among suppliers. This discourages Russian businesses from becoming more efficient.
It is now obvious that Russia's problems in making the transition were seriously underestimated. As this painful process continues, Russians look forward to the day when a prosperous free market economy becomes a reality.
Applying Economic Ideas
- What problems has Russia experienced in switching from a state-controlled to a free market economy?
- Why might Western nations be willing to make loans to troubled Russia?
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