DATE=12/2/1999 TYPE=BACKGROUND REPORT TITLE=RUSSIA / SHOCK THERAPY NUMBER=5-44890 BYLINE=ANDRE DE NESNERA DATELINE=WASHINGTON CONTENT= VOICED AT: /// Eds: This is the second in an eight-part series on Russia. Among issues to be raised: I-M-F loans, President Boris Yeltsin's legacy and NATO-Russia relations. /// INTRO: The "Who lost Russia" debate currently under way in the United States centers around whether or not the West used appropriate policy measures in the early 1990's to foster economic reforms in that country. In this second of eight reports, former V-O-A Moscow Correspondent Andre de Nesnera looks at one of those controversial economic policies, so-called "shock therapy." TEXT: After the demise of the Soviet Union in 1991 and the emergence of Russia led by Boris Yeltsin, Western economic planners were faced with a key question: how do you help move that country from a centralized economy to one dominated by a free market? What emerged in the West as a solution to Russia's problem was known as "shock therapy" - a combination of measures including liberalizing prices, cutting subsidies and stabilizing the country's budget. Such measures were used successfully in Poland and advocates of "shock therapy" felt the same could be done in Russia. In the early Nineties, most of the policymakers in Moscow - including then-acting Prime Minister Yegor Gaidar - felt that was the way to go. To this day, experts differ as to whether that approach worked. Some say the measures did not go far enough; others say Russia got a dose of "shock" and no "therapy." Harvard University's Marshal Goldman believes Russia should have undertaken economic reforms in a much more gradual way. /// GOLDMAN ACT /// In part because the assumption was that Russia had institutions in place that could absorb these changes, that could react to these changes much as happened in Poland. And my feeling - my very strong feeling - was that these institutions were not in place. After 70 years of communism, they had all been eliminated. So when you brought in money or you expected prices to change, what you had is not a competitive system, as the advocates of that approach had assumed would be the case. What you ended up with was monopoly and the oligarchs and the controls and the distortions and a very strong feeling that you could steal from the state and there would be no price to pay for that. /// END ACT /// But other experts disagree with the view that Russia needed gradual, slow-paced reforms. One of them is Ariel Cohen - a Russia expert with the Heritage Foundation research center (in Washington)- who says "shock therapy" was not an unmitigated disaster. /// COHEN ACT /// Yes indeed, it resulted in high inflation and the savings that were not indexed were wiped out. On the other hand, Russia was facing famine at the time - this is 1992: the shelves in the stores were empty and as a result of freeing of prices, the market reached equilibrium and the shelves filled, the stores filled very, very fast. This broke the backbone of the central distribution system that the USSR was practicing for over 60 years at the time and it was a necessary measure. All the alternatives of slow economic reform that were undertaken in countries like Romania and Ukraine, showed that as a result, the corruption was even greater and the macro-economic results were not necessarily better. /// END ACT /// Whether or not "shock therapy" worked - or was even implemented to its fullest - Russia's experience with it was short-lived. By December 1992, radical reforms were on the way out. So was acting Prime Minister Yegor Gaidar. And since then, Russia has not had a consistent economic policy. Successive Russian governments have wavered: moving in the direction of reforms, then putting on the brakes. Jack Matlock was the last U-S Ambassador to the Soviet Union. A long-time Russian scholar, he says during those first years following the end of communist rule, Western economic planners knew very little about the challenges they were to face in trying to tackle Russia's problems. /// MATLOCK ACT /// There were no sure bets. Nobody had a road map. Of course, we understood generally where we would like Russia to be and where most Russians wanted to be. But nobody knew how to move from where they were to where they needed to be. And this was an enormous task. There was no roadmap and everybody knows that when you are doing something new, a lot of mistakes are going to be made. /// END ACT /// Many analysts say mistakes are inevitable as Russia moves ahead toward a market economy. But experts also say the West must continue to help Moscow in that difficult transition. (Signed) NEB/ADEN/KL 02-Dec-1999 14:16 PM EDT (02-Dec-1999 1916 UTC) NNNN Source: Voice of America .