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Russia After The Coup

A reformer, Dr. Leonid Abalkin, director of the Soviet Academy of Science’s Institute of Economics, and economic adviser to former …

A reformer, Dr. Leonid Abalkin, director of the Soviet Academy of Science’s Institute of Economics, and economic adviser to former Soviet President Gorbachev, stresses the need for the Russians to accept full responsibility for both the changes and the havoc of current economic turmoil.

A pragmatist-Abalkin is known to favor what works-he has been deeply involved in using U.S. know-how to help grow modern, free-market-schooled Soviet managers–most recently through a cooperative effort with Duke University‘s Fuqua School of Business. In 1988, Dr. Abalkin visited Duke University, and his efforts encouraged J.B. Fuqua, chairman of Fuqua Industries, to fund the school’s Center for U.S.S.R. Manager Development, [See "From the Fuqua Center" ff.], and in 1989 Abalkin met with Fuqua in the Kremlin, to help identify Soviet managers for the program.

These cooperative efforts emphasize a need for the Russians to do as much for themselves as they can, and speaking to U.S. CEOs (before the proclamation of the Commonwealth of Independent States), Abalkin emphasized that too much foreign financial support could have a negative effect on the union’s ability to develop long-term opportunities for growth.

Dr. Leonid Abalkin (Institute of Economics, Soviet Academy of Sciences): I am very happy to help you clarify your vision about what is going on in our country these days. The events which took place in August 1991, the abortive coup d’etat and its suppression, deeply influenced developments in my country. First, the event demonstrated the depth of all the changes taking place in the last six years. Before this, there were certain doubts about how large-scale and deep the transformation taking place was. The events which took place in 1991, dissipated all doubts, and they showed that our people cannot return to the old lifestyle any more. The future path will be far from straight-it will not be the straight path of a sober man going along the road-but there is no way back any more. The events of 1991 show that thousands of people support the new movement.

What is very important to understand is that the economic restructuring is not just an isolated phenomenon. This is my second point. In a very short time, we have created around 70,000 private enterprises. In the first half of 1991, the number has grown by 70 percent. This is a very high rate of transition. And now in my country, we have 1,500 private, commercial, cooperative banks. This gives us a certain optimism and satisfaction that all we have done in the way of transforming the old, rigid system is leading us toward a viable economic system.

HARD TIMES ARE HARD

But the results are far from simple, and sometimes they are very contradictory. This is point number three. We now know that the new processes we are witnessing can have quite dangerous dimensions, and affect the future development of our economy. The abortive coup exposed the disintegrative trends in our society. And without taking immediate, very decisive economic measures this year, those negative forces could be affected by the deficit in the state budget, which might reach 800 billion rubles. That would be a nightmare.

Inflation is worsening too. Our factories which are printing paper money are working in three shifts, day and night, without any breaks, and bank note denominations are getting bigger all the time. First it was the 100 ruble note, now we are starting to print 250 and 500 ruble paper money because soon we might be without the special paper to print the new money with. Production is down 12 percent, and inflation is higher than 200 percent. The changes we are making are very dangerous. This is why our prognosis now is more pessimistic than some months ago.

The coming two years promise to be the most difficult period for us. It is dangerous to hope for quick improvement of the economic situation, but one can be optimistic about mid-term and long-term prospective. We have enough material, labor, and individual drive for progress. And I do hope that my country is capable of learning from our own experiences. But the question remains about the social price we will have to pay for economic development. That is a very vital question. We have a humanitarian duty to minimize this price, to make as little sacrifice in this area as possible. Here our concern is grave.

So where is the way out? First of all, the government needs to reach agreement on how to restore people’s confidence. We need the political wisdom to exert command over ambition and over separatist trends, and to find common aims. We need to create political strategies which will enjoy the support and confidence of the population, because only on this basis can we carry out successful normalization of the economic situation. And the majority of this work should be done by ourselves and in our country and by our leaders. And only on this condition should they also count on support from abroad-but I say again that the bulk of the work should be done by ourselves, and support from abroad should be only beyond what we can do for ourselves. The main undertaking should be our own, but there is a humanitarian kind of help that we are interested in. There are no conditions for that help. The transition is difficult.

Michael S. Levin (Titan Industrial): How are we as Americans to understand the position of some Soviet leaders today who are lifelong Communists, lifelong supporters of a system that has now changed? How are we to interpret and to understand and relate to people like Boris Yeltsin or Mikhail Gorbachev? What, in your opinion, has happened to their understanding of economics and social theory, and more important how are we to deal with them?

J.P. Donlon (CE): What you’re asking is can a Communist change his stripes?

Levin: Correct.

Abalkin: During the last years, I had to think a lot about this problem, and I am ready to discuss it very thoroughly. The problem is very serious, but I will try to be short and clear. The Cold War that started in 1946 touched upon or impacted both systems. Both the West and the East built their own image of the enemy and their own dogma. All this was imagination operating on the level of 19th-century thought. The ideological dogma could hardly be called a scientific approach.

Now during the last half century global changes, crucial changes, happened in human civilization. It has become very different, and more involved with megatrends in this half of the century, and the new thinking has reached a higher level far above the ideological approach. Now the basic contradiction is not between socialism and capitalism, but between the ripening of civilization in the North and the weight of the difference in the underdeveloped South. We have gotten away from ideological dogma, and this is true of Soviet scholars as well as many Western scholars. Politics is not the question.

So the core of the answer to your question is if those people have really changed their attitude, they have understood the necessity of change, or they are playing political games. If we don’t understand the new readiness to change, I think our children are going to revolt. And if you ask about certain people, about Gorbachev and Yeltsin, I don’t want to evade your question. I think that these people empirically feel the changes. These people are not thinkers; they are people of a different type, but they are not playing with the moods of the people. They are pragmatic people with a feeling for the new trend.

HOMEGROWN ENTREPRENEURS

We need to create a very powerful program to support managerial entrepreneurs, a program which could enjoy public support and public confidence. We have doubts about whether we still had people who are capable of becoming entrepreneurs, who are capable, energetic, and creative. Maybe such people will not come forward, and we will have to import such people from other countries. But I believe from our thousands, tens of thousands, hundreds of thousands of young people, a new generation of entrepreneurs will appear. They don’t have knowledge of foreign languages, because they are the children of our time, but they have got initiative, they have got strong will, and they have intentions. And having now acquired economic freedom, they will never give it up. This was clearly manifest in the August 1991 events.

Frank Liguori (Olsten Corp.): We have heard and read a lot about the work ethic of the socialist labor force, and now we’re seeing, as East Germany joins West Germany, a strong contrast that suggests the work ethic under socialism is not quite as good.

How will the work ethic of the Russian labor force evolve in a capitalist society? Abulkin: The work force question is very serious because of the true situation in our country today. For example, we were raising the purchase price for farm goods, hoping that this would stimulate our peasants to work better. We are thinking within the framework of market economics. But the farmer still continues to work even less, produce less corn, less potatoes, no more than he would need to live on the lowest standard of living. He has got his job, he doesn’t have to pay for the education of his children, he’s got holiday, he’s got one bottle of vodka a day for himself because he cannot consume more per day. So what should he break his neck for? This is a traditional phenomenon of Russian consumption. And the state is playing the role of a good father, taking care of everything.

We must change both of these roles, by creating new demands from the farmer, and having the state step aside. That means you should throw the human being into the water and let him try, let him sink or swim. Some will be drowned, but there is no other way but to preserve the old system. So that is what I called in my introduction the price we have to pay for ambition, and that will mean a change in the labor force, a basic change in the attitude toward work. It will not happen next year. It will not happen in two years. No less than one generation would be required to switch over to a new way of thinking. But if we don’t start today, this fundamental change will only be delayed later and later.

WHAT THE WEST CAN DO

Antranig Sarkissian (Citicorp): You are the author of the Abalkin plan, and I will leave it to you to tell us what happened to that, and what your views are now about current plans. But the fundamental question involves the role of central planning itself in your economic restructuring.

Abalkin: I have a new proposal with me, and I have shared parts of it with you tonight. But the key issue remains what we should do to survive this fall and winter. And then, independent of that, what kind of political system we are going to have in one year, or in five years. We will have to survive with our social cataclysms-a head-on collision is certainly unimaginable.

Daniel A. Witt (Tax Foundation): You have made reference to several rather significant obstacles to Western investment in your country, ranging from the lack of convertibility of your currency to somewhat underdeveloped distribution systems. Given these obstacles, what advice would you have to potential Western investors, and how important is Western private participation?

Abalkin: Without large scale private investment from the West, it would be difficult for us to carry out changes in our economic structure. We can revise our economy only with the help of large foreign investments, private foreign investments. And we do understand clearly that there are a number of conditions for such investments. First of all, such investments should be both protected and guaranteed. They should bring income to the investor, possibly a higher income than in other countries. And at last, this income should be freely convertible, or allowed to be used to buy goods, if there are goods, at the same time. And, of course, our legal structure, taxation system, and property system should be regulated to meet all these needs.

If you talk about long term private placement investment, and becoming an active part of the growth of our economy, the Soviet Union has something to offer our partners from abroad. First of all, this is a huge market-a free market which is not occupied yet by anybody. Second, there are achievements in high technology which were kept secret in our country until recent times. Mainly they are in the military industry, but we don’t know how to properly introduce this technology into consumer production. But if there is a chance to combine our high technical achievements with the organizational experience of our Western colleagues, we can make significant achievements together. A number of projects involving aircraft are underway.

Another long-term investment advantage is a fairly cheap but quite highly qualified labor force-according to the estimation of our Western colleagues. And last, our huge natural resources which I don’t put, as you notice, top priority on. What is very important is to assess the strategic benefits from investment, not in the short term, but in the long term. We have short-term needs, but one should not postulate high benefits based on those needs. Real gains will come from a long-run investment strategy only that helps us to build on our own independent growth.


FROM THE FUQUA CENTER

For more than a year now, we have had the privilege and opportunity to teach free-market business practices to groups of Soviet managers. Representing many different industries and republics, these middle and upper-level managers participate in an intensive three-week program. Tailored specifically for their needs, the curriculum encompasses such subjects as market-based management, and managing the transition to a market economy. Following the on-campus program, the Soviets visit U.S. companies for a one-week internship.

Many managers report that the program was a springboard to realizing their entrepreneurial dreams. Others have used their newly-acquired knowledge to make important contributions to their home companies. Vladimir Chmil, a chief engineer at NPO Saturn, a leading Kiev telecommunications company, pushed through a drive to privatize portions of the firm’s production capacity. Chmil’s so-called “small enterprises” operate in the same building as Saturn, but serve as independent suppliers to the company and other buyers throughout the U.S.S.R. Irina Kozhenikova was a market analyst in the foreign relations department of Iset in Shandrinsk. Since returning from the Fuqua program, Ms. Kozhenikova has been promoted to department chief.

Two other Soviets have also made dramatic business changes. Sergey Akulov, the director of a tobacco factory, not only bought the factory upon his return to the U.S.S.R., he also pulled off a marketing coup by distributing newly-packaged “St. Petersburg” cigarettes on the very same day Leningrad recovered its former name. And Vladimir Cholnikov, a researcher at the Academy of National Economics, changed careers, to become director of investments at the Moscow branch of AvtoVAZbank.

We learned a great deal from the Soviets, and were impressed by their thirst for knowledge, and clever, sophisticated manner. Their formality and rapt attentiveness in the classroom also came as a surprise. Each manager would raise a hand, wait to be recognized, and then stand at attention before speaking. Their dedication even extended to turning down baseball tickets in order to complete homework assignments. Their creativity was impressive, and they know about dealing with uncertainty on the supply side-unlike U.S. managers who just deal with uncertainty on the demand side.

Leonid Abalkin has repeatedly stressed the critical need for trained Soviet managers. Nothing, he says, is more important in the short term. We look forward to playing a continuing role in assisting the U.S.S.R.’s march toward a market economy, as our fourth group of managers arrives. Three weeks after the failed coup, a group of Fuqua’s “Weekend Executive” MBA students journeyed to the U.S.S.R., where they were hosted by our Soviet alumni, and where one of our students bought stock in a Moscow sewing machine company.-    Thomas E Keller, Dean of the Fuqua School of Business, Duke University.

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