Despite its instability, Russia shows no signs of adopting prudent economic policies. Yet the IMF recently agreed to lend the country another huge sum of money. Hoover fellows Bruce Bueno de Mesquita, James D. Morrow, and Hilton L. Root on a gigantic act of folly.
Last summer the International Monetary Fund agreed to an additional $4.5 billion in loans to Russia to keep it from defaulting on earlier outstanding IMF loans. This aid is being provided without the usual economic reforms that are expected of countries that get IMF funding. In fact, rated on economic merits alone, Russia would not qualify for continued help.
This isn’t the first time the West has erred in dealing with Russia’s economic problems. Although endorsing long-term political reforms, most Western governments, as well as the U.S. Treasury, the World Bank, and the IMF, have acted on the belief that the Russian economy must first be fixed because making political changes during economic reform is unmanageable and may even jeopardize short-term economic recovery.
An economic crisis, however, is exactly the time to make political changes—as evidenced by the considerable political reforms in Argentina, Chile, Poland, and Thailand. Once the crisis ends, the entrenched elite will be in a stronger position to oppose any changes that could threaten their political and economic dominance.
The recent history of Russia and Poland amply illustrates the importance of making economic assistance dependent on political change. In the early 1990s, the Poles reformed their political institutions at the same time that they shifted to a market-based economy, and they have enjoyed relative economic and political stability. The Russians sought to adapt existing institutions rather than construct new ones suited to their changed circumstances, and they failed, both economically and politically. Unlike Poland, Russia’s reforms did not include an effective legal system for resolving business disputes and enforcing property rights; a stock market that provided investors with information about how companies were performing; a tax system that collected revenue without massive evasion; or a decentralized, competitive democracy with national political parties that contended in legislative and presidential elections.
Russia has ineffectively regulated its market economy. As a result, business disputes are often resolved with hit men; land is not effectively bought and sold because titles are ambiguous; stock valuations are meaningless since the numbers are known only to the company managers; taxes are rarely collected; and political parties are subordinate to charismatic leaders seeking the almost unfettered power of the Russian presidency.
The first burst of economic reform in Russia created many winners who accumulated great wealth. These new tycoons felt their interests threatened by proposals that would have required the state to enforce its laws, ensure respect for property rights, and enact effective accounting standards that would have made corporate finances and tax reform transparent. Nor was President Boris Yeltsin willing to promote reform; he needed the tycoons to raise money for his 1996 presidential election.
Renegotiating continued IMF support, however, affords an opportunity to tie economic assistance directly to specific economic and political changes. The centralized apparatus still in place from the Soviet era must be abandoned. A new constitution—balancing power among the executive, legislative, and judicial branches—can help advance transparency and accountability in government.
Unless Russian politicians are prepared to put their own hold over power at risk, economic assistance will not produce political reform. IMF money should follow institutional reform, not lead it. It is counterproductive for the IMF to help local oligarchs preserve their power at the expense of local taxpayers and thereby make it harder to build the foundations of successful liberalization.
International assistance will be meaningful only if it helps Russia’s leaders confront basic structural problems in their own economy. But the latest series of IMF loans merely serve to give Russia an excuse to avoid that day of reckoning.
Bruce Bueno de Mesquita is a senior fellow at the Hoover Institution and the Silver Professor of Politics at New York University.
An earlier version of this essay appeared in the Los Angeles Times, April 9, 1999, as “IMF Loans Must Be Linked to Reform.”
Available from the Hoover Press is The International Monetary Fund—Financial Medic to the World? A Primer on Mission, Operations, and Public Policy Issues, Lawrence J. McQuillan and Peter C. Montgomery, editors. Also available is “Adios, IMF? International Monetary Fund,” a videotape of the weekly television program Uncommon Knowledge™, jointly produced by the Hoover Institution and the San Jose PBS affiliate KTEH. To order, call 800-935-2882.