Policy Credibility Case Summary

Reform and the Law in Russia

In January 1992 Russia embarked on radical economic reform. The reforms included foreign trade liberalization, domestic price liberalization, a privatization program, and state budget reform. Foreign trade reform made the Russian rouble into a stable, convertible currency, gave ordinary Russian consumers the opportunity to purchase a wide array of imported goods, and subjected Russian producers to market-based international competition. Domestic price liberalization created market-determined prices and made shortages and queues history. A mass voucher privatization program privatized over two-thirds of Russian enterprises, giving investors, workers, and managers the opportunity to formalize and make markets in enterprise ownership shares. State budget reforms have greatly downsized the arms industry and appear to be succeeding in bringing about low inflation and setting up the macroeconomic conditions for private-sector-led economic growth.

Nonetheless, economic reforms have also created a crisis of credibility for the law and for beliefs about right behavior. The rapid economic changes in Russia require the development of an extensive new body of law. Not surprisingly, a large body of new laws is often contradictory, and it does not and cannot have an established body of precedent and administrators who are experienced in interpreting and applying it. This means that the credibility of law is particularly dependent on intangible factors such as individuals' beliefs about fairness, good faith conduct, and right action.

The growth in recognized crime and corruption, and increasing perceptions of injustice and unfairness, represent a significant challenge to the credibility of law and the sustainability of reform in Russia. Privatization, not just in Russia but in all formerly socialist economies, is fraught with charges of corruption, favoritism, and unfair power of the former elite. Since the credibility of property rights depends in part on public acceptance, such charges, particularly if they are true, weaken property rights. Macroeconomic stability depends on relatively stable tax revenues, while perceptions that the tax administration is arbitrary, unjust, and corrupt promote non-compliance with the tax code and tax revenue crises.

More generally, the economic reforms have opened a new range of freedoms for individuals and prompted a flowering of entrepreneurial initiative and energy. The reforms have also created large incentives for unethical behavior and prompted a massive struggle over the distribution of wealth. Economic transactions require mutually understood, credible rules of behavior. A major challenge for economic reform in Russia is to develop and preserve such rules.

Policy Credibility Learning Module