#16 - JRL 7172
Transition
The Newsletter About Reforming Economies
The World Bank
January/February/March 2003
http://www.worldbank.org/transitionnewsletter/
Latin America–Russia: Similarities and Differences
By Victor Krassilchtchikov

The author is a researcher at the Center for Development and Modernization Studies, Institute of World Economy and International Relations, 23 Profsoyuznaya str., Moscow, 117997, Russia; fax: 7-095-1206575, email: f1victor@mtu-net.Ru.

A few years ago the "Latin Americanization of Russia" was a comparison fraught with menace, but the steep decline in the former superpower’s economic and social status changed the meaning of this metaphor. Russia needs to progress in several areas if it is to overtake some developed Latin American countries.

Since the end of 1991, when Russia embarked on its shock therapy reforms, it has lost about half of its industrial capacity. "For the first time in recent world history one of the major industrial nations with a highly educated society has dismantled the results of several decades of economic development—however tortuous, costly, and often misdirected it may have been—and slipped into the ranks of countries that are conventionally categorized as ‘Third World,’" wrote Peter Reddaway and Dmitri Glinski in their book, Tragedy of Russia’s Reforms: Market Bolshevism Against Democracy. To examine the causes of the current Latin Americanization of Russia let us review some major similarities between Russia and the large Latin American countries that existed for many decades before both regions underwent economic transformation in the 1990s.

Historical Similarities

At the beginning of the 20th century neither the tsarist regime in Russia nor the Latin American oligarch-ruled countries were able to face the challenges of modernization. The inertia of the ruling elites resulted in crises that gave birth to ideologies that shaped the countries’ future economic development: bolshevism in Russia and populism in Latin America. In Brazil and Argentina, following the 1929-33 depression, the traditional social elite were forced to share power with populist political leaders. In Russia the Bolsheviks launched a variant of conservative modernization after consolidation of their power. They attempted to reconcile the imperatives of modernization (industrialization, economic growth, scientific knowledge, mass education) with the attributes of an archaic peasant society (adoration of a charismatic leader, fear of innovation, search for "enemies").

Despite the apparent differences between the nationalistic rhetoric of the populist regimes in Latin America and the proclaimed internationalism and universalism of the Soviet leadership, the two models’ ideologies were similar. Both political movements emerged in environments where civil society was weak and large segments of the population were marginalized. The ideologies and policies of both Latin American populism and Russian bolshevism aimed at catching up with industrial societies and accomplished the social function of mass mobilization. In Brazil, President Getulio Vargas (1930-45) promoted the idea of the "new man" shaped and nurtured by the state. This submission of individuals to the state was considered the principal purpose of the government’s social policy, just like in the Soviet Union, where in the late 1930s Stalin constrained and undermined any kind of individualism. Similarly, the Soviet trade union system—a branch of the state machine—resembled Argentina’s corporatism under Juan Domingo Perón (1946–55). Stalin’s keen interest in Argentina’s experience was no coincidence. Thus both bolshevism and populism served as social and ideological agents to prepare traditional, agrarian societies to face new challenges posed by modernization, while at the same time adjusting the features of modernization to meet the needs of old social structures and relationships.

In both cases the policies of modernization were based not just on social mobilization, but also on a focus on internal resources, that is, development from within. Latin America’s industrialization under the populist regimes aimed at substituting imports with domestic products to be manufactured either by the state or by private enterprises protected from external competition, expanding internal markets, and loosening dependence on the world economy. In the Soviet Union economic growth was subordinated to the strategic interests of the military-industrial complex. Even during the 1950s and 1960s, the "golden" period of Soviet economic history, industrial growth was mainly stimulated by military and economic competition with the West, not by domestic needs.

While industrial and social development in both regions undeniably made great strides, the economic and social gap between them and the industrial countries remained (see table 1), and their economic structures hindered the expansion of internal markets and the introduction of intensive technologies. In addition, unlike in the West, their rapid industrial growth had not been accompanied by "managerial revolution."

Lost Decades

During the first half of the 1960s both Latin America’s import substituting industrialization and the Soviet Union’s development based on a command economy reached their limits. The Soviet Union’s Nikita Khrushchev and Brazil’s João Goulart were probably the last genuine populists to hold power, and in 1964 both were ousted by conservative political forces that had a different take on modernization. The new rulers in both countries accused their displaced leaders of identical sins: voluntarism, ignorance of economic laws and scientific principles of management, demagogy, and unfulfilled promises.

The elitist modernization in Brazil contradicted the regime’s declared aim, creating a society based on mass consumption, and the failure of the government’s economic policy accelerated Brazil’s transition toward democracy. In the Soviet Union the authoritarian regime of Leonid Brezhnev tried to work more closely with the military-industrial complex and the party bureaucracy, but had no new strategies for economic and social rejuvenation. The stagnation of the 1970s sowed the seeds of disintegration 20 years later.

By the 1980s in both Latin America and the Soviet Union the inertia of import substitution and the command economy—based on energy- and natural resource-guzzling economic growth—became incompatible with the task of creating innovative economic systems. In both regions the state bureaucracy attempt to stimulate technological innovation; however, in both regions structural imbalances and neglect of human capital further hampered the shift toward a new, postindustrial age.

In Latin America the debt crisis of the early 1980s was aggravated by the accelerated outflow of capital and the weakening competitiveness of goods and services. Per capita GDP fell, and in some countries GDP itself shrank, while poverty increased and inflation ran rampant. Thus the 1980s became known as the region’s lost decade. The 1980s was also a period of lost opportunities for the Soviet Union, as the country’s leadership missed its last chance for real transformation. The deep crises of their respective economic systems led to radical changes in both Latin America and the Soviet Union. Once the crises deepened, the alternative to overwhelming state control seemed be a dismantling of the state’s role in economic and social life through a radical version of economic liberalism. Such a transformation took place in Latin America and Russia.

Comparing Development

In the 1970s and 1980s inflation was one of Latin America’s gravest problems, but the stabilization measures undertaken in the 1990s succeeded in containing it almost everywhere. It fell to single digit levels across Latin America except in Ecuador and Venezuela, although it accelerated again this year in Argentina. In Russia the inflation rate was permanently in two digits between 1991 and 2001, reaching its lowest level of 11 percent in 1997, and might remain at two digits through 2002. The Russian economy only started to grow after 1998, while growth had resumed in the Latin American countries by the early 1990s, although average per capita GDP returned to its 1980 level only in 1997 (table 2).

The structure of Latin American external trade improved in the 1990s: the share of primary goods in total exports declined from 66.9 percent in 1990 to 41.7 percent in 2000, while the share of manufactured goods increased from 33.1 percent to 58.3 percent. While Latin America attracted and used new technologies to modernize its industry, Russia could not even maintain the level of industrial production achieved during Soviet times. Russia’s adjustment to global trade was not accompanied by genuine technological renewal of the economy except in a few industries, in particular, telecommunications in large cities and financial services. The structural distortions that played such an important role in the Soviet Union’s collapse deepened further. According to the 2001 Russian Statistical Yearbook, output in 2000 was 18 percent of its 1990 level in light industry, 50 percent in machine building, 61 percent in the food processing industry, 71 percent in the steel industry, 72 percent in the oil extraction industry, 76.5 percent in the electric power industry, and 89.5 percent in natural gas extraction and distribution.

Poverty in Latin America increased from 35 percent of the population in 1980 to 41 percent in 1990. In 2000 the number was almost the same as in 1990, about 200 million people, but the share of poor people in the growing total population declined from 41 percent in 1990 to 35.3 percent in 1999. The level of poverty in the former Soviet Union is comparable with that in Latin America. According to the 2001 Russian Statistical Yearbook, in 1996-97 the share of the Russian population living below the national poverty line was 22 percent. The figure rose to 29.9 percent in 1999, and in 2000 decreased slightly to 29.1 percent.

If we look at poverty based on the share of food in total household expenditures, whereby people who spend half or more of their incomes on food are considered to be below the poverty line, in 2000 almost 50 percent of Russia’s population would have been below the poverty line (table 3). Many people who would otherwise have fallen into this group did not do so because they grew some of their own food or obtained it from relatives in the countryside. In Mexico, with similar measures, only 20 percent of the population is considered to be below the poverty line.

In Latin America the excess labor supply was mostly absorbed by the informal, and even the illegal, economy. In the 1990s urban employment in the informal sector grew by 4.2 percent per year, more than triple the rate in the formal sector. In Russia too the rise of the informal economy helped the poor and unemployed survive. About 70 to 75 percent of all employees in both regions earn low salaries. Income differentiation trends are similar in Russia and Latin America. In the late 1990s the ratio of per capita income between the highest and lowest deciles was equal to 23.3 in Russia (at the national level), 22.3 in Peru (in urban areas of the three countries), 24.8 in Mexico, and 34.1 in Argentina. However, as many of the newly rich in Russia are involved in criminal activities, their incomes are much higher than indicated by official statistics. Thus according to Russian economists and sociologists, the actual income gap between the lowest and highest deciles in Russia is closer to 30:1 or even 40:1.

In Latin America the lack of a good education, and consequently the inability to get a higher-paying job, has been a key determinant of poverty. In Russia, by contrast, many college graduates, including teachers, physicians, engineers, and scientists, have been pushed below the poverty line. This degradation of human potential is expressed in the human development index, which in Russia has fallen below its 1980 level. Only three other countries have fared as badly on the human development index: Romania, Zambia, and Zimbabwe.

Economic course correction has recently been put on the agenda in both Russia and Latin America. It assumes further development of market institutions, but also recognizes that the state can play a useful role in several areas, including strengthening the rule of law, improving corporate governance, enabling fair competition, developing human capital, and stimulating wealth creation.