[NOISE] Today we continue to make the analysis of initial steps of reforms of market reforms in Russia and the first point we will deal with will be price liberalization. In order to create market environment In Russia, it was not only enough to privatized assets, state home assets but price liberalization should be also dealt with because as I have already reminded to you, prices have been regulated by the state. They were all fixed by the state, predetermined by the state, and no deviation from the fixed price of the state could be possible. And whatever shop you visit, you could have similar items, similar goods at similar prices. So no variety of prices throughout the space of Soviet Union Territory. So, in order to proceed further with market reforms, one has to prices. A few words about the concept. As usual thinking about the liberalization of prices two major options were considered. Gradual liberalization or fast and the immediate liberalization of prices. Two major options existed and were considered by reformers. Well if I would be a reformer. Then my logic rather inclines in favor of gradual change while definitely in such a serious matter as price liberalization. Everybody has to adapt to new realities. Everybody has to adapt its budget for new prices. People have to calculate their budgets in order to be ready for price liberalization. Industries and enterprises had to take into account the dynamics, the future dynamics or possible dynamics of prices so. My vision and my logic normally supports, gradual price liberalization step-by-step I would say. To a certain extent, and then you could adapt policies in a more rational way to what is happening, with the price liberalization. Well, but that was not the case, all Russian reforms and the reformers opted for a fast and rapid change, rapid liberalization of prices for the majority of goods. Here you can see the starting point since January 2nd of the year 1992, prices for most of the products and services were liberalized. You can see here, the figures that something like 80% of wholesale prices and around 90% of retail prices at that time were let free to fluctuate. Prices for some products, especially most sensitive products like medical products. Like milk or bread, transportation, prices for some products still were regulated by the state. But as you can see, that considered only 10% to 20% of prices which are remains partially regulated. But even those prices that were regulated, they we're in constant increase. Okay, you can see the figure but they increase prices that had been regulated was to the amount of three to five times. They have been an increase by three to five times which is an incredible rise in prices. So if regulated prices were in such a fast race, and fast increase, what about the rest of the prices. We will learn about that in a minute. Since March of the year 92, so same year, similar year, practically all consumer goods prices were let to fluctuate free, and they went crazy. I remember that time. Prices really went crazy and people were shocked. Each day you go to a shop and you see some item, I don't know a sausage, today it could be priced 10 kopecks. Next day 15 copies the other day 20 copies then one rubble then ten rubbles and there was no limit to price fluctuation so all the required products, all products which were produced not in substantial quantities to meet. The demand of the people, they were really in a crazy increase. You can see here the figures are beyond belief. The 92 price increase in the Russian Federation in comparison to the year in 91 was 2500% for many items. But just imagine if you look at an average increase for all the items for just one year, not in comparison to 91, but only within one year, within the year 92, price increase was something wide by 100 to 150 times depending on the goods and services just imagine 100 times more a price and that was really a shock for the people. People started to make reserves so to say they started to buy certain goods they would need in advance ahead of their ahead of their needs. So they started to buy rice, for example. Not just one package, but let's say 10 or 20 packages, to stock them somewhere in their houses or apartments. Just to be sure that they would not starve to death eventually, in a week or a month, that they would have something to eat for prices they could afford at the time they bought some products. That created even a worse situation because there was a lack of many goods anyway, but when people rushed into the shops to buy the necessary goods, so there were big queues and prices went crazy and you can compare the salary rise. Salaries also rose during that time but it was only 10 to 15 times rise. So incomparable to the rise of prices for product and services. So that was really a shock to the people, to the majority of people. That period of time they call, well economists call, it a shock therapy. Was it a mistake, to choose that kind of option to liberalize prices? Again, a rhetoric question. Reform was wanted to make migratory forms faster in a faster way. And they decided that the market would determine the level of prices itself and then levels of production and consumption could be more or less balanced by the market itself. With such an instrument as prices because, well, definitely prices at the time of the Soviet Union had no correlation with realities. They were fixed by some imaginary concepts and they did not represent any kind of realities. They did not reflect the number of goods produced, costs of production, level of consumption, demand, and things like that. So probably that was a reason, one of the reasons why they wanted to let the market to determine right from the start good proportions between production and demand. So, again a rhetoric question but I would like to advance some more arguments in favor, or against that kind of logic. As a result of this fast liberalization of prices a lot of people made fortunes. Some of the people, the majority of the people struggled to survive as I have described it because they were really short, they were really, they didn't know what to do with all of those crazy prices and they could not afford many products for the every day life. So, for them, that was really a very hard period in their lifetime. And that, as a result, as a result, some people, a small layer of people, started to be very rich. While the majority, the vast majority started to be relatively poor you can see here one of the figures which reflects the transition patterns of that time as a result of this kind of transition. 45% of total incomes in Russia went to the top small layer of people the top reach and the discrepancies between very rich and the top rich the bottom poor is the highest in Russia among all the OECD countries. You can see here the figures, that the spread between the top 20% most reached and the bottom 20% less paid in Russian figurations is the highest in all the developed economies, so that's a reflection of hard realities of the time that where some people struggle to survive and others made their fortunes. One more important thing to understand which had both positive and negative impact on the development of national economy. So remember that the vast majority of state owned enterprises had been privatized. So the new owners of the new enterprises were supposed to start structural reforms because one of the major goals of reforms was to increase productivity, increase competitiveness, restructure major industries and make structural reforms in general. So now imagine that you become a new owner of a new enterprise. You get the, 51% stake in a certain enterprise. And you come to control, all together with a other group of people, you come to control a certain enterprise. Now before starting any investment into this enterprise, you start planning your production schemes. And then all of a sudden comes a period of the shock therapy and all the prices are liberalized. And they go up. In a crazy way. What are you going to do with your enterprise? You just sit. Just do nothing and you can sell whatever products your enterprise is producing. And whatever quality are your products, you can easily sell them at prices which each day become all the more higher. So, new owners felt comfortable. They got extremely high incomes, extremely high benefits, from the sales of the products. There, enterprises continue to produce. But on the other hand that produced a very negative impact on the, first on the initial stage of the Russian equality in transition. Because there was really no motivation for the new owners to restructure their enterprises, to buy new machinery, to upgrade the quality of their products in order to compete with other products and other producers. Because there was a lack of everything, prices went crazy so there was nobody compete with. Producers enjoyed higher profits and that led to another very negative if effect in the Russian economy conservation of inefficient management for a long time. So instead of starting to apply efficient management techniques to increase your productivity and the quality of production and competitiveness of your product. You didn't have to do that at that time because of the short therapy and because of the situation on the market. So that turned out to be very negative consequence for right from the start and the starting point of the reforms which could be felt. Yet until present times, because those bad habits of doing nothing and enjoying high profit had the deep roots in the Russian mentality of the Russian business community. So, it's one important point to understand which will be important to apply to modern trends in the Russian Economy and in general the sub-conclusion of this slide would be that for many people, this kind of experience was really a shock without a therapy. Because they were not really cured. So [SOUND]. [MUSIC]
