Why Perestroika Failed; P. Boettke

But after six years in power and despite much talk about renewal and restructuring, the economy is worse off and the Soviet Union no longer exists as a political entity. As a program of economic restructuring, perestroika must be judged as an utter failure. Glasnost to be sure produced a polit ical and cultural awakening of sorts unknown dur ing the 74 years of Communist rule, but perestroi ka failed to deliver the economic goods. Why? One of the main reasons perestroika failed was because it wasn't tried. During his six years in power, Gorbachev introduced at least 10 pro grams for the "radical restructuring" of the Soviet economy, not a one of which was imple mented. Instead, economic reform was limited to inconsistent and incoherent half-measures. The law on individual economic activity, the law on state enterprises, and the various price-reform proposals, for example, amounted to nothing more than half-measures incapable of producing Peter J. Boettke is an assistant professor ofeconomics at New York University and the author of The Political Economy of Soviet Socialism (Kluwer, 1990).

the desired economic results even if they were implemented in an ideal environment. Conceptually,economic reform is a fairlysimple matter. Private property in resources must be established and protected by a rule of law; con sumer and producer subsidies must be eliminated; prices must be freed to adjust to the forces of sup ply and demand; responsible fiscal policy should be pursued that keeps taxation to a minimum and reins in deficit financing; and a sound currency must be established. Introducing such reforms even within Western economies-is anything but simple. And the major problem is not just a con ceptual one of designing the appropriate sequence or plan of reform. One of the most important insights derived from academic research in modern political econ omy is the potential conflict between good eco nomics and good politics. In democratic regimes, where politicians depend on votes and campaign contributions to remain in office, research has shown that the logic of politics produces a short sightedness with regard to economic policy.Popu lar economic policies are those that tend to yield short-term and easily identifiable benefits at the expense of long-term and largely hidden costs.

Deficit financing and inflationary monetary policy are but two examples from Western economies. In the formerly Communist political economies, this argument about the logic of politics can be intensified. The benefits of public policyfell main lyon the only constituency that mattered: the party bureaucracy. From the nice dacha to special access to stores, the party elite were the primary beneficiaries of the system. Economic reform 114 THE FREEMAN • MARCH 1992 promised to disrupt this system and yield very real short-term costs. If market reforms had been introduced sincere ly by Gorbachev, the short-term prospects would have been higher prices as consumer subsidies were eliminated, unemployment as inefficient state enterprises were shut down, and overt income inequality as new entrepreneurs took advantage of opportunities for economic profit. In other words, structural economic reform promised short-term and easilyidentifiable costs to be borne mainly by the party bureaucracy, and long-term and largely hidden benefits in terms of increased economic efficiencyand consumer wellbeing.The logic of reform was in direct conflict with the logic of politics, and ·politicswon out.

EconomicRealityPrevails Even though the ruling elite fought economic reform at every step, they could not repudiate eco nomic reality. The Soviet economy had exhausted its accumulated surplus in terms of natural resources and Western technology and was unable to continue to develop. The economic situation grew worse under Gorbachev, and the demands for structural reform grew louder and more threat ening to the old system. Glasnost, in addition to the events of 1989-from Tiananmen Square to the Berlin Wall-mobilized the intellectual and cultural elite. As a Russian saying went, "We are still on the leash and the dog dish is still too far away, but now we can bark as loud as we want." The failed August 1991coup was the last gasp of the main beneficiaries of Soviet rule: the privileged apparatchiks and ruling elite. For 60 hours the world first shuddered, then gasped as the coup unraveled, and finally cheered as the ordeal ended. But the coup was a precondition for the beginning of real reform of the system. Otherwise, the party bureaucracy would still have held a degree of legitimacy and power that no longer exists. The displacement of dominant interest groups, as Mancur Olson argued in his Rise and Declineof Nations,is a prerequisite for systemic political and economic reform.

The paradox of government, as James Madison so eloquently pointed out, is that a workable con stitution must first empower the institution of gov ernance with the ability to govern its citizens, and then force it to govern itself. As the leaders of the former Soviet republics debate their future eco nomic and political ties and the legal frameworks that will govern their societies, they must bear in mind the most important lesson of the 74-year his tory of Soviet Communism-when politics is allowed to dominate economics as an organizing principle, political and economic irrationality result. A workable constitution must protect against unwarranted political intrusions (even in the name of democracy) into the operation of economic forces. The law must establish "rules of the game" that protect the economic freedom of the people. Only in this manner can hope and prosperity come to a people who have been blessed with natural resources, but who have lived with the curse-first under the czars and then under the Commu nists-of bad rules that failed to restrain the polit ical whims of the ruling elite. D 115 Czechoslovakia on the Hudson by Robert Zimmerman T he invitation from friends in Prague finally ended many years of procrastination.