ESSAY.
FINAL
DRAFT.
By
Anton Matiukhin.
24,
NOVEMBER 1998.
Международный
Институт Экономики
и Финансов, 1
курс,
Высшая
Школа Экономики.
ICEF, gr. 2.
It
is obvious almost to everyone, that 1/6 of the land is now in deep
economical and political crisis and the whole world is waiting to see
how the country will emerge from it. Russia’s chaos was caused
by economic turmoil and political upheaval. Economic slump on the
stock market, devaluation of the ruble, a default on foreign debt by
banks and government are parts of a climax and the general
instability of Russia is worsen by them. These things sometimes
happen in the process of transforming a country from a command into a
market economy.1
There was a sharp increase in the inflation level after
it has been brought down to as little as 5.6% a year in July. The
prices began to rise fast and a lot of people were thrown far beyond
the poverty level.
The anatomy of the financial crisis
consists of several causes. The first cause is the so-called “Asian
factor”. There was economic turmoil in Thailand first and then
it spread all over Asia: South Korea, Hong Kong, Singapore and
Malaysia in 1996- 1997. "All these countries and more have seen
their economies wrecked over the last couple of years. Now Russia has
its currency heading for the basement and is basically defaulting on
its national debt". 2It
has scared foreign investors. “This cooled their enthusiasm for
investment in riskier economies” (Russia today) and they start
taking their money out of its stocks and converting their rubles into
dollars. It will take a lot of time for them to gain confidence in
Russian “emerging” market again.3
Although the Russian government was insisting it would
not devalue the currency, it had to float the ruble three days later.
For propping it up the Central Bank drained its reserves- $1 billion
a week for ruble’s defense. This also increased the
devaluation.
Poor tax collections forced Russian authorities to raise
funds to cover its expenses. It has been floating GKOs (short-term
treasury bonds) which provided as high as 240 percent interest.
Although the state attracted billions of dollars, it needed to borrow
more to pay off the short-term bonds. But without tax revenue, the
government would not be able either to pay the international bills or
maintain essential services. It cannot afford to pay state workers
and without their wages, they cannot pump money back into the
economy. Large fiscal deficit makes Russia highly unprotected from
swings in market sentiment.
Another thing, which sank the crisis, was a drop in
world oil prices. Russia is the world’s third-largest oil
producing country and oil is the great hope of its economy, because
unfortunately its production level is not good enough not to let
Russian huge natural resources to be sold out.
All these above-mentioned problems
seem to be very complicated and, of course, there are no quick fixes
available. But, from my point of view, the solution key word is not
“help” but “self- help”. "Currently
institutions such as the world bank and the IMF have been formed to
be the lenders of last resort to governments who themselves control
the various central banks which are the lenders of last resort for
people within their countries."4
However, these institutions are no longer really in effective
control. There are people at the top of this pyramid, those who are
really making money from it, who are more concerned about their
relative
power and
wealth than with the overall damage that is being caused by this
current chain reaction of a collapse. A
fundamental reform of the world financial system needs to happen to
clear up this mess.5
The
World Bank should not help the countries with “emerging”
markets only with money and then make itself richer from loans, but
it must be restructured into the knowledge bank. It must provide
these countries with specialists, teaching how to act themselves in
critical situations. World Bank must also exchange its experience
with them to prevent them from “inventing the bicycle”
once more. It must teach these states how to help themselves.
I
do not know, whether it is possible, but it would be good if the IMF
and the World Bank cancel all loans given to developing countries
with “emerging” economies for the sake of the world’s
safety. Otherwise their economies would be doomed to be destroyed
because of the short-term debts, which these countries need to pay
back. But on the other hand, if it have had cancelled, no
organisation including the IMF would have been looking forward to
further negotiations with such countries and provided them with
credits.
But
the worst thing is that the economic crisis entailed the political
crisis. Because, as one of the most famous writers, philosophers and
politicians of the Renaissance Niccolт Machiavelli said, "the
only way to reach prosperity of the country is to have a firm,
determined and intelligent leader, who will be an avatar of the
majority's interests, and who will have a great estimation among the
people". And the Russian president Boris Yeltsin has already
lost all the consideration, and the things were getting worse and
worse after the beginning of the crisis. The recent ordered murder of
the famous deputy and democrat Galina Starovoytova was a signal that
lawlessness in Russia has reached its apogee. She was among those few
people, who performed real action. As a peacemaker she went to many
"hot spots" and tried to stop the bloodshed. But she was a
real obstacle for people who did not want human rights and laws to be
the most precious thing. After this incident, all democratic parties
have realised the necessity of joining their forces against their
common enemies- communists and fascists. It may seem unbelievable,
but at the end of XX-th century there is a serious threat of turning
Russia into a nationalistic and fascist country, because the number
of people (especially young) joining different nationalistic
organisations. The opposition, which is always very active, would not
hesitate a second if there would be a little chance to overtake the
power.
I
think that in the case with Russia, despite the IMF wants our
authorities to provide it with their economic program first and then
they will be able to give Russia credit, giving a loan now will
prevent the country from a possible revolution. And this is the
urgent measure to be taken. For a great amount of people the crisis
was a proof of an insolvency of market economy, at least they think
it was. This caused the act of protest on the 7-th of October.
Fortunately it has not such scale as it was expected to. But, in my
opinion, it was not a failure of market economy itself but of a
present inefficient and weak government. The important thing is that
the politicians stop playing politics and dividing the power and
entrust together to the serious and urgent measures that Russia
needs. Although I do not like the new government and the Prime
Minister very much, I hope they will be firm enough and well
disciplined to continue working on restructuring country’s
economy.
Sources:
Anatomy
of a Financial Crisis. Russia Today; wwwssiatoday;
Fr. Aug. 21 1998.
Russian
Financial Crisis.
islamic.uk
Aug. 39 1998.
Global
Capitalism. The Economist. Sept. 12 1998.
1
Anatomy of a Financial Crisis.
Russia Today; wwwssiatoday;
Fr. Aug. 21 1998.
2
Russian Financial Crisis.
islamic.uk
Aug. 39 1998.
3
Anatomy of a Financial Crisis.
Russia Today; wwwssiatoday;
Fr. Aug. 21 1998.
4
Global Capitalism. The Economist.
Sept. 12 1998.
5
Russian Financial Crisis.
islamic.uk
Aug. 39 1998.
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