Foreign Policy Briefing No. 25

Soft Assistance for Hard Russian Reform

By Karen LaFollette
June 3, 1993

Executive Summary

The difficulties Russia faces in its transition to a democratic market system have prompted Western leaders to pledge massive amounts of financial aid to Moscow. If the West intends to help President Boris Yeltsin and assist Russian economic reforms, however, it should refrain from sending large-scale aid. Rather than encourage democracy or capitalism, aid is likely to undermine the reform and prolong the transition to a market economy. Moreover, foreign aid transfers will not introduce the policy changes that the Russians themselves must implement—widespread privatization, deregulation, trade liberalization, and tax reform. Although the West can help Russia by lowering trade barriers, ending restrictive overseas investment rules, and forgiving or restructuring Russia’s debt, Western leaders should realize that they cannot determine the course of events in Russia.

The International Monetary Fund, the World Bank, and other Western advisers have given Russian reformers harmful advice that threatens to jeopardize Russia’s transition. If Russian reforms are to succeed, rapid and widespread privatization, coupled with an end to government subsidies to money-losing industries, is needed.

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Karen LaFollette is a research associate with the Institute for Political Economy.