This research will begin with the definition of a Market Economy. Janos Kornai's book The Socialist System: The Political Economy of Communism is a useful point of departure for defining a market economy. Five distinctive features of a socialist economy versus a market economy follow naturally from his classification. First, the foremost criterion of the communist economy was the supremacy of the Communist Party, with its ideology and politics, over the economy. This is so evident that it is often neglected. Now it has ceased. The economy has become depoliticized. Second, centralized state allocation, with centralized commands to enterprises on physical output targets and deliveries, has ended. State orders lingered on for some time in 1992 and 1993, but now they have been whittled down to nothing. Vertical, administrative allocation has been replaced by free, horizontal bargaining between independent enterprises. The economy has been liberalized both internally and externally. For imports, all quotas are gone, and the protectionism the researcher discusses amounts to the level of the customs tariffs. For exports, some quotas, licenses, and taxes remain, but export deregulation is proceeding and an important additional step was taken in a presidential edict of May 23, 1994. In spite of periodic setbacks in the internal liberalization, market saturation is increasing steadily. The allocation has become depoliticized....
Consequently, the remaining state enterprises are independent, as in a market economy. Ownership has been depoliticized. Fourth, the economy has been monetized and the ruble has become a real, reasonably convertible, currency, with a unified exchange rate that is market-deter-mined and floating. Admittedly, the volume of U.S. dollars in circulation and in Russian bank accounts exceeds the volume of Russian rubles in Russia, but the dollar is also a currency. The problem here is not lack of monetization but the stabilization of the ruble.
Fifth, the last major hurdle to making Russia a market economy was to introduce hard budget constraints in enterprises. This was essentially done on September 25, 1993, when President Boris Yeltsin issued a decree abolishing subsidized credits. The refinance rate was already high and rose to 17.5 percent a month--that is, 593 percent a year--on October 15, 1993, and it has stayed high in real terms since then. The budget deficit has been kept fixed at about 9-10 percent of GDP. Thus, since October 1992, Russia and Russian enterprises have faced a severe monetary squeeze, and Russia has reacted exactly as market economies do: the inflation rate has fallen, from over 20 percent a month last year to about 9 percent a month from February through April 1994. As a result, during those months Russia had a positive real interest rate of 9 percent a month, or 180 percent a year. A Russian enterprise in trouble can no longer count on the state to bail it out. Credit has become relatively, though not completely, depoliticized (Aslund p. 5-6). The current attempt at financial stabilization may fail, and the social costs of the Russian transition might rise higher because of gradualism and