Sergei Guriev: Democratic capitalism will only succeed if middle class prevails

So, what lessons can we draw from the successes and failures of Russia’s past two decades of post-Soviet transition? And what lies ahead?

The first lesson is that market competition, responsible macroeconomic policy, and private enterprise generally work. Market reforms eventually resulted in historically high growth rates. While high commodity prices played a part, privatised and new enterprises were the fastest-growing part of Russia’s post-communist economy.

Second, a market economy needs strong political and legal institutions to protect property rights and competition. Such institutions are difficult to build from scratch, and doing so is not merely a technocratic task; it requires political change.

Contrary to popular belief, Russia’s reformers understood this from the start. They created a new judiciary and tax system, established fiscal federalism, and introduced an independent central bank, an anti-monopolies agency, and many other institutions. But they also knew these institutions would work only if there was political demand for them – and that this could come only from private owners, a critical mass of which had to be created.

That is why the reformers rushed ahead with privatisation. But, because privatisation took place before corruption was rooted out, it involved substantial abuses, which undermined popular support for private property.

The reformers’ arguments gained ground: most of Vladimir Putin’s reforms during his first presidential term were promoted and even designed by the new capitalists. Private land ownership was introduced, the tax system was streamlined, the business environment deregulated, a stabilisation fund created, deposit insurance implemented, and credit-history bureaus established.

But the unpopularity of privatisation also provided support for Mr Putin’s model of state capitalism. Following nationalisations (both overt and through acquisition by state-owned companies), Russia’s government has regained control over the commanding heights of the economy.

Russia’s state capitalism is different from a planned economy, because government-owned companies are supposed to compete in the market like private firms. Critics warned of the risk of government capture by company managers, which has happened in Russia as firms grew so large theywere indistinguishable from the state.

Not surprisingly, government has supported these companies through regulation and subsidies, thereby protecting them from competition. Nor is it surprising these companies failed to eliminate inefficiencies and raise productivity.

In short, the third main lesson of Russia’s transition is that state capitalism does not work (at least not without a strong meritocratic political party, as in China). Indeed, recent events have shown the system to be inherently unstable. As market reforms have brought substantial prosperity, a large middle class, based mostly in small and medium-size companies and the service sector, developed beyond the reach of the state-owned behemoths. Most of this middle class also lives in large cities – where the battle for Russia’s future is taking place.

Their demands are crucial. They understand they must win the battle against corruption or leave the country, as they would have no future in Russia otherwise. That is why they have rallied around young blogger Alexei Navalny, whose WikiLeaks-like anti-corruption campaign has brought forth evidence of billions of dollars stolen from state-owned companies, luxury limousines bought by officials, and highlighted the spectacular business careers of the ruling elite’s children.

Now, it seems, sufficient prosperity has arrived, calling forth a middle class solid enough to demand accountability, the rule of law, and a real fight against corruption. Whatever happens in the March presidential elections, the mobilisation of the middle class will eventually lead to democratisation.

• Sergei Guriev is rector of the New Economic School in Moscow.