To understand the full impact of this phenomenon, we looked at data from the Russian Longitudinal Monitoring Survey, which had followed men and their families from 1994 through 2006. Using a technique called survival analysis, we looked at 6,586 men who had jobs in 1994, of whom 593 had died and the rest had survived. We then evaluated what factors could predict who was most likely to have died or survived. The data revealed that the men most likely to drink vodka and nontraditional alcohols were manual workers and technicians. And they were also the most likely men to die. The gap in death rates between the factory workers and the managers had widened dramatically in the period we studied. In particular, the survey asked people about their perceptions of social standing as a measure of social stress. We found that those persons who had the least economic status, power, and respect in their communities were at a three-times greater risk of dying than those with the highest wealth, respect, and power. Overall, we found that a twenty-one-year-old Russian factory worker could expect to live fifty-six years, about fifteen years less than the factory managers and professionals.17
But the worst risks were seen in people like Vladimir, who were no longer in the workforce; men like him had a six-fold higher risk of dying than those who kept working. As if losing work was not enough of a shock to people’s health, in the Soviet Union it also meant the ancillary loss of community and social support structures. In the Soviet era, employment was more than a paycheck and a purpose in life. Soviet working conditions were quite unlike those in Western firms. Although they were totalitarian and assembly-line-driven, they also had some uniquely beneficial aspects. Soviet planners provided their employees with on-site hospitals, diabetes screenings, childcare, and other social protection programs. While parents worked, children could play. And for the parents, there wasn’t too much intensive work happening. The running joke among factory workers was, “We pretend to work, and they pretend to pay us,” and it was true; people didn’t earn much, but they did have stable jobs and many fringe benefits. All of these social support programs were provided free of charge to Soviet workers and their families. In the Soviet mono-towns, there was a deep sense of community, as people were, whether they liked it or not, all in it together.18
A key question, given the troubling rise in deaths, is how these harms could have been avoided. Many have argued that the extraordinary mortality rates in post-Soviet Russia were simply an unavoidable consequence of the necessary shift from a communist to a capitalist economy. After we published our studies showing a rising death rate among newly unemployed Russian men, one analyst for the New York Times asked us whether the mortality crisis wasn’t “just an unforeseen and unwelcome result of the end of communism.” In other words, was it inevitable that the transition from communism to capitalism resulted in terrible shocks and traumatic risks to health? That’s a hugely important question. For answers, we looked at similar data across all the countries that had once constituted the Soviet Union and the Soviet bloc. If stress-related deaths were indeed an inevitable result of profound changes inherent to the transition from communism to capitalism, then the data would show dramatic increases in illness and death throughout all these nations.19
But the data didn’t show a rise in deaths everywhere. Poland actually became healthier while Russia got sicker. Both Russia and Poland had experienced similar death rates in 1991, before the fall of the Soviet Union. But three years later, deaths had risen in Russia by 35 percent, while in Poland they fell by 10 percent. Kazakhstan, Latvia, and Estonia all had large jumps in mortality rates on par with Russia’s experience, while Belarus, Slovenia, and the Czech Republic did not.
The key to understanding these differences is the policy choices made about how to transition from communism to capitalism. The critical decision was about the appropriate pace of reform. Those countries pursuing a very rapid transition from communism to market systems with radical privatization programs experienced a one-two punch of mass economic dislocation, together with huge cuts to social welfare. Ultimately the “rapid privatizers” suffered worse health than the “gradualists,” who reformed more slowly and in so doing maintained their social protection systems and saw health improvements during the transition to capitalism.
As the Soviet Union was breaking apart, politicians and economists—both in Russia and in the West—debated about the best way to establish Western market capitalism on the ruins of communism. It was clear that the Soviet system was unviable, as could be plainly seen in the empty grocery stores and shortages of meat, milk, and matches. Some form of transition needed to occur—and indeed a gradualist one had already begun with Gorbachev’s perestroika and glasnost reforms in the late 1980s. As the Soviet Union fell apart, the key question for debate was how—and how quickly.
Economists were divided about what was the appropriate pace of reform. One group of radical free-market advisers argued that the capitalist transition needed to occur as rapidly as possible. These economists pushed for Shock Therapy, a radical package of market reforms. Its proponents were mainly Harvard economists, including Andrei Shleifer, Stanley Fischer, Lawrence Summers, and Jeffrey Sachs, as well as Russian leaders such the Soviet economist and acting prime minister of Russia, Yegor Gaidar.
The rapid reformers argued that the sooner market reforms were implemented, the sooner economic benefits would accrue. That is, the Soviet factories would restructure and be successful again, and people would be more productive and earn more money, lifting Soviet society out of stagnation. Communism’s fall had created a period of “extraordinary politics,” according to members of the World Bank’s transition economics team, during which politicians could demand great sacrifices from the population. Fast reforms would be economically painful because they would involve cutting people off from all the social protection systems they had been getting; but the reformers were, above all, concerned that if they did not act swiftly, Communists would return to power. This strategy traded short-term pain for long-term gain. This was, in essence, a deeply political plan to prevent the return of Communism and ensure that a capitalist market economy would endure in Russia. Once the market was established in the Soviet state system, it would be all but impossible to reverse.20
A key supporter of this theory, Jeffrey Sachs, published a landmark paper outlining his plan in January 1990. The essay, “What Is to Be Done,” shared the title of Vladimir Lenin’s pamphlet from ninety years prior, which had set out plans for the October 1917 revolution and the creation of Communism. The modern version argued a plan for Shock Therapy, a program to implement rapidly a combination of radical free-market reforms.21
Shock Therapy had two main elements. First, there would be economic “liberalization,” which meant releasing the government’s grip over the prices of goods in the market. The Soviet Union had controlled everything, from the wages workers earned, to the price of bread they bought in the factory towns. Such control needed to end, went the thinking of the Shock Therapists, if the market was to begin to work for the betterment of Soviet society.22
Next would come a massive privatization program. It would help remove the government’s influence and create incentives for profit; extensive privatization would need to take place, selling off government-run projects. This was the most controversial and painful policy, but many economists viewed it as the key. Milton Friedman, the radical free-market economist and godfather of Shock Therapy, put it succinctly: “privatize, privatize, privatize”—break the Soviet state’s grip on the economy as soon as possible. It was not only the economy that would be affected, however. In the Soviet Union, the state’s funds for supporting public health and social services came directly from its state-owned enterprises. Mass privatization would not only dislocate workers, but also lead to huge cuts to its cradle-to-grave social protection system.23
Never before had anyone attempted to privatize an entire economy in such a short period of time. To put the Shock Therapists’ plan into perspective, Margaret Thatcher, the great privatizer o
f the British economy, privatized about twenty large British utilities companies in eleven years during her time as prime minister. The Harvard economists planned to privatize more than 200,000 Soviet enterprises in less than 500 days. The reformers argued that speed was essential lest the former Soviet Union slip back into communism. As Lawrence Summers of Harvard University put it, “Despite economists’ reputation for never being able to agree on anything, there is a striking degree of unanimity in the advice that has been provided to the nations of Eastern Europe and the former Soviet Union (FSU).”24
Yet in reality not everyone agreed with the Shock Therapists. A group of “gradualists,” most prominently Joseph Stiglitz, who had been chief economist of the World Bank and in 2001 would win the Nobel Prize in Economics, concluded that capitalism could not be created overnight. Arguing that it had taken centuries for capitalism to develop in Western Europe, Stiglitz and his allies called for a slower transition, recommending that Eastern European countries slowly phase in markets and private property while allowing regulatory agencies and legal rules time to develop, to ensure that markets worked well rather than becoming manipulated by the powerful. They advocated a “dual-track” system so that former communist countries would incrementally “grow out of the plan,” with the private sector eventually outgrowing an outmoded state-owned sector.25
As a solution to the debate, in 1991, Harvard economists proposed an idea for a grand bargain, backed by the US government. This promised as much as $60 billion in economic aid to support the Soviet workers and their families if the rapid reform plan was adopted; in exchange, the West would gain military concessions and influence over Soviet foreign policy. The US Agency for International Development led the aid effort, providing nearly $1 billion alone to the region to promote private-sector development. Soviet President Gorbachev, however, called for a slower pace of reform. His political adversary, Boris Yeltsin, approved of the US plan. After an August 1991 military coup against Gorbachev failed largely because of Yeltsin’s opposition to it, Gorbachev’s power and that of the Soviet Union itself were fatally compromised. Yeltsin banned the Soviet Communist Party in November, and on December 25, 1991, the Soviet Union came to an end.26
That political outcome tilted the balance of power in Russia to those who supported pursuing Shock Therapy, in a move away from Gorbachev’s slower pace of reform. Not just Russia, but most countries in the former Soviet bloc, heeded the advice of the Shock Therapists. Shock Therapy policies were fully implemented in Russia by 1994, as well as in ex-Soviet republics like Kazakhstan and Kyrgyzstan. But politicians in other countries such as Belarus decided instead to take the gradualist path instead of Shock Therapy. A group of relatively similar countries embarked on widely different reform paths—a huge “natural experiment” in which relatively similar groups of people underwent vastly different reforms, and experienced dramatically different outcomes.
FIGURE 2.2 Economic Collapse in Russia and the Former Soviet Union, but Rapid Recovery in Central and Eastern Europe27
The results were disastrous in those countries that implemented Shock Therapy. As shown in Figure 2.2, between 1990 and 1996, per-capita income in Russia and most of the former Soviet Union (FSU) plummeted by over 30 percent, slightly less than the decline in the Great Depression. In purchasing-power-parity, Russia’s economy in the mid-1990s fell to become equivalent to that of the United States in 1897.28
Mass privatization, a central plank of Shock Therapy, was supposed to break the Communist Party’s influence on the economy. But, in Russia, it simply led to the mass transfer of wealth from the state to the former Communist Party elites, the nomenklatura, resulting in a handful of oligarchs and an enormous rise in inequality. Ultimately, it was the common public who lost out. Poverty skyrocketed—from 2 percent in 1987–1988 to over 40 percent by 1995. A running joke among families became “The worst thing about Communism is Post-Communism.” In 1992, Russia’s vice president, Alexander Rutskoy, denounced Yeltsin’s program, calling it “economic genocide.”29
But not all countries had the same fate. Russia’s neighbor Belarus followed a gradualist path. It kept poverty rates below 2 percent during the transition. Its unemployment rate rose in the transition period to a peak of 4 percent but has remained below ever since and, today, has a rate of less than 1 percent. Across the region, the macroeconomic data from twenty-five post-communist countries covering the years 1989 to 2002 revealed that that those countries that implemented rapid mass privatization suffered increased male job losses by 56 percent compared with those that pursued a gradualist path.
Poland’s experience made clear that privatization wasn’t inevitably bad; rather, the problem was that its rapid pace in other countries had often left firms without strategic owners. Poland, held up as the poster child for Shock Therapy, did liberalize quickly in the early 1990s, but in fact delayed large-scale privatization under pressure from trade unions and angry protesters. In the Czech Republic, too, mass privatization was proposed, and even attempted, but then partly reversed after revolts by unions in the mid-1990s. This slower pace of privatization made a lasting impact on economies. Those countries that privatized their biggest steel mills more slowly were better able to attract foreign investors to take them over. Unlike Russian managers who took over firms and stripped their assets through mass privatization schemes, some foreign investors had a strategic interest in the firms they purchased. Poland was able to attract Volkswagen, along with $89 billion worth of foreign investment between 1990 and 2005. Similarly, the Czech Republic had the French car-maker Renault and Volkswagen Group competing to take over the state-run company, Automobilovézávody, národnípodnik, Mladá-Boleslav (now known as Škoda). Volkswagen won the bid in 1991, in a joint-venture partnering agreement with the Czech government. Škoda was once the laughing stock of the car industry, but with Volkswagen’s help, it soon became one of the country’s most important sources of economic growth, and today sells more than 875,000 cars each year.31
Transitions weren’t painless in any countries of the former Soviet bloc, but they were far less dire and less sustained where the transitions took place more gradually. The Central and Eastern European countries that privatized more gradually to gain foreign investors also had an initial economic recession just like all the former Soviet states, but averted a full-scale economic depression like the one in Russia and the other rapidly-privatizing economies.
Rapid mass privatization was intended to break the Soviet state’s grip on the economy, which was perceived by the West as corrupt. Ironically, however, corruption increased after rapid privatization. Many of the insiders who took over firms in shady privatization deals didn’t invest in companies but simply stripped down their assets, sold them, and deposited the money in Swiss bank accounts. To look at what happened to firms, we investigated surveys of managers in 3,550 companies operating in twenty-four post-communist countries. We found that privatization to foreign owners led to increased restructuring of firms into competitive ones, with boosts to both investment and employment. This was precisely the pattern we had seen with Volkswagen in Eastern Europe. But mass privatization to Russian owners wasn’t actually followed by the expected economic boom; instead it led to an economy in free fall, with more bribery and asset-stripping than before privatization. The economic impact of mass privatization was to perpetuate economic stagnation, dropping the affected economies’ output by 16 percent—a fall equal in size to the countries experiencing the Great Recession of the present.31
The former Soviet countries’ very different economic responses to the collapse of communism had distinctly different effects on the health of their populations. When we compared the data between these countries from 1989 to 2002, before and after transition, we found that rapid privatization carried two chief risks to people’s well-being: people losing their jobs and their social safety nets all at once—a one-two punch.32
The World Bank, the leading development agency supporting mass privatization, rec
ognized the health risks. The Bank argued in 1997 that “The central premise is that before long-run gains in health status are realized, the transition towards a market economy and adoption of democratic forms of government should lead to short-run deterioration.”33
Jeffrey Sachs argued that a speedier transition would improve economic growth and, as a result, minimize health damage. But despite such adamant declarations, data from Russia showed a stark picture of human suffering and increasing poverty. As Sachs himself would acknowledge in 1995, the reforms did generate enormous stress and anxiety for the workers, creating winners and losers, but he maintained that the situation would improve in the longer term: “The reforms have surely created a rise in anxiety levels, even if they have not resulted in a fall in actual living standards. In a quite tough sense, economic reform in the early years is a bit like a society-wide game of musical chairs. Once market forces are introduced, a significant proportion of the population must search for new forms of economic livelihood. The result of that search, to be sure, will be highly positive in the longer term for most of the workers, but the process of change can be deeply upsetting during the transition, and some workers will also end up as economic losers from the changes.”34
Consistent with the Shock Therapists’ predictions, mass privatization led to short-term increases in unemployment and more than 20 percent cuts in government spending, including to health budgets. The consequences were the most severe in the Soviet mono-towns. There, a large rise in unemployment left people without savings to pay for food, housing, medications, or even access to healthcare. Contrary to the Shock Therapists’ predictions, however, it also led to an economic depression. Those countries that implemented mass privatization had steeper declines in economic growth, slower recoveries, and more cuts to government spending on healthcare. We found that people living in those countries that pursued mass privatization had substantial drops in access to healthcare.35
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