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system in Russia are not performing as well as their counterparts in Central and Eastern Europe.

This chapter is organized as follows. The next section contains a brief historical overview of prices and entry of private firms in the Soviet Union. Obstacles to Russia's price liberalization efforts are then discussed. The following section provides evidence that despite these obstacles, a price system integrating intra- and intercity goods markets has emerged in Russia. Data on the emerging price system, however, suggest that firms and distributors are operating with significant transaction costs. Next, we argue that new private firms in Russia face more discrimination in input and credit markets than do comparable firms in Central and Eastern Europe. Using a theoretical model, we show that the relatively slow development of competitive access to input and credit markets may explain some of the fragmentary evidence suggesting that start-ups have had a much more positive impact on the standard of living in Central and Eastern Europe than in Russia. The final section presents conclusions.


It is clear that in the former Soviet Union, property rights were ill defined. Prices for state firms were centrally controlled, and nonstate firms (which were at times permitted to coexist marginally in certain sectors to alleviate shortages) operated in a precarious regulatory environment. The inefficiencies resulting from price controls and the arbitrary regulation of nonstate firms are well understood. The maintenance of prices at levels at which demand exceeded supply encouraged buyers in state-sector markets to allocate time to socially inefficient activities (e.g., queuing, reselling, and bribing), while the enforcement of prices at which supply exceeded demand resulted in the accumulation of excessive inventories of goods. More generally, broad price controls, coupled with artificial mechanisms designed to stimulate state firms to fulfill administratively set plans, created an economic environment in which fulfilling consumers' needs was a low priority.

Because of regulation-induced imbalances in the state sector, socialist governments were compelled to tolerate a certain amount of private business activity. As a result, private farmers furnished a large share of the urban food supply, while nonstate firms were at various times significant suppliers of clothing, handicrafts, construction services, small electronics, and repair services (see Grossman, 1977; Simes, 1975; Shlapentokh, 1989). While the prices, quality, and quantity of state-sector goods were determined according to administrative criteria, prices, quality, and quantity in the private sector were generally flexible and responsive to consumer demand. Nevertheless, state regulators and politicians curtailed private activity whenever it became too large or profitable. In periods of retrenchment from socialist reform,

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