Finance and Revolution in Late Imperial Russia

• In Event: Trade, Development and Institutions: Late Imperial Russia and the Soviet Union

Abstract

Strategies of reform implementation have played a central role in transitions from central planning to market economies in the 1990s. Under aggregate uncertainty, gradualism induces a higher reform payoff for citizens, compared to shock therapy. I propose a stochastic game between a government and the peasants over an infinite horizon. In each period the government decides the tax that it will impose on the peasants and the degree of centralization of the financial system in subsequent periods. Then the peasants decide whether they accept or reverse the government’s proposal. If they reject the offer, then they revert to the tax imposed in the status-quo-ante. If they accept, then the reform passes and industrialization occurs through three different channels: a centralized financial system that generates high levels of inequality, a centralized financial system that generates low levels of inequality and a decentralized financial system. In equilibrium, the government is a successful reformer, when it is able to make offers that render the reform reversal constraint non-binding. Assuming a stage game where the outcome is either repression or revolution, the government is faced in equilibrium with three outcomes. Ex-ante revolution occurs, when the government imposes the highest possible tax and the reform reversal constraint is binding. Ex-post revolution occurs when the reform passes and the government is better off with a centralized financial system with high inequality. Ex-post repression occurs when the reform passes and the government is better off with a decentralized financial system. In the latter two cases, the inadvertent effects of industrialization become obvious. This model is used as a basis to explain the economic reforms of Sergei Witte and some of his predecessors (Vyshnegradski, Bunge and von Reutern) and the extent to which they contributed to the Russian Revolution.

Author

• Theocharis Grigoriadis, Freie U Berlin (Germany)