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The ultimate success of Russia's attempt to establish a democracy will depend on Russia's ability to shift to a market economy and convert the massive, state-run defense industry from the production of military products to consumer goods. Poor government policies and lack of capital have resulted in economic chaos rather than orderly conversion. The Russian policy emphasizing top-down management of conversion runs contrary to the experience of defense firms in the United States (US). Defense conversion in the US has rarely been profitable, even with well-managed companies, suggesting that the Russian top-down approach has little chance of success. Further, the policy of funding defense conversion with arms exports provides no incentives to Russian defense establishments to move toward consumer production. Worse, US aid has been applied poorly and produced few benefits to either country. The Russian economy would benefit more by allowing the skilled workers and managers in the defense establishments to move to more efficient civilian factories, thus accomplishing conversion from the bottom up. Russian conversion policy should emphasize building a strong business infrastructure to attract capital that can replace the income from arms sales. The US government should provide tax incentives and loan guarantees to encourage US companies to form joint ventures with Russian companies.
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