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From: Robert Weissman [EMAIL PROTECTED]
Subject: [stop-imf] IMF defends actions in Russia!
To: "[EMAIL PROTECTED]" <[EMAIL PROTECTED]>
This is an absolutely stunning piece from the IMF, where it manages todefend its "reform" program for Russia. It fails to acknowledge thatmost of Russia's meager economic accomplishments in recent years tookplace by virtue of its refusal to follow IMF direction -- eg., bydefaulting in 1998 -- and astonishingly belittles the utter failure,corruption and looting of the country's privatization process. (Sure,there were problems with Russia's "dirty privatization," but now itappears it is "starting to confer some broad-based benefits.") For an empirical discussion of the utter theft of the state carried outin the name of the IMF-supported privatization, see an interview we didin Multinational Monitor with Forbes reporter Paul Klebnikov, "Theft ofthe Century: Privatization and the Looting of Russia" athttp://www.multinationalmonitor.org/mm2002/02jan-feb/jan-feb02interviewklebniko.html --Robert Weissman http://www.imf.org/external/np/vc/2002/082602.htm Has Russia Been on the Right Path?A CommentaryBy Kenneth RogoffEconomic Counsellor and Director,Research Department, IMFVedomosti August 26, 2002 In June, the designation of Russia as a "market economy" by the U. S.Department of Commerce�and the announcement by the European Commissionthat it would follow suit�was hailed by President Putin as a recognitionof how far Russia has come ten years after the dissolution of the SovietUnion. This designation comes at a time when crises in some LatinAmerican countries and U.S. corporate scandals have provokedsoul-searching in many quarters about pro-market or "neoliberal"policies. So it is natural to ask: Has Russia been on the right path? And where isit headed? To some Western observers, the answer to the first question is anobvious "No." For instance, according to the distinguished economictheorist Joseph Stiglitz, Russia should have learned from the "enormoussuccess of China, which created its own path of transition, rather thanjust using a blueprint or recipe from Western advisors." China pursued atwo-track approach, pursuing faster market reforms along its coastalregions than in the hinterland. But it is unlikely that China's successful strategy could have beenpursued in Russia. China started its reforms with "the advantage ofbackwardness": it was one of the poorest countries in the world in 1978.Today, after 20 years of growth, the average person in China earns about800 dollars annually, half the income of the average Russian. Of course,China's strategy has created its own challenges; for example, the IMF's2002 World Economic Outlook discusses how Chinese banks are dealing withchallenges resulting from the slow restructuring of state enterprises. Another key difference is that in the former Soviet Union, over 85percent of the workforce was in non-agricultural state enterprisescompared to under 20 percent of the workforce in China. This allowedChina to reform the state sector slowly while it grew by transferringsurplus agricultural labor to township and village enterprises. ButRussia needed to end the subsidization of the state sector to freeresources for the new non-state sectors of the economy. The best evidence that the two-track approach would not have worked inthe transition economies is that such an approach was in fact tried insome countries, and abandoned. In the mid-1980s, Mikhail Gorbachev inthe Soviet Union, Janos Kadar in Hungary, and Wojciech Jaruzelski inPoland did try a Chinese-style approach of limited reform. However, thepower of the center had been significantly eroded so that it was simplynot possible to implement effectively such reforms, even ignoring thefar greater complexity of privatizing industry rather than agriculture.It was the failure of these attempts that led to more aggressive effortstoward a market economy. But even if a two-track approach couldn't be followed, shouldn't thetransition have proceeded more gradually along its single track?Shouldn't the legal and institutional reforms needed to support a marketeconomy have been carried out first? This view is also held by many"gradualists", including not only Professor Stiglitz but also the notedHarvard University Sovietologist Marshall Goldman. They argue thatexisting institutions should have been abandoned only when the newinstitutions, e.g. for financial market oversight and taxation, werefunctional. The gradualist view seems to be that if only Russian leaders could havekept communism going for 20 more years while they sent bank regulatorsand tax inspectors for Western training, everything would have beenbetter. This is improbable for at least a couple of reasons. First, it isunlikely that market institutions could have been developed in alaboratory setting and without actually starting the messy transition tothe market. Institutions take a long time to nurture and theinstitutions that are there today, however imperfect, might well not bethere if the effort had not been started ten years ago. Second, it is unlikely that there existed within the Soviet Unionorganizational and social capital which would have allowed the existingstructure of industry and the level of output to be maintained while newcapitalist institutions were being developed. Much of the capital thatunderpinned economic activity under central planning had decayed beforethe collapse of communism; indeed, this decay was a major reason forcommunism's collapse. Some new institutions therefore had to be createdquickly. Of course, to say that Russia could not have followed a gradualist,China-style path is not to say that everything was done correctly or tocondone the extreme examples of corruption, particularly in the area ofprivatization. There was an intellectual case for rapid privatization. Rapid transferto private hands, given appropriate competition policy, would lead to amore efficient and rapid restructuring of enterprises than if left inthe hands of the state. Some advocates of rapid privatization were trulymotivated by considerations of fairness, a desire to give ordinarycitizens a stake in the economy. More important, they also perceived aneed to seize the window of opportunity that had opened forprivatization before the state bureaucracies regrouped and resisted theprocess. But the actual experience revealed the pitfalls of the rapidprivatization approach. In the Czech Republic, for instance, the firstphase of rapid privatization did indeed transfer assets to millions ofordinary citizens. Subsequently these assets ended up being consolidatedin investment funds. But there was no genuine restructuring ofenterprises, either because the investment funds lacked the capital todevelop them or because the funds were in turn controlled by state-ownedbanks that did not impose so-called hard budget constraints. The weakgrowth performance of the Czech Republic in the late-1990s, relative toother Central and Eastern European countries, can be attributed in partto its weak enterprise reforms. In Russia, the country's mass privatization program of 1992-94transferred ownership of over 15,000 firms into private hands. Reformersrecognized the importance of creating incentives for restructuringthrough the establishment and enforcement of a clearly specified legaland regulatory framework, and development of bankruptcy legislation.Nevertheless, in part because of less-than-perfect implementation, theprivatization did not lead to self-induced restructuring of firms. Itwas hoped that secondary trading would introduce outside ownership, andthat transparent methods would be used in the second wave ofprivatization of remaining firms still in state hands. Neither hope was fulfilled. Insiders were wary of relinquishing control;workers feared the cost-cutting that might occur under outside control,and managers found it easier to keep enterprises alive by lobbying thestate for subsidies than to foster competitive performance throughinvolvement of outsiders. The second wave of privatization, inparticular the so-called "loans-for-shares" scheme, systematicallyfavored parties with ties to government interests. It is clear now that creating incentives for genuine restructuring ofenterprises was more important than moving property into private hands.Imposing hard budget constraints to force out the chronic loss-makersamong the enterprises turns out to have been quite important in inducingrestructuring even if the enterprises were still in state hands. What lies ahead for Russia? Several developments suggest that cautiousoptimism about the country's prospects is warranted. After many falsestarts, macroeconomic stabilization�a commitment to low inflation andfiscal responsibility�appears to have taken hold in the period since the1998 crisis. This is a welcome development as the experience of thetransition economies has shown that stabilization is a prerequisite forsustained growth: many Central and Eastern European countries and theBaltics, who had early and durable stabilizations, have had bettergrowth than countries which have been laggards. Though it is too early to render a final judgment on the success ofRussia's "dirty privatization," some feel that it may be starting toconfer some broad-based benefits. MIT professor Rudi Dornbusch, arguablythe world's leading international macroeconomist until his untimelydeath this July, said in a March 2002 interview: "It's true that theRussian reformers ... privatized without much care for niceties ... Yet,in the end, it worked. The massive privatization and restructuring ofstate enterprises is paying off ... Now you can begin to think aboutattracting foreign capital. Would that have been possible if Russia wasadvised by someone who would still be drawing perfect privatizationschemes in his head?" Acceleration of structural reforms in many areas and greater politicalstability are other positive developments. High oil prices have helpedperformance; Russia's ability to preserve these gains in the event of adecline in oil prices will be a critical test. To me, personally, another hopeful sign can be found in this descriptionby Lilia Shevtsova, a Moscow scholar, of her 19-year old son and hisfriends: " ... I am amazed. These are people who are absolutely free ofold stereotypes. They don't remember communism. They have no fear orinferiority complex. They are ready to live in this global environment.They live on the Internet. My son spends nights at his computer chattingwith friends in all countries about chess, about music ..." The sheernormalcy and universality of this description provides me with hope thatRussia is on the right path. *** This article is excerpted from the author's forthcoming IMF paper(written jointly with Prakash Loungani and Andrew Berg). _______________________________________________
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