Ed, The USSR printed up an excessive amount of rubles (excessive in terms to the value of products and services being generated by the economy). In a free market, such an excess of currency would lead to inflation -- too much currency chasing too few products and services. (In the US, the Federal Reserve manages this balance by increasing or decreasing the cost of borrowing new currency, and thus affecting the demand for currency and thus the amount of currency that is released into the general economy.)
Estimates were that by 1990-1 there was a ruble excess of about 50%, relative to the values of goods and services. This 50% is called the 'ruble overhang'. The reason that the USSR was not experiencing inflation, though, was that the USSR kept tight control over the prices of products and services, and attempted also to do so over the international exchange rate for the ruble. Leaving aside the other impacts of such controls, at least it did keep prices stable and this allowed the USSR population, living on fixed incomes, to afford products and services (when they could find them). But imagine what would happen if these price controls were eliminated: all of a sudden, you would have prices that reflected the amount of rubles available to pay for them. That massive 50% surplus of rubles would chase after the too-few products and services and prices, now uncontrolled, would shoot through the roof. This type of inflation would be so swift and dramatic that the term hyper-inflation was used to describe the phenomenon. Unfortunately, that is exactly what happened. Price controls were lifted, and prices shot upwards, bringing a rough balance to the amount of rubbles in circulation and the value of products and services, as measured now by the new prices. The problem, of course, is that it destroyed the life-savings and pensions of a huge portion of the USSR population. Overnight, people were ruined and condemned to lives of poverty. This is why Sachs is so despised, among people who know what happened. Despised, you see, because it all could have been avoided. The desirable state of having a balance between the amount of currency in circulation and the value of goods and services could have readily been achieved without trashing the population, had Sachs paid attention to the problem of the overhang, and given some thought to how to handle it. Not that he would have had to look far, for the solution had already been proposed to the USSR. Only, it was proposed to Gorbachev, and Sachs, fresh from his Polish triumph, showed up on the scene when Yeltsin had come to the fore and Gorbachev was in the doghouse. The way that it should have been done is this: The USSR also wanted, as part of its transition to a market economy, to move state owned properties and factories into the private sector. This was called privatization. These assets should have been sold to the private sector for real prices, instead of the crony insider-deals that were actually used. The sales would have easily 'absorbed' the ruble overhang. The state would have ended up with massive amounts of ruble currency. THEN, and only then, should price controls on goods and services have been eliminated. The result would be that state properties were privatized (good); prices would have remained stable (good); and the buying power of pensions and savings would have been preserved (good); and the USSR's fixed-income population would have been assured of a dignified retirement (good). But it gets even better: what does the USSR do with its massive ruble accounts? It BURNS about 90% of it. That is, about 90% of the overhang rubles get destroyed. This takes discipline! But the result is that the USSR is spared inflation for the medium- and possibly long-term, as it was by privatization for the short-term. And what is done with the remaining 10%? It is used to create a social safety net for those harmed by the shift of the economy from a controlled one to a market one. This is what Sachs should have recommended. And if he had, Russia would be a far different place than it turned out to be. Instead of doing it right, they did it wrong. Hyperinflation and a whole generation was wiped out financially; the 'oligarchs' bought the state's assets at trivial prices, and scammed employees who had been given shares in their enterprises out of their shares; the value of free markets fell into disrepute, and Russia in reaction began to struggle its way back to a centrally-controlled economy. Of course, at another level, we have to recognize that Sachs was only a consultant. He wasn't holding a gun to anyone's head. But in my opinion, consultants have a special responsibility: it is to care for one's clients. We may only be providing recommendations and analyses, but we bear a moral responsibility for both the content of the recommendations and the efficacy with which they are implemented. And in the end the Russian people, so willing to accept help and advice after decades of distrusting the outside world, were let down by those in whom they placed their trust. Today we reap the consequences of that botched opportunity 15 years ago. Cheers, Lawry -----Original Message----- From: Ed Weick [mailto:[EMAIL PROTECTED] Sent: Saturday, May 06, 2006 8:11 PM To: [EMAIL PROTECTED]; [email protected]; 'Christoph Reuss' Subject: Re: [Futurework] Galbraith and economics ~ What should economists do? Thanks, Lawry. But could you say a little more about the "ruble overhang"? Not quite sure of what you're getting at. Regards, Ed > Sachs's mistake was, I think, greater and more technical: he failed to > understand how to deal with the ruble overhang, then estimated at about > half > the currency in circulation. Without first absorbing the ruble 'overhang', > hyper-inflation and all the misery that followed with it was inevitable. > Sachs was full of himself after Poland, and didn't bother to do his > homework > in Russia. > > Cheers, > Lawry > > -----Original Message----- > From: [EMAIL PROTECTED] > [mailto:[EMAIL PROTECTED] On Behalf Of Ed Weick > Sent: Saturday, May 06, 2006 4:40 PM > To: [email protected]; Christoph Reuss > Subject: Re: [Futurework] Galbraith and economics ~ What should economists > do? > > Chris, can't anyone ever be naive? Must everyone do things out of a > cynical > > self-interest? What Sachs and a few senior Russian officials did at the > time was try to convert Russia into an ownership economy. Shares in the > state's productive assets were given to people on the assumption that they > would keep them as owners of important chunks of Russia. It didn't work > out > > as intended. Sharp operators went around buying up the shares, often for > a > bottle of vodka, and the scheme was a total failure. The intentions were > good, if foolish. > > Ed > >> Ed Weick wrote: >>> Geoffrey Sachs is a very good economist, but when I was in Russia in >>> 1995, >>> he had become something of a bad joke among thinking Russians because he >>> was >>> associated with the privatization scheme that, in the light of >>> hindsight, >>> did far more harm than good. Out of their history, ordinary Russians >>> had >>> little understanding of "private" or "property". He thought he was >>> recommending the right thing and providing a better future for Russia >>> but >>> things couldn't work out that way. >> >> Let's not parrot their hypocritical PR too hypo-critically. Sachs, Soros >> & Co. know exactly what they are doing -- not to serve or even liberate >> Russians but to plunder them (or "liberate" them from their money). But >> of course they didn't tell Russians in advance "we come to plunder you" >> but "we come to liberate you". Clever advertising uses half-truths. >> >> >>> What I've found is that people in bad social surrounds are able to >>> collectively find their own path to a more secure existence. In the >>> slums >>> of Sao Paulo, fundamentalist religion provided a basis for positive >>> association, collectively taking on projects to enhance the community >>> and providing welfare to those in need. In rural Costa Rica, the >>> cooperative movement underpinned by the Catholic Church was effective >>> in providing for peoples' needs and holding communities together. >> >> And in the slums of Palestine it's called the Hamas approach. >> >> >>> I think that the most important task is to understand before you advise >>> and recommend. >> >> And the most important task is to understand the real motives of the >> advisors >> in order to avoid getting duped by them. >> >> Chris _______________________________________________ Futurework mailing list [email protected] http://fes.uwaterloo.ca/mailman/listinfo/futurework
