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
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