Re: Joe Stiglitz's book

[Ed Weick]

ED: > > I'm not sure of what else might have been done. > > LAWRY: > What might have been done was: > 1. Recognize that the threat of hyper-inflation was the number one issue in > transforming the Soviet/Russian economy > 2. recognize that the hyperinflation threat arose from the 'ruble > overhang' - a huge excess of ruble currency far surpassing the value of > goods and services. This overhang was being hidden on a day-to-day basis > through the artificial control of prices and currency exchange, but even so > there were pretty good estimates of the magnitude of the overhang readily > available. > 3. 'Absorb' the ruble overhang by selling off state properties - buildings, > equipment and coops, especially. There were plenty of rubles floating around > Russia at the time. Without anything else to do with them, people would > gladly have bought tangible items. The state would then collect vast ruble > sums, thus getting the overhang rubles back (having printed a vast excess of > them to begin with. The sale of state properties would continue until it > was estimated that the rubles still in circulation roughly equaled the value > of goods and services being produced. (All this requires honest sales, > priced at the value of the property being sold, and this would have required > careful management by honest administrators. This was quite do-able, if > attended to properly.) Now comes the tricky part: > 4. Destroy 85-95% of the rubles that have been retrieved. Of course, it is > tempting to pretend that these rubles have value, and to put them into some > account that will be used for something, but in reality, they are > hyperinflationary excess and the government could have destroyed them > without the sense of loss that an individual might have. > 5. Use the remaining 5-15% of the overhang rubles to create a social > services 'net' for anyone so dislocated or harmed by the coming transition > to a free market economy that they simply cannot maintain a minimum standard > of living. Yes, the use of these rubles will be inflationary, but if the > program is managed carefully and the rubles only dispersed on a real > need-basis, the inflationary impact would be minimal and perhaps not even > perceptible. Meanwhile, the people are given one more reason to have > confidence in the way the economic transition is being handled. > 6, Let the dynamics of the free market prevail. > 7. Seek and punish individuals who launch scams or defraud investors and > consumers. > > I do believe this approach would have worked. It was proposed in 1990-91, > but internal political turmoil was already such that clear thinking and > implementation was difficult. Under Yeltsin, the intellectual discipline was > quite poor, and initiatives requiring this kind of thoughtful and dedicated > management were probably impossible, not to mention that Jeffrey Sachs had > got their ear by then and, ignorant of how to handle the overhang, he was > endorsing economic policies that were to lead to Russia's ruin. > A variant on this was proposed to the Georgians and successfully implemented > by them. > Lawry Lawry, one of the points Stiglitz makes, and I certainly agree with, is that the kind of reforms you suggest in the foregoing, or those that the IMF typically requires, need a lot of prior institutional reform if they are to prove effective. Your prescription, above, sent me back to my 1995 notes, and after some rereading, my conclusion was that very little could have worked in the early to mid-nineties because Russia was simply not in a position to be reformed. Moreover, many people in positions of power were benefiting from what was going on. My notes can be found at: http://members.eisa.com/~ec086636/moscow.htm Here is a sample from them: Thoughts on how the Russian economy got screwed-up Inflation: Prices were set free at the beginning of the post-Soviet reforms. All prices went up but domestic production could not increase proportionately. Wages tried to keep pace and the State had to resort to printing money to pay its own workers. Workers in the profitable sectors (e.g. import goods) were compensated out of rising prices. People who were stuck were those whose incomes were fixed or whose wages (as in public sector) tended to lag well behind prices. Apathy, envy and cynicism grew with losses in real income. Because money wages for many tended to lag prices, there was a continual redistribution of income from those who were stuck to those who could manipulate prices and wages - i.e. the new Russians. Delays in payment took place partly because it was possible to withhold money for personal gain, but also because there simply wasn't enough money around to pay people at the rising wage levels. Because wages lagged prices, people were driven into the underground economy to try to find the money somehow - i.e., the concern was to find enough money just to keep going. (Income and employment taxes could be avoided in the underground economy as well, giving enterprising people an additional incentive to move into it.) Unemployment comes from a different source, which accounts for why it exists at the same time as inflation - i.e., its source is the curtailment of heavy industry and defense, and the conversion of collective agriculture to private farms. Many people have been displaced. The low official unemployment rate is not indicative of the true situation. There is a great deal of hidden unemployment, with people pretending to work while their employers pretend to pay them. Lesson: Prices should have been freed much more slowly and strategically, in accordance with the Russian productive sector's ability to respond. To promote import substitution, importation of foreign goods should have been carefully controlled to allow in only those goods which were necessary for the continuation of daily life. Description: Jacques Sapir (a French economist who has written about it) is right in saying that Russian inflation is not a monetary phenomenon. It is market and policy driven. There are strong, opportunistic monopoly elements behind it, and it is not difficult to conclude that the whole process of "reform" was a get rich scheme perpetrated by the powerful. As well as being highly disruptive, its main economic effect has been redistributional, enriching the few and impoverishing the many. Its main political effect has been to drive a wedge between the people and the government, even though many in government are not really to blame. Its main effect morally has been to foster a level of corruption, cynicism and apathy that will take a very long time to shake out of the system. Prognosis: Continuing internal chaos, for a time. Growing distrust of foreign companies which are seen as taking over the domestic market. Growing distrust of foreign advisors (Geoffry Sachs) who are seen as being both ignorant of Russian ways and on the side of the new rich. Look for a strong, nationalistic, xenophobic leader to emerge. Yeltsin has tried but has lost too much ground. My prognosis about a strong leader emerging does not appear to have been fulfilled.  The late General Lebed was seen as a possibility at the time.  I don't think Putin quite fills the bill, though he is good at making deals and keeping lids down. Ed Ed Weick 577 Melbourne Ave. Ottawa, ON, K2A 1W7 Canada Phone (613) 728 4630 Fax (613) 728 9382