Following is a message I posted on David Johnson's Russian List (JRL). <[EMAIL PROTECTED]> I think it may be of interest to those Pen-ers who are interested in developments in Russia. #5 From: [EMAIL PROTECTED] (Frank Durgin) Date: Fri, 1 Jan 1999 Subject: Re Mark Jones It was highly enlightening to read Mark Jones comments on JRL 2530. I think we should all give him his due. He has been right all along in predicting it would end in tears. And I am afraid events will prove him right in his dire prediction that 1999 will end in blood. If he seems to shout, its because he has to. Most of us have proven to be quite hard of hearing. Mark said that a child could have foreseen it all. I would suggest that a chimpanzee could have foreseen it. A chimp would have noted that every time he punched the "tighter monetary and fiscal policy" button, his cage got colder, the human misery index went up a few notches, and the economy sank deeper into oblivion. What a chimpanzee would have figured out with a couple of punches, the Gaidars, Chernomyrdins, Krienkos and the IMF sages still haven't figured out after almost eight years of continual punching that same old "tight money -tight budget" button. Future economic historians (if the world survives Russia's looming social upheaval) will surely marvel at the fact that some 65 years after Keynes showed the world that budget deficits could serve as an instrument for curing depressions, and a quarter of a century after Nixon declared "We are all Keynsian's now", those who were setting economic policy for Russia were prescribing ever progressively tighter monetary and fiscal policies. At the end of 1997, Russia's GDP was down by over 50% from the pre-reform level. In 1998, according to the IMF's "World Economic Outlook", it fell another 5.7%, and in 1999 will fall another 8.3%. Unemployment continues to rise, and, as many reports posted on the JRL have shown, the numbers of sick and hungry men, women and children sleeping in the streets, or huddled in unheated and unlighted houses is rapidly growing Yet the response to this is the tightest budget since 1992. The budget for 1999 calls for expenditures of some 570 billion rubles, a sum equal to less than 15% of GDP. In USA dollars that's $30 billion, a figure considerably less than the some $90 billion Americans spend every year on Alcoholic Beverages and the some $50 billion they spend on Tobacco Products. The deficit is planned at some 2.5% of GDP. By way of contrast the US Budget deficit in the 1980's and early 1990 averaged over 4% of GDP. As Michael Gordon has pointed out, when the debt servicing costs are excluded, Government revenue will exceed spending by 1.7% of GDP. The budget will thus have pronounced deflationary effects. Compare Russia's government spending of 14.7% of GDP with government spending as a percent of GDP in 1992 of over 50% in Sweden, over 45% in Belgium, Holland Norway, Luxembourg and Denmark, and some 30% in Japan and the US. The IMF's hackles are being raised by the Primakov plan to borrow from the central bank (what the opponents of the plan call "print money") and thus expand the money supply, which had fallen by more than 8% since Jan of 1998. Russia's money supply (M-2) as a percent of its GDP is the world's lowest. In Sept. of this year was equal to 14-15% of GDP. Contrast that with the US where money supply is equal to about 50% of GDP and still expanding. Compare it with that of many of the other industrialized nations of the world where it runs some 80% of GDP. Money is the lifeblood of any economy. Shrink the US money supply to 15% of GDP and slap on the Russian Central Bank rediscount rate of some 80% and overnight you'll precipitate a Yeltsin-Gaidar type depression in this country Seventy to eighty percent of all transactions in Russia are now conducted via barter. There are huge backlogs of unpaid wages (80% of that backlog being in the private sector), and when wages do get paid, they are just as often as not paid in kind. Companies carry out transactions via barter and pay taxes and wages with goods, not to avoid taxes, but simply because of the scarcity of money - they just do not have it to pay out. The creation of new money is an every day occurrence here in the US and throughout the capitalist world. Every time a bank makes a loan, it creates new money. When it grants a construction loan it creates the money without which the construction project could not and would not have been carried out. When it makes a consumer loan it creates the money without which a car or house would not have been purchased and consequently manufactured, thereby producing employment for the workers, profits for the company and tax revenue for the government. The IMF's insistence that the root of Russia's problems is its inefficient system of tax collection is all backwards. It is not a high tax harvest that produces vibrant economies; it is vibrant economies that produce high tax yields. Tight fiscal and monetary policies do not produce vibrant economies. There are gargantuan unmet human needs in Russia all fuelling social and political unrest. All of these are growing. And it is tight money and fiscal policies that are preventing Russia's vast economic potential of idle plants, equipment and manpower to get buzzing once again and on with the business of satisfying those needs and soothing social and political unrest. It is interesting to note that while Talbot, the IMF, etc, deny Russia the opportunity to carry out a Rooseveltian type new deal, Japan, is planning on a record breaking 82 trillion yen (about $700 billion) budget for 1999. According to Sheryl WuDunn, it includes a "significant increase in spending for the construction of roads, bridges, dams ands other public works intended to revive the sinking economy. The prime argument against Russia following a similar course is that an expansion of the monetary base will cause inflation. But there are many forces other than money supply that drive inflation, a prime one being the velocity of circulation of money. When this is driven upward by the expectation of inflation or fear for the future (of which there is plenty in Russia), it produces inflation. The dire state of the economy and its attendant social misery, social unrest and political chaos are themselves a cause of inflation. What rational person would leave his capital in that economic and politically crumbling nation? Estimates of the amount of capital Russian's have stashed overseas since the beginning of the reforms run between $100 billion and $200 billion. It is estimated that this year, a record breaking $25 billion to $30 billion will have been stashed overseas. According to the Moscow Times, for every dollar invested in Russia since the beginning of the reforms about $15 flew out. This capital outflow exerts a downward pressure on the ruble, thereby increasing the prices (inflation) of many imported necessities. Something like half of all food consumed in Russia, for example, is now imported. As long as the economy continues its slide; as long human misery and social and political unrest continue to mount; and as long as chronic uncertainty and the threat of civil war hangs over the nation, whatever capital is left in Russia will continue to flow out, and the downward spiral of the past 7 years will continue on its inexorable course. Inflation is something to be avoided, but not at the price not paying workers; not at the price of keeping factories idle; not the price of keeping manpower unemployed, hungry and cold; not at the price of pushing a nation to the brink of a civil war. Even a chimpanzee would understand that.
