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#39 - JRL 2008-89 - JRL Home
Date: Tue, 6 May 2008
From: W. George Krasnow" <president@raga.org>
Subject: Did Shock Therapy Help Russia?

Did Shock Therapy Help Russia?
About Anders Aslund’s Capitalist Revolution
By W. George Krasnow
Dr. W. George Krasnow is President of Russia & America GoodWill Association in Washington. Former Soviet defector, he was professor at Monterey Institute of International Studies in California. Under his Russian name Vladislav Krasnov, he authored Russia Beyond Communism: A Chronicle of National Rebirth

Now that the Russian economy is doing well, many an economist would want to take credit for it. Anders Aslund, former Swedish diplomat in Moscow, one-time adviser to the Russian government, now Senior Fellow at the Peterson Institute for International Economics in Washington, did just that during an April 21 presentation of his new book, Russia’s Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed,[1] at Kennan Institute for the Advanced Russian Studies. He claimed that it was he and Jeffrey Sachs who picked out Yegor Gaidar from among young Russian reformers and anointed him to become President Yeltsin’s Prime Minister in charge of economic reforms.

His claim is credible: at the time of Soviet collapse, those who offered Russia both a quick fix and the money to pay for it had decisive advantage. Sachs and Aslund offered both. We shall return to their role. But, first, let us consider the dual thesis of Aslund’s book that the current Russian economic success is due to Gaidar’s shock therapy but the failure of democracy was caused by President Vladimir Putin’s “authoritarianism.”

We agree with Aslund that there was a need for Russia to radically reform its Soviet-era command economy. We agree that such reforms should have aimed at a free market economy, including privatization, deregulation, and integration with world economy.

But we do disagree with Aslund’s assertion that the “shock therapy” was the best and only remedy. We particularly disagree with his contention that there was “Washington Consensus” for it. There was none, but U.S. mega media wanted us to believe there was. In fact, there was no consensus even among the economists at the World Bank and IMF that backed the reforms.

One who opposed was Joseph Stiglitz. After chairing Clinton’s Council of Economic Advisers, he replaced shock-therapy iconoclast Larry Summers as Word Bank’s Chief Economist. In his book, Making Globalization Work, Stiglitz deplores the excessive reliance on “free-market fundamentalism” and recommends a gradualist approach that takes into account each country’s specific character. “It is clear that rushing into major reforms does not work,” says Stiglitz. “Shock therapy failed in Russia.” And, “Privatization was done in Russia before adequate systems of collecting taxes and regulating newly privatized enterprises were put in place.”[2]

Another dissenter was William Easterly, New York University professor, who had worked for the Bank for sixteen years (1985 ­ 2001). In his 2006 book, The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good, Easterly condemns the Bank’s condescending toward the recipient countries, including Russia.[3] "Searchers" (pragmatists), not "Planners" (dogmatic theorists) should have been put in charge of its aid programs, Easterly argues.

When Paul Wolfowitz, the architect of the Iraq war, arrived at the Bank in 2005 and ordered a report on "Lessons of the 1990s, " “the report showed that countries that had ignored bank dogma (China, Vietnam, India) were thriving, while those under bank tutelage (Russia, Argentina, Zambia) did poorly,” says Easterly in a later article.[4]

About Wolfowitz’s scandalous fall from the Bank’s presidency, Easterly says: “The root cause of his debacle…was pretty much the same as the reason for the fiasco in Iraq: intellectual hubris at the top that disdained the messy realities at the bottom.” Alas, Wolfowitz’s predecessor, James D. Wolfensohn, under whose watch the Russian reforms were undertaken, says Easterly, “also had a fondness for utopian schemes.”

The best description of how reforms in Russia were conducted came from social anthropologist Janine Wedel. Now professor at George Mason University, Wedel traveled widely in Eastern Europe and Russia, interviewing both donors and recipients of Western aid. She summed up her observations in a book, Collision and Collusion: The Strange Case of Western Aid to Eastern Europe, 1989-1998. Focusing on Russia, Wedel showed “how Harvard’s best and brightest, entrusted with millions of aid dollars, colluded with a Russian clan to create a system of tycoon capitalism that will plague the Russian people for decades.”[5]

In the Fall of 1991, at a dacha outside of Moscow, “Sachs, his associate Anders Aslund and several other Westerners offered their services and access to Western money,” she writes. “The key Russians present were Yegor Gaidar, the first ‘architect’ of economic reform, and Anatoly Chubais who was part of Gaidar’s team and later would replace him as the ‘economic reform czar’”[6]

That was the beginning of the collusion to which Wedel devotes a whole chapter. With the help of Sachs, Harvard Institute of International Development (HIID) got U.S. government’s exclusive contract for Russian reform. Andrei Shleifer, economics professor and émigré from Russia (on Israeli visa), whom Sachs introduced to Gaidar and Chubais, was put in charge. He hired Jonathan Hay, a graduate of Harvard’s law school, to manage Moscow office. Shleifer’s wife Nancy Zimmerman, and Hay’s girlfriend were also signed on. The Harvard “clique” exclusively relied on the Chubais clan for delivering “shock therapy” to Russia.

Thanks to the Harvard coterie, writes Wedel, the Chubais clan was able to put their men in the Russian government. As to Chubais’s special role, Wedel cites Olga Kryshtanovskaya, a Russian researcher: “Chubais has what no other elite group has, which is the support of the top political quarters in the West, above all the USA, the World Bank and the IMF, and consequently, control over the money flow from the West to Russia.”[7]

The collusion resulted in the creation of Russian Privatization Center (RPC) of which both Shleifer and Aslund became Board Directors. Aslund’s particular role was to help “deliver Swedish government monies to the RPC” and he “served as a broker between the HIID-St.Petersburg coterie and the governments of Sweden and the United States.”[8]

Highly confidential information was now at the fingertips of Shleifer’s team. But the contract forbade them to take part in any financial transactions of the enterprises they reformed. The temptation proved too strong. In 1994, Shleifer and his wife started questionable investments. In April 1997, the FBI asked to interview them. On May 9th Sachs removed Shleifer from the project. On May 19th First Deputy Prime Minister Chubais demanded that the U.S. shut down the project altogether. That’s where Wedel’s book ends.

Only in August 2005, U.S. District judge in Boston ruled that the Harvard team engaged in prohibited investments in Russia. The defendants agreed to repay the U.S. government: Shleifer $2 million; Nancy Zimmerman, $1.5 million, and Hay up to $2 million. The original charge of “knowingly defrauding the government” would have required Harvard to repay $120 million. But the judge ordered the university to repay only $26.5 million for breach of contract. Still, this was the largest fine in the history of this venerable institution.

In the January 2006 issue, Institutional Investor magazine ran a detailed investigative report, “How Harvard Lost Russia,” by David McClintick. FBI investigation uncovered, writes McClintick, “evidence of fraud and money laundering, as well as the cavalier use of U.S. government funds to support everything from tennis lessons to vacation boondoggles for Harvard employees and their spouses, girlfriends and Russian pals.” In sum, it was “extraordinary display of an overweening ‘best and brightest’ arrogance toward the laws and rules the Harvard people were supposed to live by.”

In his new book Aslund does not even mention this sordid affair. All he does is praising Shleifer’s scholarly work. We are not about to question Aslund’s moral integrity. Our disagreements with him are more fundamental. They go to the core of his profession. As an economist, he should have asked himself: What is the effectiveness of my economic advice in terms of the cost/ benefit ratio?

If he had, he would not be so sanguine claiming credit for the growth of Russian economy. Even if that growth were entirely due to his advice, it would never offset the staggering cost of shock therapy scheme that the Russians have to bear in rubles, dollars--and yes--blood, sweat, and tears.

Luckily, the country was spared the Big Blood of civil war. But it was Aslund’s “revolutionaries” who tore the fabric of society apart and put it on the brink of civil war. Guarded by the armed goons hired from the ranks of former «siloviki», in 1996 the oligarchs threatened civil war if Yeltsyn were not re-elected. As Aslund himself admits, the oligarchs subverted the election by putting up nearly $600 million to re-elect Yeltsyn, even though the official ceiling for campaign was $3 million.[9] That’s what then went under the name of democracy.

Another important question must be asked: How did the HIID manage to outbid other competitors to win the exclusive and lucrative contract from the US government?

There is nothing about it in the book either. We don’t know whether Aslund even asked that question before joining the Shleifer team. Wedel did. And she found out that there was no competitive bidding. The standard procedure of open bidding was waived and the contract was given to the HIID, she was told by a government official, for “foreign policy considerations.” [10]

It may have been OK for a Swedish citizen to follow a U.S. foreign policy line. But how could the avatar of Free Market ignore its first and foremost principle? Shouldn’t a free market for goods agree with a free market for ideas?

Harsh on Putin, Aslund is tenderly protective of the oligarchs whose power Putin had tried to curb with some success. Putin certainly stopped the overt political ambitions of Boris Berezovsky, Vladimir Gusinsky and Mikhail Khodarkovsky. But this is a far cry from being able to break the oligarchs’ strangle hold on the country’s economy.

In April 2004, Paul Klebnikov, the American editor of Forbes Russia magazine who authored of a book about the “supreme” oligarch Berezovsky,[11] set the aggregate net worth of Russia's 100 wealthiest oligarchs at $140 billion.[12] Klebnikov was killed in Moscow the same year.

On April 18, 2008, the Russian RIA Novosti reported that the number of Russian billionaires has grown to over 100. In four years their combined wealth increased from $140 billion to a staggering $522 billion.

In his talk at Kennan, Aslund ignored these figures, dwelling instead on less than convincing growth of small businesses. However, in the book Aslund is so sold on the oligarchs that he compares them favorably to the American robber barons of the late 19th century. “Increasingly, the Russian oligarchs have become more like big businessmen in Western countries,” coos Aslund, “only more dynamic, successful, and colorful.”[13]

The snowballing enrichment of the rich may gladden the heart of a “capitalist revolutionary.” But it bodes no good for Russia. The oligarchic monopolies undermine the very foundation for free enterprise in Russia. Their growing wealth correlates with the growth of corruption, which Putin admitted he was unable to curb. Dmitry Medvedev, the new president, declared that fighting corruption would be his priority. He has a huge task before him. Even assuming that an average oligarch is no more corruptible than an average citizen, he has both the greatest means and the greatest reasons to engage in corruptive practices to reign over his ill-gotten wealth.

But why Mr. Gaidar does not blow his whistle to claim credit for the present “success” of Russian economy and denounce Putin’s authoritarianism, the ways Aslund does? As one of the Russian fellows at Kennan Institute asked that question, Aslund’s replied that Gaidar is simply too scholarly to meddle in politics. It is more likely, however, that, unlike Aslund, Gaidar has learned the lesson of what happens when scholars meddle in politics too much. Perhaps, mindful of his mistake on relying too much on Western advice, recently Gaidar argued for restructuring world financial institutions to give a greater voice to the developing nations.

[1] Anders Åslund, Russia’s Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed, Peterson Institute for International Economics, 2007

[2] Joseph E. Stiglitz. Making Globalization Work, Norton: New York and London, 2007, p. 51

[3] Wilianm Easterly. The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good. Penguin Press HC, 2006

[4] William Easterly, “Does He Hear the World’s Poor? Don’t Bank on It!” Washington Post, April 22, 2007

[5] Janine Wedel’s book, Collision and Collusion: The Strange Case of Western Aid to Eastern Europe, 1989-1998. (St. Martin’s Press, New York, 1998)

[6] Wedel, p 123

[7] Wedel, p 126

[8] Wedel, p 141

[9] Aslund, p 166 ­167

[10] Wedel, p 127

[11] Paul Klebnikov, Godfather of the Kremlin: The decline of Russia in the Age of Gangster Capitalism. Orlando,FL: Harcourt

[12] Klebnikov, “The Golden Hundred”, Forbes, July 22, 2004

[13] Aslund, p 184