This Date's Issues: 3081•
Johnson's Russia List
8 March 1999
[Note from David Johnson:
1. AFP: Kremlin criticizes Primakov: report.
2. AFP: Primakov's reign of Russia: Half a year, and growing.
3. Washington Post: Fred Hiatt, Russia's Relevance.
4. Chicago Tribune: Colin McMahon, FALL OF RUSSIAN TYCOON PORTENDS POWER
5. David Ellerman: Voucher Privatization as the Cold War by Other Means.]
Kremlin criticizes Primakov: report
MOSCOW, March 7 (AFP) - The Kremlin is growing
impatient with Prime Minister Yevgeny Primakov's stalled efforts to win
urgently needed financial assistance from world creditors, Moscow radio
reported on Sunday.
The Russian premier should be more critical of his economic point-men's
recent work, deputy Kremlin administration chief Oleg Sysuyev (eds:
correct) was reported as saying by Moscow Echo radio.
Russia and the International Monetary Fund (IMF) last week became entangled
in a war of words over Moscow's failure to swallow the economic
prescription issued by the Fund.
Moscow is in danger of defaulting on its old Fund debts, which mature this
year, unless the Fund releases fresh help in the coming months. The Russian
media has been speculating about a possible government shake-up as a result.
President Boris Yeltsin has, however, said publicly that he is happy with
Primakov and would like to keep his premier for the remainder of his term
in office, which ends in summer 2000.
Communist First Deputy Prime Minster Yury Maslyukov, chief of negotiations
with the IMF for Russia, has been picked by the Russian media as the next
man to lose his government post.
Primakovs reign of Russia: Half a year, and growing
MOSCOW, March 7 (AFP) - Prime Minister Yevgeny Primakov
has spent half a year running Russia and has done everything in the mean
time to make sure he will keep doing so for years to come.
It is a grip on power that has Kremlin rivals envious and analysts
perplexed. Few had predicted that the 69-year-old former spymaster with a
heavy nationalist tint would remain so popular here for so long.
Fewer still thought that Boris Yeltsin would relinquish so much power to
his subordinate, removing the visibly ailing Kremlin chief from the
political scene 16 months before the next presidential elections.
Primakov came to head the Russian cabinet at one of the most difficult
junctures in the country's post-Soviet era. The economy had just collapsed
and the ruble was soaring. Yeltsin and parliament were at loggerheads while
western nations watched the chaos in Moscow with concern.
Then Yeltsin asked his long-serving foreign minister to head the
government, replacing the liberal team that oversaw Russia's instant
Primakov's first vow on his confirmation day in parliament on September 11
was one that has so far defined his rule.
"Do not wait for quick results if you elect me," Primakov said moments
before parliament overwhelmingly voted him into office. "Our economy is in
such a state that quick results are impossible."
Analysts in unison called Primakov an interim premier who would fall
shortly after the Russian economy hit rock bottom during the winter.
Primakov put former Communist deputy Yury Maslyukov in charge of the
economy and Viktor Gerashchenko, famous for printing Russia into
hyper-inflation earlier in the decade, back at the helm of the nation's
He also spent months consulting with Communist politicians and think-tanks
about the best course for the nation's economy, in the end vowing to
protect stalled Soviet-era industries introduce new price controls.
The leftist Kremlin opposition in parliament was pleased. The International
Monetary Fund (IMF) and Russia's other financial backers were not, freezing
their assistance to Moscow.
Primakov has been unable to mend relations with the IMF and Maslyukov's and
other senior cabinet official's jobs seem to be in jeopardy as a result.
But the premiers own stock is only rising, his approval rating hitting some
70 percent according to recent opinion polls.
The reason for this appear two-fold.
Primakov has moved astonishingly quickly to install his old spy friends in
some of the most senior government and media posts.
His former KGB underling Grigory Rapota now heads the giant national arms
exporter Rosvooruzheniye. The former foreign intelligence press secretary
Yury Kobaladze in managing the news agency ITAR-TASS, making criticism
there of the premier all but impossible.
Few are thus convinced by Primakov's repeated denials that he is gunning
for Yeltsin's job.
But while others have been sacked by Yeltsin for moving to consolidate
their power under the president's nose, Primakov has been publicly assured
job security by the Russian leader.
Yeltsin appeared on national television standing next to Primakov and vowed
never to fire Primakov. It is a right the Russian leader has exercised
freely in the past and suggests Yeltsin has resigned himself to serve out
his term with the premier handling all of his duties.
The reason for that, analysts say, is that Yeltsin has no other choice --
should Primakov go, the Russian parliament would be up and arms and likely
seriously challenge the president's right to serve in office.
Any form of political stability in Russia rests on Primakov keeping his
job, no other candidate emerging as such a consensus builder among Russia's
endlessly squabbling forces.
It is a stability however that has come at the cost of losing most of
Moscow's foreign financial friends.
March 7, 1999
[for personal use only]
By Fred Hiatt
The writer is a member of the editorial page staff.
So loose nukes may be rolling through the taiga, the ruble may be in ruins,
tuberculosis flares in Siberia.
Not so long ago it was assumed that Russia's health was essential to world
stability. Then Russia's troubles slid from bad to worse, and the rest of
the world hardly seemed to notice. Now some in Washington are suggesting
that maybe Russia didn't matter so much after all.
Certainly many Russian politicians believe that the United States has
written them off. (Most of the rest believe the United States is out to
destroy them.) Proof, for them, is everywhere. When President Clinton
launched Desert Fox on the eve of his impeachment, for example, Republicans
in Congress smelled one rat, Russians another. It was also the eve of a
scheduled Duma vote on the START II arms control treaty. The U.S. military
action doomed the vote. So if Clinton really cared about relations with
Russia, many Russians reasoned, he would have postponed his bombing campaign.
But it's not just Russians who suspect the Clinton administration has given
up. "The U.S.-Russian relationship has, in the last eight years, gone from
a strategic partnership," Republican Sen. Dick Lugar said recently, "to a
pragmatic one, to a relationship of benign neglect, to one that is lurching
toward malign neglect."
Administration officials feed this perception when they advocate, in Deputy
Secretary of State Strobe Talbott's words, a policy of "strategic patience
and persistence," or when Clinton visits Moscow and seems to have no idea
what to do once he arrives.
In fact, most administration officials have not concluded that Russia
doesn't matter. They still believe, as Talbott also said, that "the stakes,
for us, are huge." They just aren't sure what to do about it.
Here's one way to look at their dilemma. As Russia's post-Communist
transition has stalled, the nation in fact has lost much of its ability to
influence the world -- at least in a positive way. Its economy now accounts
for something like one percent of world output. Russia remains the world's
biggest country, but territory has long since ceased to be a key indicator
of power. It holds vast stores of oil and mineral wealth, but in a global
economy based increasingly on knowledge and technology, those, too, are of
Russia's declining population of 150 million is too impoverished to tempt
many companies as a consumer market. And despite a high level of education,
its value as a labor pool is dimmed by the crime and uncertain laws and
taxes that keep most foreign companies away.
So Russia's potential influence is mostly negative. It can scare the world
with the consequences of collapse: untended nuclear weapons, degraded
missile-launch computers, the export of crime and pollution and contagious
U.S. policy has evolved in two ways as a result. Not surprisingly, most of
its aid is aimed at averting the bad, not promoting the good.
Three-quarters of U.S. assistance dollars, Secretary of State Madeleine
Albright said last fall, "are devoted to programs that diminish the threat
of nuclear war and the danger that weapons of mass destruction will fall
into the wrong hands."
And, as Russia has moved "from the core of the international system to the
periphery," as the Carnegie Endowment's Michael McFaul said, it has also
moved to the periphery of U.S. foreign policy. On issue after issue --
Kosovo, Iraq, Iran, NATO expansion, anti-missile defense -- the message
from the administration is that Russia matters, but not enough to derail
Excluded from policymaking, Russia then emphasizes even more its spoiler
role: shipping dangerous technology to Iran, encouraging Serbian
aggression, tweaking the United States wherever possible. And so the two
nations find themselves in an unhealthy downward cycle -- a long way from
the strategic partnership envisioned at the opening of this decade.
This, it should be stressed, is mostly Russia's fault. Until Russia gets
its reforms on track, its influence will continue to diminish. A foreign
policy that indulges Russian nostalgia and wishful thinking, as the United
States did with its great-power summitry and its premature transformation
of the G-7 into a G-8, can't change the reality. It's more likely, in fact,
to bruise feelings and delay reform by convincing Russia that normal rules
won't apply to it.
Yet "strategic patience" isn't sufficient either. Russia does matter. If it
takes its place as a democratic, free-market economy, pulling its neighbors
in the same direction through force of successful example, one kind of
world will result. If it implodes or grows hostile, the world will be very
different, and far more dangerous.
That understanding motivates those who continue to search for a U.S. policy
that will speak to Russia's potential and not just its pathologies.
U.S.-Russian relations need "a new and dramatic high-profile program,"
Lugar says. His proposal: a U.S. commitment to help Russia produce 10,000
masters of business administration and 10,000 certified public accountants.
Inside the administration, some officials seek ways to turn
ballistic-missile defense, at the moment one of the greatest irritants in
the relationship, into something positive by proposing a cooperative
undertaking. And many arms control specialists continue to urge unilateral
U.S. steps to reduce the nuclear arsenal and take it off trigger alert.
This could encourage Russia to follow suit but would be free of the
coercion and preaching that seem counterproductive these days.
Some say all of this must wait -- until a spent Boris Yeltsin and a U.S.
administration identified with failed policies both pass from the scene.
Perhaps so. But two years in modern Russian history is a long time. The
next U.S. administration may find itself with even fewer, and less
attractive, options than those available today.
6 March 1999
[for personal use only]
FALL OF RUSSIAN TYCOON PORTENDS POWER STRUGGLE
By Colin McMahon
Tribune Foreign Correspondent
Boris Berezovsky's titles have never matched his influence in Russia.
The mysterious and controversial business tycoon is widely believed to
control various oil, auto and media companies, never mind that he is not
their president, director or CEO. His governmental posts, too, have meant
little to most Russians.
What matters with Berezovsky are not his nameplates but the symbolism
behind them, the understanding that he and the other so-called financial
"oligarchs" in Russia have strong friends in the highest of places.
Now that Berezovsky is on the verge of being ousted as secretary of the
Commonwealth of Independent States, few care what that holds for the
organization itself. What matters is what Berezovsky's fall means to the
oligarchs, what it means amid the struggle for power in Russia.
What matters is what might come next.
With President Boris Yeltsin's move to oust him, Berezovsky has lost the
trump card he has long wielded like a weapon. He can no longer, it would
seem, claim the unflagging support of Yeltsin and his family.
"This is the end of the political career of Boris Abramovich
(Berezovsky)," said political analyst Igor Bunin.
Some analysts are predicting this is only a preliminary move by the
Kremlin. Eager to reassert his authority and counter the rising influence
of Prime Minister Yevgeny Primakov, Yeltsin may be preparing to demand
changes in the Primakov government.
The analysis goes this way:
Yeltsin is ditching Berezovsky as a concession to Primakov and to
Communists in the parliament who accuse the tycoon of corruption, and
worse. In exchange, Yeltsin will demand that Primakov shake up his Cabinet.
The top target: Yuri Maslyukov, the Communist deputy premier in charge
of economic policy. Maslyukov has been accused of incompetence in general
and specifically of bungling Russia's negotiations for new loans from the
International Monetary Fund.
Beyond that, some political opponents and Russian media, including a
newspaper controlled by Berezovsky, charge that senior Cabinet officials
were selling governmental posts. Maslyukov denies the allegations.
By sacking Berezovsky, Yeltsin can argue that he, at least, has moved
against those in his circle accused of corruption. Now it is Primakov's turn.
"Yeltsin wants to demonstrate that he is an honest broker, that he is
fighting corruption not only in the camp of political opponents but in his
own camp too," said Andrei Piontkovsky, a political analyst and sharp
critic of Berezovsky's.
"It was difficult for Yeltsin not to move against Berezovsky,"
Piontkovsky said. "He is a symbol of corruption almost inside the
Berezovsky's power sprang from many sources. He is close to Yeltsin's
daughter and to the president's longtime chief of staff, who was dismissed
in December. Berezovsky reportedly arranged a profitable book deal for
Yeltsin's memoirs. And he was among those powerful tycoons whose massive
wealth and control of the news media carried Yeltsin to re-election in 1996.
In exchange, critics said, Berezovsky and the other oligarchs got
sweetheart deals buying up government property. They gobbled up businesses
from oil and mineral companies to airlines. Their banks grew tremendously,
turning giant profits from buying Russian government debt.
Some of the oligarchs, including Berezovsky, passed in and out of
government. Few made any effort to hide their wealth or influence.
Russia's financial meltdown last August changed all that. The tycoons
found themselves owing billions to Western creditors and holding nearly
worthless paper from their own government.
None of the oligarchs is expected to wind up in the poor house, but
their empires have fairly disintegrated. Now they find themselves on the
Interior Ministry officials say they are investigating Alexander
Smolensky, whose SBS-Agro Bank made a fortune off government contracts.
Police acting on orders of the Primakov government also have raided
companies linked to Berezovsky. Primakov also is trying to wrest from
Berezovsky control of the ORT national television network.
Now comes the Kremlin announcement that Yeltsin wants Berezovsky gone as
chief of the Commonwealth of Independent States, a loose-knit and mostly
impotent federation of the former Soviet republics (minus the Baltic
states) that gained their independence in 1991.
Berezovsky, in comments unlikely to please Yeltsin, responded by saying
Moscow cannot tell its partners what to do.
"Very often temptations and delusions arise to dictate from a single
center," Berezovsky said Friday. "In Russia there are thoughts about
restoring the empire. But that time has passed and is impossible to bring
From: Dellerman@worldbank.org (David Ellerman)
Date: Sun, 07 Mar 1999 12:56:18 -0500
Subject: Voucher Privatization as the Cold War by Other Means
Voucher Privatization as the Cold War by Other Means
By David Ellerman, email@example.com
[The views expressed in this note are entirely those of the author and should
not be attributed in any manner to the World Bank, to its affiliated
organizations, or to the members of its Board of Directors or the countries
Voucher Privatization: Summary of the Arguments
In the post-socialist transition, the "Washington Consensus" favored voucher
privatization with investment funds as the best method of privatization (when
foreign sales were not feasible). In retrospect, it seems that voucherization
was more about post-socialist politics than privatization so we will consider
the following standard voucher privatization arguments:
* No-cash argument: Lack of cash supposedly implies giveaways. But there
third option besides cash sales or vouchers: credit sales. There is also an
alternative to third party credit: seller-supplied credit.
* Speed arguments: It is not always the case the vouchers are fast and
"case-by-case" is slow. Moreover the speed argument was hardly consistent
shutting down and even reversing some types of non-voucher privatization quite
successful in transition economies (lease buy-outs) in order for "something
to go into the voucher auctions."
* Social justice argument: Justice is said to demand spreading shares across
the population. But wealth takes other forms than shares, and shares in
quasi-bankrupt companies have the least claim on the residual worth.
* Share-privatization = Company-privatization argument. Why do the experts on
privatization sometimes seem to be so inured in a pre-Berle-Means
that they didn't understand that privatizing shares in a mass distribution in
fact "socializes" the company (and yet they understand the point quite well
it comes to arguing for voucher investment funds)?
* The 0.4% solution to the "corporate governance" problem. Why does anyone
really think that a "corporate governance" problem in a company is solved by
having it controlled by an investment fund with an even worse corporate
governance problem and with a minuscule interest (e.g., 0.4%) in ownership
income? (Hint: it has something to do with who has "corporate governance" in
* Red directors argument: Why do western advisors seem to assume the role of
cold-warriors assigned to vet "Red directors" instead of seeing to it that the
directors of whatever coloration are bearing their own costs?
* "Get the State Out" Argument: "Getting the state irreversibly out" of the
economy is not an argument for voucher privatization as opposed to, say,
cookie-cutter case-by-case privatization (e.g., the Polish leasing model).
Moreover, the main thrust of voucher schemes was often to bring power back to
the new "clean" state by reversing the earlier decentralizing reforms (e.g.,
eliminating Solidarity's self-management councils).
The No-cash Argument.
Since the citizens and workers didn't have enough cash, it was argued that
shares must be given away for free. This is a wonderful argument coming from
advisors who have credit cards, home mortgages, car loans, and so forth. Yes,
there is a third option besides selling it for cash or giving it away for
nothing; it is credit. But, it is asked, who would loan them the money? No
banking system, much less the ones in these countries, could finance
transactions on the necessary scale. Credit does not have to be third party
credit. The credit for non-cash and non-giveaway privatization is
seller-supplied credit, i.e., seller-taking-paper financing with installment
payments. Yet even to this day, we continue to hear the "no-cash" apology for
The Speed Argument 1: Vouchers Need Not Be Fast
Voucheristas love to set up false dichotomies between "rapid" voucher
privatization and "slow" case-by-case privatization. Even assuming that
"privatization" is privatization in any worthy sense of the long-suffering
it is not necessarily fast. The laughing-stock of the Mass Privatization
Program (MPP) hit-parade was the Polish case. It was originally billed by a
Harvard professor as the "rapid privatization program" complete with a monthly
timetable based the academic guru's extensive experience in institutional
transformation. Every year, World Bankers working on privatization would
over to the annual conferences in Eastern Europe to get the "progress
the Polish MPP. After four or five or however many years (I lost count) and
much arm-twisting from aid providers, the Poles have a rather pathetic
essentially "parastatal" investment funds floated on the Warsaw Stock Exchange
(that's why it was called "privatization") and managed by western portfolio
managers collecting nice fees. Now we are told that the "real privatization"
takes place when portfolio companies are sold out of the funds to private
investors--which could be mercifully interpreted as a back-handed admission
the MPP itself did not constitute "privatization" in spite of being touted as
such for the better part of the decade.
But the Polish MPP does have a Purpose! It was "invented by God" as the test
given to "privatizers" when they die and go to Purgatory. They will be asked
"Did the Polish MPP scheme have anything to do with 'privatization'"? If the
answer is "Yes, of course, it was even called a privatization plan" then they
are instructed to go through one door. If the answer is "Are you kidding?"
they go through the other door. In case you are dying to find out what was
behind each door, I am afraid you will just have to.
It was not just in Poland that voucher "privatization" was not rapid. In
Russia, voucher privatization's "great leap forward" over the chasm fell far
short of the "market economy" on the other side, and it will take a long time
for Russia to climb back out of the chasm. It would have been far quicker to
incrementally build a bridge across the chasm.
The Speed Argument 2: "Case-by-Case" Need Not Be Slow
Meanwhile a "privatization by liquidation" program designed by Poles
advice of western experts used seller-supplied credit and standardized
"cookie-cutter" procedures to privatize thousands of small and medium-sized
enterprises (SMEs) as "de novo" firms in the manufacturing sector. These
have been a key part of the Polish success story. The "privatization by
liquidation" scheme is also called "Polish leasing" since the installment
payments can be viewed as lease-purchase payments. Instead of dreaming up
schemes for "privatizing" the larger firms, many could be "busted up" into
contractually-related medium-sized units which could then be privatized in the
way we have seen actually works. The same holds for many large mis-bundled
conglomerations of assets that have been "voucherized."
But did the Russians at the time have a real alternative to their Great Leap
Forward? They would, for example, need something like the Polish leasing
to seed the crucial SME sector. The Soviets had such a model called the
buy-outs" developed during the Gorbachev perestroika era. But, it will be
surely these lease buy-outs were just case-by-case privatizations which
"everyone knows" are too slow. Actually, it was the other way around. The
lease buy-outs were too fast, not too slow. In Russia and in many of the
countries of the FSU, the lease buy-out programs were stopped so that there
would be "something left to go into the voucher program."
The early leasing models had a technical problem with "collective
this could be easily fixed with a limited liability company as in the German
GmbH or with a closely-held joint stock company. Indeed the problem was fixed
both in indigenous cases and in the EBRD's pilot lease buyouts done in
the pre-voucher time period. And even that "flaw" may not be that
practice since the Chinese township-village enterprises (TVEs) suffer from the
social ownership problem and yet have fueled the spectacular Chinese growth.
Thus to summarize, the Russians (and other FSU republics) had a home-grown
privatization method (lease buy-outs) that with some easy improvements
more or less equivalent to one of the most successful programs in Eastern
(Polish leasing) in terms of speed and depth of privatization. Yet it was
abolished by the "reformers" with the full approval and indeed insistence
western advisors. In addition to stopping the leasing programs in the FSU,
of the lease privatizations were even partially undone so there would be more
shares to put into the voucher "privatization" program.
The Social Justice Argument
Before the "reformers" in Russia went on from voucher privatization to the
loans-for-shares scheme in their quest of "social justice", we used to hear
much about the "equitable distribution of the national patrimony." But wealth
takes many forms other than shares. If one wanted to distribute what little
wealth there was in quasi-bankrupt companies to the citizens, why would one
them shares which have the least claim on the assets of a distressed
opposed to, say, senior debt instruments which might have some prayer of being
paid off? Or better yet, since atomized citizens have little power to enforce
bondholder rights (forget shareholder rights), why not have the government
that collective action problem by collecting the wealth (e.g., installment
payments from privatization with seller-supplied credit) and then distribute
that non-share form of wealth to the citizens, e.g., as part of an overhaul of
the pension system? In addition to mysteriously assuming that wealth could
be distributed as shares, the "social justice" argument was a shallow play
the sentiments of primitive communism ("Let's split it up equally and start
The social justice argument could be seen as a high-brow version of the
political feasibility argument that voucher privatization was necessary to
political support for privatization. Here again is the confusion between
distributing wealth and distributing shares. Even if it were necessary to
support with a wealth redistribution, that is not an argument for distributing
shares as opposed to other forms of wealth.
The Share-Privatization = Company-Privatization Argument.
This is an ideologically touchy issue that often seems too cognitively
to bear sustained thought. The "vision" of a private property market economy
that informs voucher privatization arguments often seems to be an essentially
pre-Berle-Means fantasy-world where shareholders "own" and "control" large
companies. Yet the people who hold power in the large firms in America do not
do so based on their "clear-cut property rights" (as their shareholding is
infinitesimal) but on the basis of their organizational role.
To review some of the basic attributes of the Anglo-American model of
capitalism, there is a separation of ownership and control. Shares are
the dispersed and atomized shareholders (including institutional holders) who
exercise little de facto control over the companies. The separation of
and control means there is a difference between the "ownership of
the "ownership of shares." Shares are still privately owned. The shareholder
exercises full "clear-cut property rights" over the shares, i.e., buy,
sell the shares. But who "owns" the company as their private property? No
organized decision-making unit "owns the company as its private property."
"ownership of the company" has been dispersed, as it were, to the four
the mass stock market. Thus the large US company becomes in fact a "social
institution" that is nonetheless touted to the post-socialist world as the
exemplar organization "based on private property." It is easy to see why
such a touchy topic and why the fantasy-world of shareholder capitalism
by much of the business press, corporate mandarins, the brokerage industry,
finance professors is so preferable to the reality of managerial capitalism.
If there is any culprit in the drama of managerial capitalism, it is the key
institution that transformed the shareholder from a proprietor into a
and that "socialized" the ownership of the large companies. Yes, it is that
same institution that is presented by so many experts as the key to
"privatization"--the stock market. The mass stock market privatizes
it socializes companies. Voucher privatization and stock market
often presented as necessary for each other. Voucher privatization is a good
idea because it will kick-start the stock market, and a stock market is
necessary for post-privatization trading of the shares. It's like a
chicken-and-egg thing! But I am afraid the "chicken" is a turkey and the
is rotten. Vouchers privatize shares, not companies, and the mass stock
socializes, not privatizes, companies. Indeed, it is precisely the
tendency of widely dispersed shareholding that leads to the next "bright idea"
by western experts and their reformer counterparts, namely voucher investment
Digression on So-called "Capital Markets"
Before turning to voucher investment funds, let me comment on the phrase
"capital market" which is often heard uttered in the same breath as "Russian
financial sector." But I am afraid I don't see the connection. In my
old-fashioned texts, I read that the "capital market" intermediates between
household savings and investment by firms. Is that what the new Russian
financial sector has been doing? I see outfits called "banks" that specialize
in money laundering, expediting capital flight, serving as shells for oligarch
power plays, and other forms of stealing. Perhaps the Russian banks have been
"intermediating" between the "savings" of the oligarchs and their
in foreign accounts. Not too many ordinary Russians were foolish enough to
their savings in the new Russian banks, and even they are fools no longer.
Or is it the "bond markets" that provide the "capital markets." At least,
longer wonder why the western experts didn't better forewarn the Albanians
the dangers of running pyramid schemes. The experts were too busy helping the
"Russian reformers" to "preserve the ruble corridor" by building the biggest
pyramid scheme in history. The protection of the ruble exchange rate (by
of the mega-Ponzi scheme) was until mid-August described as "one of the main
accomplishments of the Russian reforms" and I would imagine that those GKO
speculators (outside and inside the government) who were handsomely paid
the last multi-billion dollar tranche would agree.
I'm still looking for that "capital market" in the Russian financial
not the banking sector or bond market, perhaps it is the "stock market"? Even
in developed western economies, the stock markets are rather minor players in
net capital investment. "To a large extent equity markets are an interesting
and fun sideshow, but they are not at the heart of the action. Relatively
little capital is raised in equity markets, even in the United States and the
United Kingdom. One cannot expect equity markets to play an important role in
raising funds in the newly emerging democracies." (Joseph Stiglitz 1994,
"Whither Socialism?" Cambridge: MIT Press. 228).
The Totemic Role of Post-Socialist Stock Markets
Why, then, all the emphasis on the "stock market" in post-socialist countries?
I am afraid that one of the main reasons is totemic or "religious" in an
anthropological sense. The "Wall Street" mentality found in the
world is reminiscent of the cargo cults that sprung up in the South Pacific
after World War II. During the War, many of the glories of civilization were
brought to the people in the southern Pacific by "great birds from Heaven"
landed at the new airbases and refueling stations in the region. After the
the great birds flew back to Heaven. The people started "cargo cults" to
mock runways and wooden airplanes in an attempt to coax the great birds
cargo to return from Heaven. Post-communist countries, with hardly a banking
system worthy of the name, have nonetheless opened up "stock exchanges" to
supposedly kick-start capitalism. Government officials in East Europe, the
and even Mongolia and Albania proudly show the mock stock exchanges, complete
with computers screens and "Big Boards," to western delegations (with
enthusiastic coverage from the western business press) in the hope that
the glories of a private enterprise economy will descend upon them from
Indeed, a "fun sideshow."
The 0.4% Solution to the "Corporate Governance" Problem
Getting back to voucher investment funds, the main argument was that the VIFs
were necessary to provide the "corporate governance" to restructure the
voucherized firms. This argument contains several infelicities in
reasoning--which have now been also revealed by the developments in the Czech
Republic. My point is to focus on the problems in reasoning which were
all along (not on the facts which only in hindsight seemed to become clear).
There is of course the formal "concentration of ownership" by the funds but
point is that the funds themselves are run by fund management companies and
hundreds of thousands of shareholders of the funds have even less influence on
the fund management company than would the stakeholders of an operating
with shares dispersed among employees, local residents, suppliers, and some
merely financial investors.
Given the situation of an investment fund controlling an operating company,
actual decision-maker is the fund management company who has an almost
negligible ownership relationship to the firm. For instance, if the fund can
own at most 20% of the operating company (e.g., Czech Republic), and the fund
management company's fee is 2% of the value of the assets under management,
amount of the ownership value that filters through to the actual
is 2% x 20% = 0.40% or 4/10ths of 1%. Notice that the pyramiding of
interests reduces (not increases) ownership interests (you don't need a math
Ph.D. to know that fractions times fractions yield smaller fractions). Such a
minuscule "0.4% solution" was the magic "desirable concentration of ownership"
offered by the experts to drive restructuring in the economies with powerful
Let us suppose that a fund management company had put in all the time and
to figure out how to restructure a portfolio company and to figure out how to
actually implement the restructuring plan. Its gross return from this time
effort is 0.4% of the increase in value! And 99.6% of the increase in value
would go to free-riders. And that is the gross return to the actual
decision-maker. You have to subtract off the explicit costs and implicit
opportunity costs to get the actual net return to the fund management company.
Thus there is negligible or negative ownership returns from restructuring
should not be surprised when it was finally "revealed" that the Czech fund
management companies had found more "efficient" ways to extract or "tunnel"
value out of their portfolio companies. Since the lack of restructuring
incentive in the 20% x 2% "solution" was clear all along, why did the western
advisors and reformer counterparts promote voucherization as the predominant
privatization method (when foreign sales were not feasible)? The simple
is that the VIFs were to be controlled by the political allies of the
in government. At least in retrospect, that fact, like the 20% x 2%
calculation, was not rocket science.
The Red Directors Argument
We were also told that voucher privatization was desired because otherwise
(e.g., in lease buy-outs) the "Red directors" would end up with all the power.
There are two other problems in the Red directors argument. One small problem
is the cold-war stereotypical image of the Russian manager as an incompetent
hack or demonized communist ideologue selected by the Communist Party for
political reasons. I think a non-ideological examination of Russian managers
would find a large spectrum of competence--just like in some other countries.
It is said that Russian managers are clueless about many aspects of
a western-style market economy. There is probably some truth to that
but then most western managers would be clueless about operating in the
"virtual economy" that has evolved in Russia (as shown by many of the business
advisors parachuted by aid agencies into the Wild East). But the question of
the accuracy of the simplistic cold-war stereotypes of Russian managers is not
such a practical question because there is no supply of well-trained
doppelganger managers to take over (e.g., no "West Germany"). At best the top
managers can be replaced by the current middle managers (cut from essentially
the same cloth).
Moreover the political motivation for the Red directors argument became quite
clear when it was used in countries such as Slovenia where the managers had
demonstrated their overall competence over a period of decades (e.g., Jeffrey
Sachs' rhetorical question "Even if they [Slovene managers] are all Lee
Iacoccas, does it make sense to simply give the country's industry to them?"
quoted in Washington Post, May 15, 1991, G3).
The more theoretically interesting problem in the Red directors argument is
presupposition that owners need to be vetted by the authorities in a private
property market economy--as if there was some "GMAT" or competence test
private owners in market economies before they were allowed to start or buy
companies. I am afraid that is not how the system works. The private
system works not by insuring that owners are smart or well-trained or
ideologically vetted but by insuring that owners pay the costs of their own
actions. Pain smartens. Thus advisors to the post-socialist countries
not be worrying at all about whether the directors are red, white, or green
whether they are bearing the costs of their actions.
The "Get the State Out" Argument
It is sometimes argued that voucher privatization was necessary to
"get the state out" of the economy. Yet that is not an argument for voucher
privatization as opposed to other forms of privatization. Moreover much of
thrust of the voucher-oriented schemes was to first recentralize power by
reversing and undoing earlier reforms that had decentralized power away
state--all of which revealed the underlying political motive rather than a
single-minded drive to "get the state out" of the economy.
In Poland, shock therapists used state corporatization to reverse the earlier
decentralizing reforms and break Solidarity's hard-won power on corporate
boards. In parts of the former Yugoslavia, voucheristas tried to bring power
back to the state by reversing decades of decentralized social ownership. And
as already mentioned, the reformers in Russia and some other former Soviet
republics sought to reverse the decentralizing reforms of the Gorbachev's
perestoika. In all these cases, where home-grown decentralizing reforms had
already "taken the State out," the shortest distance to the market would have
been to proceed straight ahead in the same direction all the way to full
privatization, not to reverse direction and renationalize or "corporatize"
The effort to pull power and ownership back to the state to be "properly"
redistributed revealed the underlying political battle. The battle was
(1) the new "clean" post-socialist reformers--those who emerged from
external exile, relatively untainted by the old system, armed with free-market
rhetoric, and well-connected to western aid sources--to take over after the
democratic revolutions of '89-90, and (2) the old "embedded" decentralizing
reformers--those who worked against the old system from within and who
had social democratic views but were dismissed as "nomenklatura" by the new
"clean" reformers. In a nutshell, "voucher privatization" was essentially the
cover-story for those pseudo-populist ("Let's take it back from the
'nomenklatura', split it up equally, and start over again") power plays of the
new "clean" post-socialist reformers against the old "embedded" decentralizing
reformers. And part of the picture was the cold-warriors jumping in to
the Cold War by other means, taking sides based on their stereotypes, and
contributing to turning the dramas in Russia and a number of other countries
A Case for Voucher Privatization?
We have now examined the main arguments for voucher privatization put
the Washington Consensus, and we have found them wanting. We have seen
sheaf of "arguments" traditionally trotted out in favor of voucher
was like a wad of three-dollar bills. In spite of all the phony economic
arguments, voucher privatization with investment funds was a brilliant
strategy for the "clean" post-socialist reformers.
Institutional Blitzkrieg versus Incrementalism
The institutional debate is not "fast versus slow" or "rapid versus gradual"
methods. It never was; that was another phony argument. The argument was
institutional blitzkrieg versus incrementalism. One of the best treatments of
this debate about development strategy is in Hirschman's 1963 "Journeys Toward
Progress" which far antedated the transition debate. Reformmongers in their
strategies and even more so in their rhetoric could be divided into those who
take an ideological, fundamental, and root-and-branch approach versus those
take an incremental, piecemeal, homegrown, and adaptive approach (in Spanish
described as "criollo"). The incremental approach is well described by
Wilson in his First Inaugural Address using words that might someday find
translation into Russian: "We shall deal with our economic system as it is and
as it might be modified, not as it might be if we had a clean sheet of
write upon; and step by step we shall make it what it should be, in the spirit
of those who question their own wisdom and seek council and knowledge, not
shallow self-satisfaction or the excitement of excursion whither they cannot
In the far future, intellectual historians will see how little the
Washington consensus understood the critique of Bolshevism-Jacobinism by the
conservative or "Austrian" tradition of Hayek, Popper, and Burke (See Peter
Murrell, Conservative Political Philosophy and the Strategy of Economic
Transition, "Eastern European Politics and Societies." 1992). So many of our
best and brightest economists seem to have just thought the Bolsheviks had the
wrong textbooks. With the right textbooks in their briefcases, the "market
Leninists" thought they could fly into the socialist countries and use a
peaceful version of Leninist methods to make the opposite transition.
But the task was not resetting inflationary expectations with a dose of "shock
therapy." The task was deep-lying transformation of many complex
institutions. These institutions had evolved through decades of communism so
the deeply rooted interconnections were not apparent, particularly to the
Leninists parachuted in from the West. The origin of what became known as the
"shock therapy" approach to the transition was not a bad analogy with
inflation-stopping therapies. Rather it was more the moral fervor of economic
cold-warriors who sought to raze the evil institutions of communism and to
socially engineer in their place (using the right textbooks this time) the
clean, and pure "textbook institutions" of a private property market economy.
An incremental approach evolving reforms out of existing institutions (e.g.,
pushing decentralization all the way to the market with lease buyouts)
an admission that "History matters"--but history does not exist in
economic models. Hence that route was rejected by the utopian social
it would only lead to some "third way" ("Third way is Third World" was a
favorite market-Leninist slogan). Only a slate-cleaning blitzkrieg approach
during the "window of opportunity" provided by the "fog of transition"
all the necessary changes made before the population had a chance to
protect its previous "vested interests." That is the market-Leninist road to
"democracy." This mentality was not new. It was a reincarnation of the
and mindset of Bolshevism and Jacobinism. But, thankfully, the "radical
reformers" had more benign and seductive instruments: aid, loans,
conditionalities, neoclassical textbooks, and even young experts with textbook
models and world-class credentials.
There has been some recent criticism of the Washington consensus for "ignoring
institutions." But the Gaidar-shock-therapists (or Bolsheviks and Jacobins for
that matter) did not ignore institutions. Institutions were just "built"
Jacobin-style with bright young people (some from elite western
financed by aid dollars) drafting "new institutions" which were then
"implemented" by the "democratic powers" of presidential decrees ("democratic
powers" established by blasting an elected Parliament to rubble). Robespierre
would have understood perfectly.
The Chinese were not historically immune to this mentality but they "got it
of their system" in the Great Leap Forward and the Cultural Revolution. They
learned the hard way where that Bolshevik mentality would lead. When they
to choose a path to a market economy, they chose the path of incrementalism
(crossing the river by feeling for the stones one at a time) and pragmatism
question is not whether the cat is black or white or Red but whether or not it
catches the mice). They had the wisdom to "know they didn't know what they
doing" so they didn't jump off a cliff after being assured by experts that
would be jumping over a chasm in just one more great leap forward.
Meanwhile under the Jacobinic reform regime guided by prophets armed with
textbook models, the Russians learned the hard way to appreciate the old
that "it's not so much what you don't know that can hurt you--but what you
that ain't so."
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