#16 - JRL 8091 - JRL Home
From: "Vladimir Shlapentokh" <shlapent@msu.edu>
Subject: Shleifer and Treisman’s Economic Comparisons are Wrong/8078
Date: Fri, 27 Feb 2004

Shleifer and Treisman’s Economic Comparisons are Wrong
Vladimir Shlapentokh
Michigan State University

Before even reading it, the article looked interesting in light of the authors’ names and the title, which claims to be paradoxical. Indeed, one of the authors, Andrei Shleifer, developed a brilliant scholarly career in the last two decades in this country. Coming as a teenager to this country from Russia, he became a star in American economics, got a tenure position at Harvard, along with the most prestigious John Bates Clark Medal. His coauthor, Daniel Treisman, is working as an associate professor at the University of California, and has published books on Russia in good publishing houses.

In some ways, the authors do not disappoint the reader. For a long time it was impossible to find such brave and unrestrained commendations of the developments in Russia since 1991. While some analysts in the West praise Yeltsin’s regime, and others Putin’s regime I have not seen even one publications that lavishes praise on both regimes. I am sure neither Egor Gaidar nor Anatolii Chubais, the fathers of the Russian reforms, would have taken the risk of hailing, even privately, the results of their reforms, as these two authors did indeed. It is remarkable that Shleifer and Treisman did not cite even one contemporary Russian author who supports their view. By disregarding the views of the Russian intellectuals and politicians, this article is definitely unique in the Western literature on Russia (the single Russian author who was cited in this article analyzed only demographic processes and did not touch the transformation of the country in general).

As a matter of fact, the author of this review was the first to use this title in both the Western and Russian literature (see my articles, "'Normal' Russia," Current History, No. 212, October 1997, "Contemporary Russia: The Best Parallel to It - Feudal Europe," Europe-Asia, Spring 1996; and "Bounjour stagnation: Russia's next years," Europe-ASIA Studies, v. 49, no. 5, 1997). I suggested that post-Soviet Russia, with all its numerous problems, was a "normal society," attributing, however, a very different meaning to this term. By naming post-Soviet Russia "normal," I was not linking this term to the political and economic institutions, and certainly not to the quality of life in the country. I only wanted to say that Russian society, as it was shaped in 1991-1994, is able to function and reproduce itself for an undetermined period of time. Using this logic, I consider many relatively stable societies normal, whatever the political or economic structure. This includes countries such as Turkmenistan and Saudi Arabia. And, of course, the Soviet Union was a normal totalitarian society, which in the 1970s and early 1980s also had a higher standard of living than most other countries in the world.

Shleifer and Treisman, however, give the term a very different, rather normative meaning. By normal, they do not mean stable. They are referring to the general characteristics of the society, measured by Western standards, and first of all by the level of development of the market economy and democracy.

The methodology used by the authors to prove this thesis is indeed quite original. Imagine a patient with many health problems being brought to two young doctors who are in rosy moods and in good health. Inspecting patient A’s problems they, with full Panglossian optimism, convincingly explain to him that other people are in much worse shape. For instance, the heart of patient B ("market economy"), the liver of patient C (corruption), the kidney of the patient D (criminalization) and the spleen of patient E (democratic system) are in bad shape indeed. The doctors did not tell their patient that what makes his life miserable is the fact that he has all of these illnesses. The devil in social and natural science lies in combinatorics.

Indeed, to argue against the pessimistic assessment of the Russian economy, the authors invite us to look at Ukraine where the decline in production is more intense. The same Ukraine, along with Belarus and a few other countries, was useful in order to suggest that the currency decline in the 1990s was even worse in these countries. In order to counter the view on the negative role of the Russian oligarches in the economy and politics, our doctors refer to Italy, Sweden, and Israel, where "the largest firms are generally either state-run, or family-run, with a few families often controlling a large share of the national production through financial and industrial groups." In order to trivialize the corrupt character of privatization, which led to the formation of the oligarches’ fortunes, our authors refer to "the owners of industrial groups everywhere in the developing countries" who behaved as Russian magnates and they point even to American robber barons, such as J.P. Morgan and John D. Rockefeller, as if they also directly encroached the federal budget as the Russian oligarches did.

When it is necessary to "normalize" corruption the authors serve Lithuania or Brazil. If it is necessary to suggest that the state of democracy in Russia is not so bad they call to the podium Nigeria. To persuade the reader that the life of journalists in Russia is not at all tragic it is possible to mobilize Turkey or Belarus. They want us to accept the closing of the oppositional TV channels and newspapers by remembering Turkey. For those who want to understand the character of the conflicts between local journalists and regional mayors or governors in Russia they recommend a consideration of Argentina or Mexico. To get a sober idea about the role of the opposition in Russia, the authors want us to see what is going on in Malaysia, Venezuela, or even in Mexico "where some rivals have been assassinated."

To go back to the comparison between the authors and doctors who make judgments about the health of patients in such a specific way, I should note one big differences between them. Even American doctors, who are often accused of neglecting the psychology of their patients, still ask them about their feelings, and in some case use their answers for diagnosing and curing them. This is not the case for Dr. Shleifer and Dr. Treisman. It is almost impossible to believe that in their lengthy article they did not use even once the data of the numberless Russian surveys about what people in Russia think and feel about their life as well as about those reforms that are so enthusiastically hailed by the authors.

The surveys conducted by various Russian polling firms in the last three years converge on the following conclusions:

1. In November 2003, most Russians (no less than 60-70 percent) considered their life "difficult" or "very difficult," and only 22 percent of the Russians said that they are "satisfied" with their life.

2. Only one third of the population endorses the economic reforms, and only a quarter of the population believes in the improvement of life in the future.

3. More than two thirds of the population reject the Western model for Russia and treat their country as a special civilization (Orthodox or EuroAsian).

(These data were taken from Yurii Levada’s surveys; see Yurii Levada’s "Bulletin," November 28, 2003, and July 2002).

Of course, the authors declined to consider the way the Russians assess their own lives. Indeed, it is not the first time in history that people have been told to feel a certain way, as recommended from the top or from outside. The Soviet leaders exactly followed this line of thinking and apparently believed themselves when they said that the life of their subjects was normal or even good. It was Stalin who in 1935 declared, amid the growing terror, that "comrades, the life has become better, life became merrier."

Mistrusting people’s assessments of their own lives, the authors elaborated a concept for judging life in any country. The concept is based on the assumption that the major independent variable that statistically determines all major dependent variables (i.e., the characteristics of society) is the average income per head. It shapes the political organization , the degree of development of the market economy, the level of corruption and crimes, the role of big business in society, the level of democracy, and even the division of powers, the honesty of elections, the freedom of the media, and the intensity of the persecution of journalists (in particular, the number of the journalist murdered in the country). And, of course, this peculiar form of economic determinism implies the universality of the economic, social and political processes in the world. The fact that "Russia is a middle income capitalist economy" is, in the opinion of the authors, the key for predicting all major elements of Russian society. Exactly in the spirit of this approach they label Russia as a "middle income democracy."

It is almost unbelievable that the authors have literally ignored all other variables that influence the developments in any country, including the cultural and political context, historical traditions, the ethnic composition, the size of the country, its geographic position in the world, the natural resources, and several other factors.

It looked as if such serene beliefs in universalism were an illness of these American advisers who worked for the Russian government in early 1990s. Indeed, Jeffrey Sachs, a fellow leading Harvard scholar, acknowledged in his critique of neo classical economics, the disregard of geography and political specifics as an organic flaw of their activities after the collapse of the Soviet Union (see his chapter in Lawrence Harrison and Samuel Huntington, eds., Culture Matters, Basic Books 2000). However, both authors are as enthusiastic about simplistic economic determinism as they were fifteen years ago.

Income indeed is one of the most powerful variables (besides education and the occupational composition of the population along with few other ) that correlates with several characteristics of society. However, in order to treat income as the main independent variable, the authors had to prove that it simultaneously, closely and uniformly influences the major characteristics of society. The authors did not do this, and nor did they cite the works where such results were published.

What is more, when the authors started to use empirical data to prove their thesis that Russia, as a middle income country, possesses a package of all other qualities to which it is entitled they refer not only to the countries that are in the same income range (in order to prove that Russia has the same qualities as these countries), or to countries with lower incomes (in order to demonstrate the superiority of Russia), but also to the countries with the highest incomes, such as Sweden (25 thousand against 8 thousand in Russia), Austria (28 thousand), England (26 thousand), and even the USA (35 thousand), which goes against their own logic. (Evidently by a sheer mistake the authors treat Israel along with Russia as countries of middle income, even though Israel’s national income per head in purchasing power is 19 thousand ­ almost 2.5 times higher than in Russia).

Several studies (for instance, those of Ronald Inglehart) have shown that income itself is a dependent variable, along with the level of democracy, corruption, and crimes, while the specific combination of cultural and religious traditions, geographical location, and the size of the country makes up an independent variable. This approach looks much more attractive than the version of simplistic economic determinism offered by the authors.

In order to substantiate their thesis that Russia is a "middle income democracy" the authors analyzed the state of the political order and economy. I do not want to spend too much time on the "political part" of their article. Here the authors defy or ignore the elementary facts, rejecting the data of the Freedom House as not good enough for their analysis (they also rejected for the same reason the data of Transparency International and the World Bank on corruption). Even President Putin himself, whatever his natural desire to commend his own country, never (even in his self-laudatory speech before his supporters and the activists in his reelection campaign on February 12) lowered himself to such a eulogy of the political life in the country as these authors did. Their feisty tone in their description of "the democracy of middle income country " could be somewhat tolerated if it were at the beginning of the process of democratization, but not at a time when the vector of the political process in the country had already been going for almost ten years in the opposite direction. It is only logical that they did not even mention the shelling of the parliament in 1993 when the trend toward the restoration of authoritarianism started.

Against common sense they describe the new constitution as not "undemocratic." They pretend to take the State Duma, which has been a puppet body for a long time and particularly after the last election, seriously. They suggest that the Duma can overrule presidential decrees. This idea would only arouse laughter in Russia, from Kaliningrad to Kamchatka. In order to assert that the Russian media are free as in other "middle income" or even "high income" countries the authors confused the subject, replacing the major Russian problem today ­ the offensive of the state against media ­ with the debatable issue of the role of oligarches in media. Contrary to the Russian people and analysts, they describe the elections as "free and fair," manipulating the data of OSCE, while totally ignoring the Russian data. The transition of power from Yeltsin to Putin does not arouse any suspicion about its democratic character. The author should not equate Russia with Argentina and Brazil ­ they usually treated these countries as less democratic than Russia ­ where honest presidential elections recently took place.

The economic part of the paper is somewhat more interesting. Indeed, the authors commit almost unthinkable textbook mistakes in analyzing the post-Soviet Russian economy. Indeed, the whole pathos of the article is to prove the success of the economic reforms and the specific character of Russian privatization. Trying to prove their thesis, the authors use data that are not at all relevant to their thesis, but which describe the restoration of the Russian economy after its decline in the 1990s. Indeed, since 1999, the Russian economy began to restore itself but the restoration of the economy follows its own logic, which cannot be reduced to the type of economic structure, as shown by the restoration of the Soviet economy after the civil war and after WWII, as well as by the economic rebounds in Japan, West Germany or South Korea.

If the authors wanted to demonstrate the superiority of the market economy over the planned one in the Russian context they should make the comparison using 1985 as the point of reference. The year 1985 was the last year of the Soviet planning system when it was still untouched by Perestroika. We know how comrade Stalin liked to tout the superiority of the planned economy over the market economy. However, he never went so far as to use 1921 ­ the year when the Russian economy was in shambles after seven years of WWI and the civil war ­ as the point of reference to show his successes as a great leader. He used, as an "honest" person, 1913, the last prewar year.

Let me use one example from the text to illustrate my point of view. The authors employed very few data to show the changes in the standard of living in Russia after the collapse of the Soviet system. One kind of data are indeed amusing. As an indication of the growth of the quality of life, the authors point to the rise in the number of Russian tourist trips abroad. They increased from 1.6 million in 1993 to 4.3 million in 2000 (about 3 percent of the population). To use these data in view of the wild material polarization in the country (the authors fortunately do not deny this) is the same as studying changes in the American standard of living by operating with the number of Americans who have yachts, or villas on the French Riviera, or even in Florida. If the authors were interested in trips of ordinary Russians, they should have looked at the section of the Russian Statistical Yearbook that describes the public transport. There they would have found that while the foreign tourism of the few has flourished, the number of people who travel inside their own country dropped immensely: the number of air passengers fell from 73 million in 1985 to 26 million in 2001; railway passengers from 3035 million to 1306 million.

But other data are more serious. The authors cite official data about the increase of the living space per person from 16 square meters in 1990 to 19 in 2000. But if they looked at other pages in the same Statistical Yearbook they would have found that in another decade ­ in the Soviet times, between 1980 and 1990 ­ the increase was exactly the same, three square meters. However, to evaluate the data brought to the attention by the authors is not enough. In 1985, schools were built for 200 thousand children; in 2000, only 54 thousand ­ a decline of four times. In 1985, preschools were built for 106 thousand children; in 2000, 3 thousand (please do not explain this difference by the decrease in the birth rate ­ it declined only by two times). Hospitals were built for 6.5 and 1.5 thousand beds, respectively; and cultural institutions, 97 thousand seats and 9.6 thousand.

Citing the data about the moderate improvements in housing conditions in this "middle income country," the authors took the data out of context and invited their readers to a very false conclusion, because they did not show the gigantic decline in the production of public goods in post-Soviet Russia.

The refusal to take 1985 as the point of reference makes all of their assessments of the post-Soviet economy untrustworthy. Indeed, praising Russian oligarches, the authors use various data, including the dynamics of assets and investments of some big companies. The readers are asked to see these data as evidence of business success. The authors do not offer any comparison with the similar industries that existed in Soviet times or abroad. They also totally ignore indicators in kind, the most reliable Soviet and Russian statistics. The authors suggest that we should believe in the efficiency of the oligarches’ companies. They compare these companies to fully corrupt state enterprises, such as Gasprom or Aeroflot, as if this comparison says something about the efficiency of private oil or nickel companies. Meanwhile, the authors’ praise for the privatized oil industry should be seriously tempered by the following data: in 2001 the Russian oil industry, which is controlled by Shleifer and Treisman’s trusted oligarches, produced 348 million tons of oil; in 1985, it produced 542 million tons. However, the number of personnel increased from 122 thousand in 1985 to 347 thousand in 2001. In other words, the productivity in this "advanced" industry, with all its technological progress, was in 2001 only 22 percent of what it was in 1985 (see Rossiiskii Statisticheskii Ezhegodnik, 2002, p. 361). As a comparison, in the last ten years the productivity level in the U.S. mining industry increased by 32 percent.

The authors found no grounds for the complaint about the origin of the oligarches’ wealth. They disregarded the moral implication of privatization in Russia as well as the attitudes of the Russians toward the oligarches, whom they tend to see as crooks. But their high respect for Russian oligarches forced the authors to avoid another fundamental fact. The Russian economy is stricken by the dangerous Dutch disease, that is, an almost total reliance on the extracting industries, particularly oil. The proportion of machines and equipment in Russian exports, which was not high in Soviet times, declined from 13.9 percent of all exports in 1985 to 8.7 percent in 2001. As the prominent Russian economist Evgenii Yasin recently noted, "the modernization of the Russian economy has not yet begun." Compare, for instance, the composition of the Russian exports that of China, where the per head income is two times lower than in Russia. Chinese goods are impossible to avoid in the stores of any country in the world, while Russian goods are practically invisible, besides "Stolichnaya."

In conclusion, I would like to offer a few hypotheses that may reconcile the reputations of these brilliant authors with the content of their piece, which is, even by the standards of "a middle income country," not very high.

In the early 1960s, the famous Soviet physicist Bruno Pontecorvo, as a member of the Soviet Academy of Science (a rough equivalent of a full professorship at Harvard), jokingly sent the totally absurd article of his Italian friend to "The Reports of the Academy of Science" (a journal that was as prestigious in the USSR as "Foreign Affairs" is in the USA today). The article was, of course, published, and to this day, Russian scholars still laugh about it. In the USA, in 1996, as a hoax Alan Sokal sent an article to "Social Text" (a prestigious journal, at least among postmodernists) that was full of postmodern absurdities. The article was published, and with it Sokal’s joke gained a level of popularity that stands up today.

Perhaps the two great scholars sent out their article in order to prove that "Foreign Affairs" would be mesmerized by their names, and would do what the other journals did for Pontecorvo and Sokal. Perhaps Shleifer and Treisman’s article will be remembered for a long time, and as vividly as Sokal’s text.

Another hypothesis ­ I will call it the "Andersen factor" ­ is not so glib. Everybody knows how the American public was outraged when it found out that the auditing firm Arthur Andersen served Enron as a consultant. In this way, Andersen had been assessing to some degree its own work. Andrei Shleifer was, as the director of the Harvard Institute for International Development, "deeply involved in advising the Russian government on privatization, security markets and tax policy for several years" (see the New York Times, May 31, 1997). Daniel Treisman, if to judge from his personal website, also had "experience with a USAID team that advised Russia’s finance ministry on tax reform."

In this article Shleifer and Treisman, like Arthur Andersen, judge the results of their own work (their real influence on the developments in Russia does not matter). According to the second hypothesis, the scholars tried to convince the world about how wise they had been almost a decade ago. "Foreign Affairs," in its On Line Edition, has done a disservice to its readers by not disclosing in the byline how much the authors had been involved in the business that they now judge from the "outside." If the second hypothesis is correct, we should begin looking for conflicts of interest not only on Wall Street, in the White House, and on Capitol Hill, but also among the best American scholars.

With all my critical views of the article, I totally agree with its authors’ high contempt for the Communist system. I also agree that Russia has changed radically since the time of the Soviet Union and Russians still enjoy several political and economic freedoms along with the right to private property. With the authors, I am glad that post-Soviet Russia is not a mortal threat to the world, and I wish that the Russians could live in the foreseeable future in a "normal democratic society" with a "normal market economy."