#12 - JRL 8105 - JRL Home
From: "Kirill Pankratov" <pkirill88@hotmail.com>
Subject: Re: Few notes of the Shleifer and Treisman article
Date: Sun, 07 Mar 2004

In the last couple of weeks the article “Russia: A Normal Country” by Andrei Shleifer and Daniel Treisman aroused great interest. Shorter versions were published in the IHT and “Moscow Times”, its Russian translation appeared in several web sites and printed publications.

Many JRL readers commented on the article and criticized various aspects of it, or the role of the authors themselves in the Russian privatization process.

Shleifer and Treisman, among other things, drew attention to severe flaws in measures and criteria themselves, by which Russia is judged whether it can or can not be considered a “normal country”. They wrote in particular: “The advocacy group Freedom House, which evaluates countries' institutions, has since 2000 rated political freedom in Russia below that which existed under Brazil's military junta of the late 1970s and Kuwait's hereditary emirate, where women still cannot vote. It rates civil liberties in Russia below those of Nigeria in 1991 under the military dictatorship of Major General Ibrahim Babangida.”

Indeed, I’d argue that someone who considers that Russia has less political liberties than Kuwait or Nigeria under military rule has a big problem with reality. But are these just some extreme examples? In my impression, they are typical cases, which render most of these numerous surveys, rankings, and scores pretty much meaningless altogether.

I’ll present just two rather important examples illustrating my point.

The 1998 financial crisis, GKO default and ruble devaluation was often presented as a uniquely Russian event. Where else can such fiscal irresponsibility, profligacy, and corruption occur? “Missing IMF billions” was a staple phrase in discourse on Russian political and economic matters. Never mind that Russia always made payments to IMF on time, hasn’t borrowed any new money in the last five years and by now paid back loans almost completely - in contrast to quite a few relatively respectable countries which borrowed more and can’t get off the IMF dole for many years.

At that time one shining example of a large emerging market country that was doing everything right, in juxtaposition with Russia, was Argentina. It was a poster child of the “Washington Consensus” ideology, duly reflected in all these rankings and scores. Argentina opened its economy to foreign capital, expanded domestic financial market and actively borrowed abroad. It had rock-solid (or so it seemed) monetary stability in the form of currency board, which was even written into constitution. The idea became quite popular among chattering classes in Russia in the aftermath of August 1998 crisis. In September of that year Argentinean finance minister Domingo Cavallo was invited to Moscow by one of the “young pro-western reformers” Boris Fedorov to advise on possible introduction of the “currency board” in Russia.

Fast forward two years later, to the end of 2000. Contrary to predictions about “total collapse” of Russian economy after August 1998, it rebounded strongly, growing at that time at 10% annual rate. Something entirely different was happening in Argentina. The 1-to-1 dollar/peso convertibility, hailed throughout 1990’s as an exemplary monetary policy, by 2000 turned into albatross, as peso became overvalued and choked production and exports. Debt pyramid was spiraling out of control. Financial markets were getting panicky at every opportunity. There was little left to privatize, so the influx of capital dried out. In short, Argentina had Russia ‘98 written all over it.

By the end of 2000 it was absolutely clear to me that a monumental disaster was slowly unrolling in Argentina. IMF still visited regularly and announced new bailout packages. Markets cheered the second coming of Domingo Cavallo in March 2001, like in 1998 it cheered whenever “pro-western reformers” like Chubais or Kiriyenko appeared to be gaining ground in Russian power struggles and said all the right words for IMF and Wall Street consumption.

In early 2001 I made a public bet ­ a case of vintage Malbec wine - on the popular emerging markets internet forum (with an Argentinean banker as counterparty) that Argentina will default and/or devalue before the end of the 2001. Cavallo, just like Russian government in the spring of 1998, kept chaotically tinkering with taxes, trying to squeeze here and there from the dead-horse economy. Like Russia in June 1998, Argentina performed large-scale debt exchange (“megacanje”) in May 2001 ­ switching short-term obligations for longer maturities with higher coupon rates. It lifted markets for a couple of weeks, but was clearly dead end in the long run, just postponing the reckoning. Like in Russia before, Argentina was delaying and reducing wages for public sector workers for the sake of “fiscal responsibility” amid severe recession... Like in Russia, monetary asphyxiation resulted in proliferation of barter and fake currencies - coupons, veksels in Russia, patacones, lecoups in Argentina. Miner's sit-in strikes and casseroles riots respectively... Cavallo, after being “the last great hope”, became an object of hate, pelted with eggs at his own daughter’s wedding. As usual, neither IMF nor the Wall Street learned anything, maintaining illusory hope that because of the government’s “market-friendly” rhetoric, things somehow will calm and turn out OK in the end.

They didn’t. After some more panic attacks and bailouts, mass demonstrations, frozen bank accounts and ATMs empty of cash, Argentina defaulted on Christmas Eve of 2001 (it de-facto devalued several weeks earlier), just a few days before expiration of our bet. Except it was much, much worse than in Russia. It resulted in political chaos, parade of five presidents in two weeks, food riots that killed some 30 people, and sharp contraction of whatever was left of its economy. The size of the default was several times larger than in Russia, which hadn’t reneged on its internationally traded bonds. Argentina stopped paying all its debt, including Global bonds which were considered safe.

Some 18 months after the crisis Russia restructured all its defaulted debt, mostly in an amicable manner to relative satisfaction of bondholders. In contrast, two years after its default, Argentina has yet to begin meaningful negotiations with its creditors. Its current proposal ­ to pay essentially less than 10 cents on a dollar of face value of obligations ­ caused consternation among debt holders. Compared to Argentina’s behavior, Russia in the aftermath of its crisis literally showered creditors with money. Today Argentina is warning that it will formally default on IMF loans immediately if IMF will not automatically roll them over ­ something Russia never threatened to do. From being one of the US-friendly of the Latin American countries, Argentina turned into one of the most hard-line one. Anything coming from Washington now is met there with utter disgust. Surprisingly, even with its much larger default and very mean-spirited attitude to creditors (partially explained by total, disastrous failure of policies promoted by the US and international financial institutions) Argentina haven’t received nearly as much bad press as Russia after 1998 crisis.

Another example: the two affluent Asian city-states, Hong Kong and Singapore, perennially occupy top spots in various rankings, such as “economic freedom index”, “globalization index” and others. Well, a dose of reality probably won’t hurt. The first one of them ­ Singapore ­ is a schoolmarmish one-party dictatorship, governed by a pervasive, though relatively efficient, corporatist bureaucracy. There one can be put to death for small amount of drugs, whipped by a thick bamboo rod for trashing the street, and get a prison sentence for heterosexual, consensual oral intercourse. Its main official paper “Strait Times” looks like “Pravda” (circa 1984, not 2004) in its deference to authorities. That might actually be a wet dream among certain political circles in the US ­ a state run like an industrial park, with loyal foreign policy, and without any troubles from pesky opposition, labor unions, environmentalists, etc.

The other ­ Hong Kong ­ is an ultimate of crony capitalism, the territory governed by oligarchs for oligarchs. Much has been said about excessive influence of a few oligarchs in Russia, at least usually behind the scenes. Well, in Hong Kong they are THE official powers. They form the government, which regularly bails them out with public funds, and manipulate land supply for construction (all land is a government property there) for the benefit of the biggest real estate tycoons. Its economy is little more than a big (slowly deflating though) property bubble and a laundering shop for money ­ of every possible degree of cleanliness and filthiness ­ entering and leaving China. Its nominal, dollar-denominated affluence is based less on genuinely high living standards than on hugely overvalued housing market, which makes almost millionaires out of owners of even some cramped two-bedroom flats in gloomy high-rises.

Consider the circumstances of the biggest business deal in recent years, involving both of these countries ­ the takeover in early 2000 of HK Telecom from Cable & Wireless by Pacific Century CyberWorks, belonging to Richard Li ­ the son of the Hong Kong’s most powerful real estate and shipping tycoon Li Ka-shing. In the process Richard Li won over the rival bid from SingTel ­ the Singapore state-owned monopoly, run by the son of Lee Kuan Yew ­ the most powerful man in Singapore in the last 40 years. The deal was sealed after Richard Li made a trip to Beijing and apparently got the approval of China Communist Party bosses.

Just imagine what a furor would rise if, for example, Russian big telecom company was divvied up between the entities fully controlled by children of Russian and Ukrainian presidents. In the next five years no single article on Russian economy would forget to bring up the subject as a consummate example of utter corruption and total inability of doing “honest” business in Russia.

Yet in the case of HK Telecom there was hardly a whisper that anything could be wrong with such practices. Well, at least until the stock price of the HK Telecom tanked (now we’re talking about real crime, any amount of stealing and corruption can be justified as long as stock is flying high). Richard Li is suddenly transformed from a “visionary young leader” to a “reckless brat” (see, for example, this article: “Richard Li: Hong Kong's Destructive Prince of Political Pull” http://www.capmag.com/article.asp?ID=444) who does not have anything behind him except family connections (oh, how exactly it was different in 2000?)

My point here is not to disparage Hong Kong or Singapore. They had some real, big successes in economic development in the last few decades, though their models were sputtering in recent years. They should themselves decide how to live and govern their societies, taking into account their traditions and cultural background. And so should we, Russians, concentrate on our own problems, rather than paying too much attention to all these scores, report and rankings, or some fantasies coming from various “think tanks” ­ except, probably, for entertainment value. And if we wouldn’t listen too much to Washington “wisdom”, we’ll probably do just fine.