Beware of economics geeks bearing gifts

by Daniel on January 23, 2006

Henry gave me the heads-up on this extraordinary story from Institutional Investor (it is worth watching the interstitial ad in order to read the story as it really is dynamite). It’s an account of the dog’s breakfast that was the Harvard Institute for International Development’s mission to Russia. I learned a few things I didn’t know from it – particularly, it was interesting the extent to which Jeffrey Sachs, who suffered quite a lot of damage to his reputation through being the titular head of HIID at the time it all blew up, wasn’t actually in charge, and to which Andrei Shleifer and his wife were involved in the whole thing to an extent which it is rather implausible to dismiss as the work of a head-in-the-clouds academic who didn’t realise that there might be a conflict of interest. It adds quite a lot to David Warsh’s excellent coverage of the same story, and indeed to the cacophony of fuck-all which has been our beloved mainstream media’s coverage of what is quite visibly one of the most interesting and scandalous tales of the 1990s (I’m linking to Warsh’s own story on the II story because it contains a few quotes that are in the paper version but not the online one, but it is well worth poking around in the Economic Principals archives for other stories on this subject).

Now there are apparently two sides to this argument – Shleifer is a good mate (and I think college roommate) of Brad DeLong, who if I remember correctly thinks it was a matter of misunderstanding rather than dishonesty. However, the physical facts are clear. Shleifer was investing money in privatisations, while advising the government on privatisations. Shleifer’s wife was attempting to become a majority stakeholder in companies which provided the infrastructure for the Russian securities market, at a time when the project Shleifer headed was writing the rules for the Russian securities market. At the same time, Shleifer’s second-in-command was considering the applications of various parties who were applying for the first mutual funds licence in Russia, one of whom was his girlfriend. It is not my place to comment on the ins and outs of the American legal system (Shleifer settled out of court without admitting guilt), but my professional opinion is, that’s fucked up.

I think that the quote from the story that sums it up for me is this:

” in Washington I wasn’t ever smart enough to predict them [ethics rules]. . . things that seemed very ethical to me were thought of as problematic and things that seemed quite problematic to me were thought of as perfectly fine. . . .”

It’s not actually from any of the protagonists in the Russia debacle; it’s from Larry Summers, for a long time one of the most unpopular men in economics, who has for the last few years been sharing his unique personal charm with a wider audience as President of Harvard, with predictable results. It just reeks with the Leona Helmsley sense of entitlement that one might expect from the little crown prince of American economics (his uncles are Kenneth Arrow and Paul Samuelson), and it’s not just the fact he’s apparently passed it on to his dauphin Shleifer that grates. It’s more that this quote is actually an accurate reflection of the attitude of a lot of the neoliberal class; corruption is what poor people do in countries that aren’t ready for democracy and it’s a good reason to never let them have any money. What you and me do, that can’t be corruption because we are the high priests of the market. Shleifer keeps his job, by the way, despite the hoards of Hahvudites howling that it stinks to high heaven. I referred to this as Enron of the Eggheads a while back, and in retrospect I think I was far too inclined to give ‘em the benefit of the doubt. In a nice little bit of narrative irony, Jeff Skilling’s trial is about to start, and his defence is basically “whaddaya mean? that was all legal, really”.

You can see the same state of mind at work here. Now I am not going to condemn Paul Wolfowitz out of hand (if you’ll recall I was one of the few commentators to be enthusiastic about his candidacy). The World Bank is a hellishly political place, there are plenty of people there who do both give and take bribes, and the Bank staff have a pretty shameful record of grumbling at necessary reforms and trying to undermine their leadership, then whining at the administrative chaos that ensues. But there are enough details in that story to see that someone else appears to have conceptual problems with the idea of straight dealing. The Wolfowitz crusade against corruption (by the way, Paul, at what point is it no longer uncivil to ask about yer man Chalabi? fer chrissake) is being headed by a political appointment forced into the job as a mate of Wolfies, working together with someone appointed earlier by Wolfensohn “to improve the Bank’s relationship with Congressional Republicans”. See, greasing a few palms to get a dam dug, that’s a mortal sin and a stain on the world. But turning a development bank into an annex of the K Street Project … well that’s one of the things that “seem very ethical to me”, I guess. Tcha. If I ever go into the business of advising poor countries, it’s going to be under the pseudonym “Timmy O’Danaos”. My girlfriend, Donna Ferentes will pick up the contracts later.

{ 27 comments }

1

Matt 01.23.06 at 5:04 pm

Several years ago, in 1999, I believe, The Nation had a terrific story on this, “The Harvard Boys do Russia” I believe it was called. It’s probably worth looking back on. There was a lot more crap going on than just the stuff that came up in legal dealings, things that make it pretty obvious that some pretty serious stealing was going on.

2

Kieran Healy 01.23.06 at 5:25 pm

As Ted Gerber and Mike Hout commented (in an article title) a few years ago, the marketization of Russia in the 1990s turned out to be more shock than therapy.

corruption is what poor people do in countries that aren’t ready for democracy and it’s a good reason to never let them have any money. What you and me do, that can’t be corruption because we are the high priests of the market.

Combine this with the same people’s amazing ability to fail upwards and you see why neither law nor economics are sufficient to understand corruption and incompetence — you need sociology instead.

3

abb1 01.23.06 at 5:27 pm

Two dozen families control 40% of the country’s total wealth (or something like that). Quite an achievement, really.

4

Commenterlein 01.23.06 at 5:27 pm

Clearly the entire story reeks of corruption, and if the facts are accurately reported then Shleifer deserves a lot worse than a $2m fine.

What I didn’t understand was your broader point that “this quote is actually an accurate reflection of the attitude of a lot of the neoliberal class; corruption is what poor people do in countries that aren’t ready for democracy and it’s a good reason to never let them have any money.” Shleifer is actually someone who has been talking about and working on corruption and “stealing” in many different environments, including the US. And I really don’t know why you say that neoliberals don’t want poor people to have any money. It is obviously fine to disagree with neoliberal policy descriptions, but your statement sounds like a cheap shot.

5

Daniel 01.23.06 at 5:30 pm

cheap shot? moi? surely you have mistaken me for some other hack.

What I was referring to was the tendency of neoliberals to a) blame “corruption” for the failure of neoliberal policies and b) use “corruption” as an excuse for pushing no-cost development strategies which substitute more neoliberalism for cash.

6

Commenterlein 01.23.06 at 5:34 pm

Now that makes more sense, thanks for clarifying.

7

John Emerson 01.23.06 at 5:50 pm

Economics Nobelists seem more felonious than other Nobelists, for example Myron E. Scholes and Robert C. Merton. Nobody but me thinks that they should be much more famous than they are.

(No, Jean Genet never won a Nobel Prize.)

8

rd 01.23.06 at 7:23 pm

Ah yes, another version of the “crime against Russia,” in which the country is devastated by a handful of American academics and their evil theories. My question, once again: shouldn’t the experience of the rest of the post-Soviet world make us at least a little wary of attributing blame to the evil shock therapists so confidently? Across the range of newly independent countries, a wide array of policies were pursued: some privatized, some didn’t. Some freed prices quickly, other didn’t. Yet in case after case we see the same immediate outcome in the 1990s: a collapse of economic activity and living standards. The cause seems to be a fairly uniform collapse of state authority and capacity. Stripped of their monopoly of power, the former appartchiks started looted and asset stripping everywhere. The “policies” pursued by the government leaders were generally beside the point: the officials charged with implementing them had turned thieves and gangsters, regardless of whether enterprises were now “public” or “private.” See the article “Trashcanistan” by Stephen Kotkin in the New Republic. You can accuse the Harvard boys of naivete, perhaps even personal impropriety. But authorship of the tragedy is a stretch.

9

dearieme 01.23.06 at 7:25 pm

‘” in Washington I wasn’t ever smart enough to predict them [ethics rules]…”‘ I’m taken by the idea that you need “rules” to tell you about ethics. And that you might refer to “rules” to check whether it is ethical to give contracts to family members.

10

paul 01.23.06 at 7:48 pm

For some reason, the saga reminds me of Tequila Sunrise (Mel Gibson, Michelle Pfeiffer, Raul Julia), where Raul Julia’s character is the top Mexican drug cop, working on a major bust with US drug agents, and (unbeknownst to the cops) the major drug lord that the US agents are luring to California so they can bust him. Gibson plays a former drug dealer who met and became close to Julia when he was in a Mexican jail for a youthful attempt to smuggle marijuana (I think) into the US and still knows him as a drug lord but not a cop.

So let’s see: Vodka Martini, with Gibson playing Jon Hay and Pfeiffer playing Beth Hebert. Julia’s dead, so we’ll have to give some thought to Schleiffer’s role.

11

Matt 01.23.06 at 9:16 pm

rd,
Did anyone _here_ claim that the harvard boys were the cause, or even _the main_ cause of trouble in Russia? Only a fool would think that. But, they were quite happy to get in on the stealing while they could, and stole as much as they thought they could get away with. Just becuase others stole more and the stealing of others cause more harm doesn’t change the fact that Shleifer,et. al. were criminals. (Corruption has a structure like a prisoner’s dilema in many ways, and it’s often silly to be overly moralistic about it. But, that certainly doesn’t make the harvard crowed less criminal.)

12

Barry 01.23.06 at 9:22 pm

DD: ” The Wolfowitz crusade against corruption …”

Did I misread this, or did you actually think that *anything* that the Bush administration does is against corruption?[1]

Remember your request for any action of the Bush admininstration which wasn’t screwed up from the start, a while back?

[1] Except in the sense of possible temporary corruption reductions unavoidable in the course of diverting the money flows to their own cronies.

13

save_the_rustbelt 01.23.06 at 11:50 pm

I’ve never met a Harvard MBA who had enough ethics to fill a thimble.

Apparently in the intellectual big leagues ethics are not a major topic of study or reflection.

And no one should ever let an economist manage anything other than the economics department.

14

Daniel 01.24.06 at 1:02 am

Ah yes, another version of the “crime against Russia,” in which the country is devastated by a handful of American academics and their evil theories

No, there is actually no mention of this in either my own article or the II one I link to. I think you are wrong on this, but I think I’ll save that debate for a time and place where people are more in the mood to read what I have written.

15

abb1 01.24.06 at 2:12 am

The country is devastated with the help and blessing of a handful of American academics and their evil theories.

16

Tim Worstall 01.24.06 at 6:38 am

A great find that article, Daniel:

“Moscow by then was crowded with foreigners eager to help Russia and get in on the ground floor of a great social and economic change. Entrepreneurs, consultants, lawyers, bankers and academics with foundation grants, as well as fast-buck artists and swindlers from all over the world, swarmed across Russia looking for a piece of the action.”

Certainly got that right although I refuse to comment on which group I belonged to.

The taxation stuff was norml for the time, being paid offshore etc, girlfriends on the company payroll? Standard practice for both western and Russian firms.

Worth noting that others not part of the Harvard gang did very well by being honest and legal (Berkeley Capital, Troika Dialog, the latter run by a friend who was also the owner of the Starlite Diner where so many of the meetings mentioned took place) and others who did very well by not being so. CSFB comes to mind with thir front-running of the order book.

Richard Layard was also out there for a time and could be pretty scathing about the Harvard group. As, indeed, were many of those I knew in the financial world. Beer time gossip was really centered around the fact that if you were going to be corrupt, play by Russian rules, then at least make pot loads of cash doing so.

17

John Emerson 01.24.06 at 7:14 am

I think I’ll save that debate for a time and place where people are more in the mood to read what I have written.

Tomorrow will be fine.

18

Matt 01.24.06 at 8:26 am

Yeah, Tim, but still, the Starlite Diner itself should get someone sent to a labor camp. Crappy over-priced food with an extra helping kitsch thrown in. Just for starting the place your friend should have been Podyesed. Also, it’s important to remember that many folks there at the time (I’m not saying anything about Tim, here) were folks who, for various reasons, could not make it at home and were unqualified losers or screw-ups of various sorts. I’ve met more than a few “investment bankers” or the like who worked there who had no experience at all. That certainly didn’t help things.

19

John Emerson 01.24.06 at 8:34 am

Expats anywhere seem to be people with problems.

20

Tim Worstall 01.24.06 at 8:44 am

Well, the Starlite opened pretty early on. 92 or 3 I think, when the only other non-Russian food was McDonald’s. He also opened Uncle Gilly’s which might redeem him a touch. And was a (successful) investment banker in the US and then again in Moscow.

Myself? Freely admit to being in the know nothing school. Started out there in offshore programming, about which I knew nothing, distributed newspapers, about which less and ended up in the metals trade, about which now I know a lot but then nothing. Put me in the chancers section, a group not directly mentioned above.

21

SamChevre 01.24.06 at 9:14 am

” in Washington I wasn’t ever smart enough to predict them [ethics rules]. . . things that seemed very ethical to me were thought of as problematic and things that seemed quite problematic to me were thought of as perfectly fine. . . .”

I don’t know–that’s how I feel about lobbying rules. My trade association can give someone $100,000 for his election campaign, and publish a list of “most important goals for the next legislative session”–but if I buy him dinner at Outback, its an “appearance of corruption”? Huh?

22

wcw 01.24.06 at 12:26 pm

The crime is always what’s legal.

23

Rodger 01.24.06 at 2:17 pm

“The Harvard Boys Do Russia” was published in the June 1, 1998 editon of The Nation,/i>, by Janine R. Wedel.

May I also recommend her Collision and Collusion: The Strange Case of Western Aid to Eastern Europe (Palgrave Macmillan, 1998, 2001)?

24

dearieme 01.25.06 at 12:15 am

John Emerson: was that a witty self-deprecation or an amusing variant on the “Americans are all descended from immigrants” boast?

25

nnyhav 01.25.06 at 8:37 am

What, no link to the prior article on Harvard looking at corruption?

26

Peter 01.25.06 at 11:02 am

Three thoughts:

1. ” in Washington I wasn’t ever smart enough to predict them [ethics rules]. . . things that seemed very ethical to me were thought of as problematic and things that seemed quite problematic to me were thought of as perfectly fine. . . .”

Further evidence, if any is needed, that economists simply do not understand normal human behavior. Economics is an academic study of some alien species, not any human society we know.

2. Jeffrey Sachs seems to have moved on from his Russian experiences: He now seems to be saying that corruption in Africa is nothing to get upset about.

3. Is nepotism necessarily bad? The best US Attorney-General in the 20th century was the President’s own brother.

27

rd 01.25.06 at 3:57 pm

Daniel,
Hmmm, you’ve made the “crime against Russia” argument before and the remark in comment #5 about “the tendency of neoliberals to blame ‘corruption’ for the failure of neoliberal policies” made me think you though the accusations against Schliefer et al were just another piece of the same picture. If not, my apologies for an off topic comment.

Comments on this entry are closed.