Enron of the Eggheads?

One problem I’ve always had with the “Harvard economists wrecked Russia” argument is that parts of the former Soviet Union that *didn’t* follow the rapid privatization path, the Ukraine, etc., also suffered huge declines in output and living conditions. It seems like the end of the Communist monopoly on power in virtually all areas of the Soviet Union led to massive self-interested scrambles on the part of the resident apparatchiks, regardless of what policy was chosen for economic reform (or non-reform). Effective state authority collapsed and the economy was cannibalized virtually everywhere, regardless of whether Harvard economists were feted or spurned. Stephen Kotkin’s book on the Communist collapse and his New Republic article “Trashcanistan” are both good on this dynamic. The scary thing is that Russia is the relatively *more* successful part of the former USSR.

Daniel,
any suggestions on policies to remedy the flight of capital through corrupt oligarchs?

The situation is also prevalent in Sub-Saharan kleptocracies like Nigeria. What can be done, within and without, to solve the problem?

I certainly wouldn’t want to absolve the Harvard crew of all blame. They were at the least massively naive. But I’m just not sure how much they mattered. We tend to talk about things like whether it was right to privatize, or to privatize in a certain way, when in fact all these debates and solemn policy dicussions were pointless. Throughout the former USSR, whether enterprizes were privatized or left under state ownership, they were relentlessly cannibalized and sucked dry by the former apparatchiks. The results were pretty much the same everywhere. The Ukraine which didn’t really even start privatization until 1995, and not much then, still suffered a catastrophic fall in output after 1991. (Somewhat exaggerated in the figures by the growth of the grey economy, but still catastrophic.)The Communist party gave the USSR state whatever coherence and discipline it had. Once it was broken up into national units and stripped of its monopoly on power, the remnants turned on fed upon the state structure that was left. Western debates about “privatization” and “shock therapy” are almost relevant in such circumstances, since they assume a state apparatus that can implement decisions effectively.

I’m curious what DD thinks the alternate scenario would look like. Without the capital flight, Russian production would have not have dropped? Would have dropped some? Would have dropped quite a bit, just not as much as it did with the capital flight?

(Also, excess death methodology can be spun like a drunk executive at an office party. Did you know the US Supreme Court is responsible for one million excess deaths a year? Fortunately the US sugar tariff is lowering that. To pick two examples.)

Carlos: I would have guessed that given the political conditions, there would have been fairly minimal new investment in Russian capital anyway, so I would have set a benchmark of three years’ depreciation on the Russian capital stock; maybe a 3-5% fall in GDP.

“my suspicion is that it was capital account convertibility rather than privatisation per se which did the real damage”

Having lived and worked in Ukraine for many years, I can assure you that it didn’t matter one iota what the law said about capital account convertibility (whatever the hell that means) or capital outflows, or anything else for that matter: if the people with money wanted to send their money elsewhere, they could. Ukraine was (and still is, from what I can gather) the ultimate lawless society. In analyzing Ukraine, don’t focus too terribly hard on what the law states, or else you’ll miss what’s actually happening.

I suspect, without any actual experience, that the same is true in Russia.

I’d have to read up on the extent of capital account liberalization, but whatever the case, bull’s post reinforces what I think is the real story for both Ukraine, Russia, and almost all the post-Soviet republics: the hollowing out of state authority and the cannibalization of economic enterprises by local bureaucracies whose members, freed of any central discipline, turned en masse to personal enrichment. That’s what makes all talk of bad policy choices almost beside the point. There was no state anymore ready or willing to carry out any coherent policy, be it liberalization or continued state managment. If you’ve got a New Republic subscription, I highly
recommend historian Stephen Kotkin’s “Trashcanistan”:

http://www.tnr.com/doc.mhtml?i=20020415&s=kotkin041502

Damned inability to put in a link! Maly’s web page is:
http://www.matthew-maly.ru

The opinion, for those who care to read it, is available at this link.

If we start jailing policy advisors for policy that turns out to be bad there is going to be a massive shortage of policy advisors. Given the inability to carry out controlled experiments in order to test what actually causes economic growth (or any other policy objective you’re aiming at), actual policy advice is always going to be heavily buggy. Especially since the people the policy is being carried out on are generally at least as smart as the policy advisors, and thus are going to respond in ways that the policy advisors don’t expect.

Then there is all the fun of figuring out what the counter-factual would be, and how much blame should be attributed to who (e.g. the forthcoming pensions crisis – are the people who were opposed to population growth to blame, or the people who put in place a pension scheme that’s basically a giant Ponzi scheme? Is there a way of putting in a pension scheme that wouldn’t face the coming crunch?) It would be a very brave court system that would tackle those issues. And the courts can do a pretty bad job of policy-making themselves. To take an example well removed from privitisation in Russia, an Australian court judge ruled that people who had sold a business were not then liable for its taxes, an innocous decision itself, thus setting up a big hole in the tax system by which people sold businesses to criminals, who then didn’t pay any taxes and sterotypically sunk the books in Sydney Harbour.

And if you describing people as having “committed a serious crime” does not count as serious criticism, I am interested in what you think does. Is anything less than hordes of people chanting outside your bedroom window mild disapproval?

I am all for seriously, or sarcastically, or satirically critising people who give policy advice that turns out to be bad. However, if you’re going to suggest that people be jailed, are you willing to take up a role advising poor countries on how to create economic growth? How have you tested your theories on what Russia should have done after the collapse of communism?

This does put his “Does Competition Destroy Ethical Behavior?” American Economic Review Papers and Proceedings, May, 2004. in a whole new light.

Tracy,

The charges against the Harvard boys were not the result of “giving bad advice” but rather for massive fraud. This is beyond the rather gross use of USAID (i.e.- tax) money to finance high-flying lifestyles for themselves in Mosow. (On this, see Maly.) Now, it’s true that more people were hurt by their “bad advice”, but it’s only the criminal behavior they are being tried for.