[stop-imf] IMF defends actions in Russia!

[Robert Weissman]

This is an absolutely stunning piece from the IMF, where it manages to
defend its "reform" program for Russia. It fails to acknowledge that
most of Russia's meager economic accomplishments in recent years took
place by virtue of its refusal to follow IMF direction -- eg., by
defaulting in 1998 -- and astonishingly belittles the utter failure,
corruption and looting of the country's privatization process. (Sure,
there were problems with Russia's "dirty privatization," but now it
appears it is "starting to confer some broad-based benefits.")

For an empirical discussion of the utter theft of the state carried out
in the name of the IMF-supported privatization, see an interview we did
in Multinational Monitor with Forbes reporter Paul Klebnikov, "Theft of
the Century: Privatization and the Looting of Russia" at
http://www.multinationalmonitor.org/mm2002/02jan-feb/jan-feb02interviewklebniko.html

--
Robert Weissman


http://www.imf.org/external/np/vc/2002/082602.htm

Has Russia Been on the Right Path?
A Commentary
By Kenneth Rogoff
Economic Counsellor and Director,
Research Department, IMF
Vedomosti August 26, 2002

In June, the designation of Russia as a "market economy" by the U. S.
Department of Commerce—and the announcement by the European Commission
that it would follow suit—was hailed by President Putin as a recognition
of how far Russia has come ten years after the dissolution of the Soviet
Union. This designation comes at a time when crises in some Latin
American countries and U.S. corporate scandals have provoked
soul-searching in many quarters about pro-market or "neoliberal"
policies.

So it is natural to ask: Has Russia been on the right path? And where is
it headed?

To some Western observers, the answer to the first question is an
obvious "No." For instance, according to the distinguished economic
theorist Joseph Stiglitz, Russia should have learned from the "enormous
success of China, which created its own path of transition, rather than
just using a blueprint or recipe from Western advisors." China pursued a
two-track approach, pursuing faster market reforms along its coastal
regions than in the hinterland.

But it is unlikely that China's successful strategy could have been
pursued in Russia. China started its reforms with "the advantage of
backwardness": it was one of the poorest countries in the world in 1978.
Today, after 20 years of growth, the average person in China earns about
800 dollars annually, half the income of the average Russian. Of course,
China's strategy has created its own challenges; for example, the IMF's
2002 World Economic Outlook discusses how Chinese banks are dealing with
challenges resulting from the slow restructuring of state enterprises.

Another key difference is that in the former Soviet Union, over 85
percent of the workforce was in non-agricultural state enterprises
compared to under 20 percent of the workforce in China. This allowed
China to reform the state sector slowly while it grew by transferring
surplus agricultural labor to township and village enterprises. But
Russia needed to end the subsidization of the state sector to free
resources for the new non-state sectors of the economy.

The best evidence that the two-track approach would not have worked in
the transition economies is that such an approach was in fact tried in
some countries, and abandoned. In the mid-1980s, Mikhail Gorbachev in
the Soviet Union, Janos Kadar in Hungary, and Wojciech Jaruzelski in
Poland did try a Chinese-style approach of limited reform. However, the
power of the center had been significantly eroded so that it was simply
not possible to implement effectively such reforms, even ignoring the
far greater complexity of privatizing industry rather than agriculture.
It was the failure of these attempts that led to more aggressive efforts
toward a market economy.

But even if a two-track approach couldn't be followed, shouldn't the
transition have proceeded more gradually along its single track?
Shouldn't the legal and institutional reforms needed to support a market
economy have been carried out first? This view is also held by many
"gradualists", including not only Professor Stiglitz but also the noted
Harvard University Sovietologist Marshall Goldman. They argue that
existing institutions should have been abandoned only when the new
institutions, e.g. for financial market oversight and taxation, were
functional.

The gradualist view seems to be that if only Russian leaders could have
kept communism going for 20 more years while they sent bank regulators
and tax inspectors for Western training, everything would have been
better.

This is improbable for at least a couple of reasons. First, it is
unlikely that market institutions could have been developed in a
laboratory setting and without actually starting the messy transition to
the market. Institutions take a long time to nurture and the
institutions that are there today, however imperfect, might well not be
there if the effort had not been started ten years ago.

Second, it is unlikely that there existed within the Soviet Union
organizational and social capital which would have allowed the existing
structure of industry and the level of output to be maintained while new
capitalist institutions were being developed. Much of the capital that
underpinned economic activity under central planning had decayed before
the collapse of communism; indeed, this decay was a major reason for
communism's collapse. Some new institutions therefore had to be created
quickly.

Of course, to say that Russia could not have followed a gradualist,
China-style path is not to say that everything was done correctly or to
condone the extreme examples of corruption, particularly in the area of
privatization.

There was an intellectual case for rapid privatization. Rapid transfer
to private hands, given appropriate competition policy, would lead to a
more efficient and rapid restructuring of enterprises than if left in
the hands of the state. Some advocates of rapid privatization were truly
motivated by considerations of fairness, a desire to give ordinary
citizens a stake in the economy. More important, they also perceived a
need to seize the window of opportunity that had opened for
privatization before the state bureaucracies regrouped and resisted the
process.

But the actual experience revealed the pitfalls of the rapid
privatization approach. In the Czech Republic, for instance, the first
phase of rapid privatization did indeed transfer assets to millions of
ordinary citizens. Subsequently these assets ended up being consolidated
in investment funds. But there was no genuine restructuring of
enterprises, either because the investment funds lacked the capital to
develop them or because the funds were in turn controlled by state-owned
banks that did not impose so-called hard budget constraints. The weak
growth performance of the Czech Republic in the late-1990s, relative to
other Central and Eastern European countries, can be attributed in part
to its weak enterprise reforms.

In Russia, the country's mass privatization program of 1992-94
transferred ownership of over 15,000 firms into private hands. Reformers
recognized the importance of creating incentives for restructuring
through the establishment and enforcement of a clearly specified legal
and regulatory framework, and development of bankruptcy legislation.
Nevertheless, in part because of less-than-perfect implementation, the
privatization did not lead to self-induced restructuring of firms. It
was hoped that secondary trading would introduce outside ownership, and
that transparent methods would be used in the second wave of
privatization of remaining firms still in state hands.

Neither hope was fulfilled. Insiders were wary of relinquishing control;
workers feared the cost-cutting that might occur under outside control,
and managers found it easier to keep enterprises alive by lobbying the
state for subsidies than to foster competitive performance through
involvement of outsiders. The second wave of privatization, in
particular the so-called "loans-for-shares" scheme, systematically
favored parties with ties to government interests.

It is clear now that creating incentives for genuine restructuring of
enterprises was more important than moving property into private hands.
Imposing hard budget constraints to force out the chronic loss-makers
among the enterprises turns out to have been quite important in inducing
restructuring even if the enterprises were still in state hands.

What lies ahead for Russia? Several developments suggest that cautious
optimism about the country's prospects is warranted. After many false
starts, macroeconomic stabilization—a commitment to low inflation and
fiscal responsibility—appears to have taken hold in the period since the
1998 crisis. This is a welcome development as the experience of the
transition economies has shown that stabilization is a prerequisite for
sustained growth: many Central and Eastern European countries and the
Baltics, who had early and durable stabilizations, have had better
growth than countries which have been laggards.

Though it is too early to render a final judgment on the success of
Russia's "dirty privatization," some feel that it may be starting to
confer some broad-based benefits. MIT professor Rudi Dornbusch, arguably
the world's leading international macroeconomist until his untimely
death this July, said in a March 2002 interview: "It's true that the
Russian reformers ... privatized without much care for niceties ... Yet,
in the end, it worked. The massive privatization and restructuring of
state enterprises is paying off ... Now you can begin to think about
attracting foreign capital. Would that have been possible if Russia was
advised by someone who would still be drawing perfect privatization
schemes in his head?"

Acceleration of structural reforms in many areas and greater political
stability are other positive developments. High oil prices have helped
performance; Russia's ability to preserve these gains in the event of a
decline in oil prices will be a critical test.

To me, personally, another hopeful sign can be found in this description
by Lilia Shevtsova, a Moscow scholar, of her 19-year old son and his
friends: " ... I am amazed. These are people who are absolutely free of
old stereotypes. They don't remember communism. They have no fear or
inferiority complex. They are ready to live in this global environment.
They live on the Internet. My son spends nights at his computer chatting
with friends in all countries about chess, about music ..." The sheer
normalcy and universality of this description provides me with hope that
Russia is on the right path.

***

This article is excerpted from the author's forthcoming IMF paper
(written jointly with Prakash Loungani and Andrew Berg).