Johnson’s Russia List #8081. 24 February 2004
I am an author of How to Make Russia a Normal Country (in Russian, 2000, 2002), so it is good to be able to comment on an article that suggests that the task has been accomplished. Maybe I should rename my book for the third edition, something like Normal Already: Trade On Tips Without Fear And Make Hay.
I would define “normal” as “whatever you should be to satisfy my expectations”. Shleifer and Treisman end their article by noting that Russia, a country that was an “evil empire” as little as 15 years ago, no longer threatens America. Good! We achieved the goal, and that makes Russia “normal”. But what have we been doing to achieve this goal? Making Russia respect our democratic values or making sure that its factories stop, its missiles rot, and its President keeps ignoring the greatest AIDS and drug abuse epidemic in the world? Is it “normal” that Russia declined or is it “normal” that, despite it all, it is still around? To me, the article did not make that clear. As far as threatening America, since Russia is run by criminals and dangerously unstable, I believe that it threatens America MORE than 15 years ago: Russia is fully capable of producing WMD-armed Osamas by the dozen, and, unfortunately, we are likely to find it out the hard way.
Why do I find the article so confusing? Because Shleifer and Treisman use a faulty rhetorical device that could be used to “prove” anything. Let me illustrate it.
Marina’s puffed-up eyes only underscore how blue and big they are, shining, even though they are a bit red today, on her beautiful face, framed with long tresses of curly hair in some disarray. Her dress, lovingly sewed-up by her grandmother, becomes her very much, the patch only making Marina look younger. Her hands, showing some scratches, probably caused by a playful kitten nearby, clutch the Macroeconomics textbook, strongly indicating that this young lady’s future will be bright. Marina is not pregnant nor does she have a venereal disease: the tests came in negative, so there is nothing to prevent her girlish dreams from coming true. It does not matter, therefore, that Marina was brutally gang raped a few days ago.
Well, there is only one way to objectively describe a sequence of events: First, we describe what actually happened, and then we describe what could reasonably have been done differently. If it could be demonstrated that the result could have been better than the one achieved, then the actual result should be designated as regrettable.
Russia in 1991 was largely pro-democratic and pro-American country ready for genuinely friendly relations with America. It had sufficient number of well-qualified people who could have been easily and quickly retrained, creating a basis for viable, competitive economy. Russia had reasonable industry that could have been put to productive use provided it was incorporated into the world economy through ownership or supervision, management, and training program. In other words, in 1991, Russia had plants that could have, with some retooling and retraining, produced parts for Boeing or assembled competitive automobiles. On the other hand, Russian population was gullible, not ready to govern itself or stand up for their rights. Non-communist elite was small and not capable of assuming effective control. All large enterprises belonged to the state and were being run with great inefficiencies. But there also were huge natural resources.
In April 1990, I participated in a conference at Moscow University where I gave a talk describing my proposal for privatization of Russia. It did involve vouchers, though not one per person, so as to equalize some glaring injustices that had been committed by the Soviet regime. But the main point was that the ordinary Russians were to entrust their vouchers to qualified western investment banks, and these banks were to seek acquisition or partnership proposals on the world market, so as to incorporate Russian economy into the world economy. Also, very importantly, the government was NOT to assess any taxes on small and medium enterprises, but instead was to rely mostly on rent derived from natural resources. That would have reduced bureaucratic control over most entrepreneurs, and that would have precluded the “krysha” phenomenon. Today, I can safely say that my proposal was much better (that is, if we wanted a prosperous Russia) than the one implemented by Chubais. I should note in passing that in 1993-1994 I worked as expert for the Working Center for Economic Reform of the Russian Ministry of Economics for one and a half years (earning $26 per month, which is not a lot for an American with an MA from Yale), and not for a minute was I able to even come near to any HIID/USAID project. The fountain of cash was jealously protected.
Now, here is the list of avoidable mistakes and undesirable consequences.
Vouchers were given to individual Russians, who could do nothing with them, and so gave most of them to pyramid schemes or sold for a bottle of vodka. At the same time, Potanin bought Norilsk Nickel for a bottle of vodka as well. The “loans for shares” auctions severely undermined Russians’ trust in capitalism, our major intangible asset in the early nineties.
Shleifer and Treisman have got to be kidding when they compare Russian oligarchs with Korean ones. Thieves do not produce anything: they steal. The Russian oligarchs did not produce an LG Flat Screen or a Daewoo automobile. We are talking a different set of skills and attitudes here. In the US, Bill Gates has a lot of influence in computing. In Russia, the Minister of Communications has comparable influence in computing. But there is subtle difference between the two. Bill wrote the code, and then he did it again, and again, and again - and each time it was better. Leonid Reiman is just a friend of Putin’s - that is all he is.
Our insistence on exorbitant taxes destroyed most Russian enterprises, drove all private entrepreneurs to seek protection from mafia, and fed an enormous expansion of Russia’s envy-driven bloodsucking “bureaucrats” who do nothing for people yet serve as a shining example of thrift, driving to work in cars costing 60 years worth of their salary. A Russian bureaucrat may earn $2K per year, but his car could be worth $120K.
Thus, by the time vouchers kicked in, most Russian enterprises were already idle, totally destroyed, without a market, and suffering under a mountain of debt, their trained staff gone and their machine tools sold for scrap metal. An average Russian citizen got only $30 for his privatization voucher, whereas Chubais promised that it would cost at least as much as a new car.
Since all property was administratively distributed, real banks did not appear, as there were no real businesses to finance. The banks that did appear were all vying for state funds and thus were corrupt, uncontrollable, and speculative institutions. This “banking system” contributed to collapse of August 1998, wiping out, yet again, savings of ordinary Russians. Why was it so? Because value of a currency is ultimately determined by goods and services that people produce. Since in Russia people either did not produce or produced “in hiding”, Russian currency had arbitrary value that depended only on the amount of IMF loans Russia could get (and then distribute among a small group of cronies).
That collapse destroyed what was left of people’s trust in capitalism and democracy. Also, by that time Russians were mostly underemployed, impoverished, dismayed, and confused. That sealed the fate of democratic movement. Without grassroots support, Russia’s “democratic” parties turned into Moscow discussion clubs, and could not nurture and attract new leaders.
No wonder that Putin is seen as a Messiah, which he is not. In fact, Putin is fundamentally incapable to solve Russia’s problem: because he is the purest manifestation of that very problem.
The problem I am talking about is actually as old as Russia’s history. Here is what it is. Russian citizens (all Russian citizens, and that includes Khodorkovsky) have no private property. All that the Russians have is conditional property, a permission from a bureaucrat, which says, “Live as you like, until discovered”. Since Russians do not have private property, they do not have the rights, and since they do not have the rights, they are not real humans. And this is the key to entire Russian history.
Now, Russians look like humans, act like humans, and, on occasion, write mighty good poetry. And so the question that is being asked in Russia, time and again is: “If they look so much like humans why don’t we turn them into humans?” “And how to do that?” “Easy: just give them the rights. They get the rights - then they acquire private property - it would protect and expand the rights - and they would then be human.”
But the Russian rulers never did take this advice. Take Peter the Great. He went to Holland, a tiny barren piece of marshland, wealthy as can be, showing what labor and endeavor of free individuals can accomplish. Peter saw it, liked it, and implemented it: upon his return, he collected hundreds of thousands of slaves and they built St. Petersburg, working to death, unpaid, hungry, and savagely beaten.
Then there was the liberation of slaves of 1861, and predictably, the slaves were liberated conditionally and without property. Then there was a revolution of 1917. Some were demanding that a piece of land should go to each individual peasant. But the winning idea was that the land should be given to “the people”, meaning that no individual would get any.
Same with Putin. Russian soldiers are going hungry. I say, “Feed them, they are human beings”. But Putin says, “Since they have been going hungry, it is fine for them to go hungry.” I say, “The crew of the Kursk! All of these guys drowned!” Putin smiles and says, “It sunk.” I say, “Granted, the Russians do not know whom to vote for. But this is the reason to teach them self-respect, basic economics, and civics - and to give them a real choice”. Putin, says, “Since they do not know whom to vote for, I’ll make them all vote for me”. Chechnya. The Dubrovka “chemical rescue”. The list goes on and on.
And this is the main point. We had a real chance to build a Russia populated by plenipotentiary citizens, and therefore genuinely prosperous and friendly towards the world. Instead, the entire wealth and power ended up in the hands of those who treat ordinary people as if they were dogs: not with hatred, not with derision, but kindly, if the mood is right. They are, however, never invited to the table.
And that is why Russia’s huge problems: public health, AIDS, drug abuse, Chechnya, the whole Caucasus issue - are not being solved, and cannot be solved. As far as the economy, the whole business climate, though improving, has been greatly damaged by the fact that the “captains of industry” are not self-made men, but former bureaucrats, bandits, or influence peddlers. Since there are no self-made men, but clans, the decision-making process is complicated and the decision is always politically, rather than economically, motivated. Indeed, the price of apples on a peasant market is politically, rather than economically motivated: there is always an Azeri guy who tells you what your price should be.
We could and should have done much better job helping Russia to become a prosperous and democratic state. If we wanted to cut Russia down to size, we have done an admirable job of it. But if indeed this was the design, it is likely to have catastrophic consequences for us in terms of security and world piece. When China would lay a claim to Siberia, I would not want to be around, and I am happy to hear they found water on Mars. If, however, Mr. Shleifer wants us to believe that he has done a good job helping to reform Russia’s economy, well, let’s just say I disagree.