[A-List] Russia: Stiglitz on shock therapy

["Michael Keaney" <michael.keaney@xxxxxx>]

Just got in my hands a copy of Stiglitz's latest, "Globalization and its
Discontents", which upset the IMF so much that Kenneth Rogoff lost his
temper publicly. It looks worth digging into, because, among the undoubted
gems, are some interesting omissions. For example, Stiglitz has plenty of
good stuff to say about Russian "shock therapy", and is damning about it and
some of its advocates and practitioners. Yet there is not a single mention
of Jeffrey Sachs and only a brief and not apparently unsympathetic cite of
Anders Åslund. Richard Layard and John Parker ("The Coming Russian Boom")
are easier to make fun of although Stiglitz lets them off the hook. Instead
he gets busy singling out the efforts of Andrei Schleifer, who certainly
deserves to be held accountable for his preposterous "theorising" and
apparently dodgy financial dealings.

Stiglitz agrees with Peter Reddaway and Dmitri Glinski that the shock
therapists were simply "market Bolsheviks", stampeding their vanguard over
the masses in order to revolutionise Russian society and economy. Here's an
extract:


Those who advocated the Bolshevik approach not only seemed to ignore the
history of such radical reforms but also postulated that political processes
would work in ways for which history provided no evidence. For instance,
economists such as Andrei Schleifer, who recognized the importance of the
institutional infrastructure for a market economy, believed that
privatization, no matter how implemented, would lead to a political demand
for the institutions that govern private property.
     Shleifer's argument can be thought of as an (unwarranted) extension of
Coase's theorem. The economist Ronald H. Coase, who was awarded a Nobel
Prize for his work, argued that in order to achieve efficiency, well-defined
property rights are essential. Even if one distributed assets to someone who
did not know how to manage them well, in a society with well-defined
property rights that person would have an incentive to sell to someone who
could manage the assets efficiently. That is why, advocates of rapid
privatization argued, one didn't really need to pay close attention to how
privatization was accomplished. It is now recognized that the conditions
under which Coase's conjecture is valid are highly restrictive -- and
certainly weren't satisfied in Russia as it embarked on its transition.
     Shleifer and company, however, took Coase's ideas further than Coase
himself would have done. They believed that political processes were
governed in the same way as economic processes. If a group with vested
interests in property could be created, it would demand the establishment of
an institutional infrastructure necessary to make a market economy work, and
its demands would be reflected in the political process. Unfortunately, the
long history of political reforms suggests that the distribution of income
does matter. It has been the middle class that has demanded the reforms that
are often referred to as "the rule of law". The very wealthy usually do far
better for themselves behind closed doors, bargaining special favors and
privileges. Certainly it has not been demands from the Rockefellers and the
Bill Gates of the world that have led to strong competition policies. Today,
in Russia, we do not see demands for strong competition policy forthcoming
from the oligarchs, the new monopolists. Demands for the rule of law have
come from these oligarchs, who obtained their wealth through
behind-the-scenes special deals within the Kremlin, only as they have seen
their special influence on Russia's rulers wane.
    Demands for an open media, free from concentration in the hands of a
few, came from the oligarchs, who sought to control the media in order to
maintain their power -- but only when the government sought to use its power
to deprive them of theirs. In most democratic and developed countries such
concentrations of economic power would not long be tolerated by a middle
class forced to pay monopoly prices. Americans have long been concerned with
the dangers of concentration of media power, and concentrations of power in
the United States on a scale comparable to that in Russia today would be
unacceptable. Yet U.S. and IMF officials paid little attention to the
dangers posed by the concentration of media power; rather, they focused on
the rapidity of privatization, a sign that the privatization process was
proceeding apace. And they took comfort, indeed even pride, in the fact that
the concentrated private media was being used, and used effectively, to keep
their friends Boris Yeltsin and the so-called reformers in power.
--Joseph Stiglitz, "Globalization and its Discontents", London: Allen Lane,
2002, pp. 163-5