In the 1990s, a small coterie of economists at Harvard and MIT, such as Jeffrey Sachs, Larry Summers, Andrei Shleifer, Jonathan Hay, and Stanley Fischer, played a crucial role in recent history by advising the government of Russia to rapidly privatize its economy. Much of the wealth of Russia wound up being stolen by a tiny number of oligarchs.
The President has nominated Dr. Fischer, who recently resigned after eight years as head of the Israeli government's central bank, to be vice chairman of America's central bank, the Federal Reserve. This might be a good time to reflect upon the successes and failures of Dr. Fischer's recommendations in contributing to the Rape of Russia.
Fischer was not the public face of the experts from Cambridge, but he appears to have been a respected insider, as he remains today. His nomination to the Fed has been greeted with outpourings of praise from global financial insiders and very little skepticism from the less privileged.
As far as I know, nobody has ever accused Fischer of attempting to unethically profit off of the disaster he helped create in Russia, as the Federal government fined Shleifer and Harvard for doing.
Still, Fischer was there at the creation. He had numerous chances to speak out publicly about what was going horribly wrong in a Russia that looked to him and his friends for advice.
Fischer's role in Russia in the 1990s can be seen from contemporary documents:
Yeltsin Arrives In US to Discuss Trade, Politics
EVEN before Boris Yeltsin touched down on United States soil June 18, the newly elected president of the Russian Republic had scored public relations victories on two fronts. ...
Yeltsin arrives in the US at the height of debate over what the West should do, if anything, to prevent a possible collapse of the Soviet economy and promote genuine, lasting market reforms.
The enthusiastic reception of Yeltsin's visit could bolster Gorbachev's bid for Western economic aid, because as a noncommunist and as the first democratically elected leader of Russia, Yeltsin could be instrumental in helping Gorbachev implement radical market reforms.
Over the weekend the much-discussed "grand bargain" proposal linking Western aid to Soviet reform, drawn up by US and Soviet academics at Harvard University, was delivered to the White House and the Kremlin.
... At the unveiling June 14 the plan's architects did not project an exact cost of the proposal, which would provide credits and cash to ease the hardships that would result from the shift to a market system and a convertible currency. But Stanley Fischer, an economist at the Massachusetts Institute of Technology (MIT) who took part in the project, says for the first few years the figures would be "large between $20 billion and $25 billion a year, a cost to be borne by the Western industrialized nations.
The first step, says Dr. Fischer, is for the Soviet Union to gain associate status at the International Monetary Fund and the World Bank, which will then oversee the country's economic restructuring. The big change, he continues, would start in 1992, when price controls would be lifted, trade restrictions would be eased, and the money supply and budget deficit put under control.
When asked if Yeltsin will support the plan, Mr. Yugin said, "I think we will." ...
Gorbachev aide Yevgeny Primakov and First Deputy Prime Minister Vladimir Shcherbakov, have distanced the Kremlin from Grigory Yavlinsky, the lead Soviet economist on the Harvard plan.
Mr. Yavlinsky's murky status is "convenient for everybody involved," says Fischer of MIT. If the plan is deemed workable, everyone can embrace Yavlinsky's work, Fischer says. If not, the Kremlin will not be seen as having failed yet again to follow through on an economic reform plan.
From the Christian Science Monitor, June 5, 1992:
Improving the World With Academic Advice
RUSSIA'S First Deputy Prime Minister Yegor Gaidar knows quite a bit about the problems Latin American nations have had with populism and hyperinflation. That's because Rudiger Dornbusch, a Massachusetts Institute of Technology (MIT) economist [and co-author with Stanley Fischer of the textbook Macroeconomics], "Fed-Exed" the Russian economic reformer a bundle of 15 or so books on that topic, figuring it would help him deal with Russia's similar difficulties.
"He actually studied them," says Dr. Dornbusch, one of several United States professors giving economic advice to the Russians.
Another MIT economist, Stanley Fischer, got back last Saturday from Moscow after spending several days working with the Russian Central Bank.
These two aren't alone. A sizable group of well-known academics from MIT and Harvard University are acting as consultants, paid or unpaid, to foreign governments. Their advice is actually having some impact on world affairs.
Probably the most famous of these economic advisers is Jeffrey Sachs, a Harvard economist who has been on leave for almost two years. He helped the Polish government undertake crash economic reforms aimed at moving toward capitalism. Nowadays he has an office in Moscow, advising the government of Boris Yeltsin on such matters as negotiations with the International Monetary Fund (IMF) over economic reforms, foreign debt issues, and budget questions.
"Jeff is a bulldog," Dornbusch says. "He has made a difference."
Several other economists from MIT and Harvard dabble part time in the mini-industry of giving advice to foreign governments.
"We do it because it is extremely interesting," Professor Fischer says. While in Moscow, for instance, he learned enough about the political situation to anticipate the resignation of the Central Bank's chairman, Georgi Matyukhin. He can even speculate on successors. Fischer also gives advice to Israel on visits to that country.
From the Christian Science Monitor, December 11, 1992:
MIT's Mr. Fischer hopes Gaidar will push ahead even faster with privatization of industry, getting the budget in shape, and other reforms. But the Russian government, he says, doesn't have "a coherent policy" for dealing with the large enterprises within the "military-industrial complex."
From the appendix of a 1993 Brookings Institution report Privatizing Russia by Shleifer, Maxim Boycko, and Robert W. Vishny, here are Fischer's comments on the success of the recommendations made by himself and his colleagues:
Comments and Discussion
Stanley Fischer: Privatization stands out as the most successful element in the Russian reform program. Indeed, Russian privatization is even outpacing privatization in other countries in the former Soviet Union and in eastern Europe.
Conversely, the slower pace of privatization in countries like Poland shows that the Rape of Russia didn't have to happen, or least not as flagrantly.
This interesting paper, written by some of the important thinkers behind the program, helps explain why.
... Apparently, the authors, like other observers, do not yet see much in the way of restructuring taking place.
Does that mean that the authors should have urged delaying privatization until they had invented a scheme that would guarantee rapid restructuring? The answer is no, because it was crucial to move these firms out of direct state control. Should the lack of restructuring cause a slowdown of the privatization process? Again, the answer is no, for the same reason.
... Was there an alternative that would have produced more rapid restructuring? The answer is yes, but that decision belonged not to the privatizers but to Boris Yeltsin. He could have pushed for a more aggressive reform program, but chose instead to confront his congressional rivals more slowly.
... The paper gives the impression that all politicians are bad. But at some point it becomes clear that Anatoly Chubais, Boris Yeltsin, and the reformers are good politicians. So this is really a paper about the good guys versus the bad guys, and we do not know what drives the good guys, and what differentiates them, except that we are on their side and they on ours.
... Beyond the privatization of industrial firms lies the challenge of privatizing agriculture and housing. Given the speed at which the current privatization is proceeding, the authors will soon be able to turn their talents to those problems.
> From The Piratization of Russia by economist Marshall I. Goldman:
Gaidar [acting Prime Minister of Russia in 1992] was a strong proponent of a market system. He was an even stronger advocate of privatization and, for that matter, a whole package of near-simultaneous reforms that came to be known as “shock therapy,” and today is called the “Washington Consensus.” Gaidar had come to this concept as a result of his studies as well as from a series of discussions with economists from both Eastern Europe and the United States. Among those interacting with Gaidar at one stage or another were Jeffrey Sachs, Andrei Shleifer, Jonathan Hay, all of Harvard University, Anders Aslund of Sweden, and, later, the Carnegie Endowment and Richard Layard of the London School of Economics. IMF officials and Stanley Fischer in particular had long advocated something similar, that is, simultaneous and far-reaching economic liberalization (that is, micro policy reforms combined with determined macro restrictions to curb inflation).
From Wikipedia' article on Yegor Gaidar:
Gaidar was often criticized for imposing ruthless reforms in 1992 with little care for their social impact. Many of Gaidar's economic reforms led to serious deterioration in living standards. Millions of Russians were thrown into poverty due to their savings being devalued by massive hyperinflation. Moreover, the privatization and break-up of state assets left over from the Soviet Union, which he played a big part in, led to much of the country's wealth being handed to a small group of powerful business executives, later known as the Russian oligarchs, for much less than what they were worth. As society grew to despise these figures and resent the economic and social turmoil caused by the reforms, Gaidar was often held by Russians as one of the men most responsible.
In 2011, Fischer deliver the Gaidar Memorial Lecture.
In 1994, Fischer became America's man at the International Monetary Fund, its number two official. (By custom, Europe gets the top IMF guy, while America gets the top World Bank official.) On January 9, 1998, Fischer delivered this less than prescient speech:
The Russian Economy at the Start of 1998
January 9, 1998
Six years after the start of the Russian economic reform process, much has been achieved and the continued progress of the economy towards economic normalization is not in doubt. ...
Nineteen ninety seven was a year of achievement for the Russian economy.
For the first time since 1992, the economy grew, albeit barely. The current account of the balance of payments was in surplus. The Central Bank of Russia once again proved its professionalism, as inflation continued to decline, and as late in the year it successfully fought off contagion effects from East Asia and maintained the currency band. At the start of 1998, with a broadened currency band, and a non-confiscatory currency reform under way, confidence in the maintenance of monetary stability should continue to strengthen.
In 1997, as in 1996, central government revenue shortfalls constituted the major failure of macroeconomic policy. At the start of 1998, fiscal reform and performance remain both the crucial element and the crucial question at the center of Russia’s economic program with the IMF. The reform of the tax code and increased revenue collection are on one side of the equation; on the other side, increasing the efficiency of government spending and strengthening expenditure management deserve no less attention. Equally important for future growth is continued progress with structural reforms, whose implementation had for some years lagged until recently — but it must be noted and emphasized that the structural components of the Russian reform program moved ahead as agreed with the IMF (indeed even a little faster) during 1997.
I am also happy to report that the IMF Executive Board yesterday completed the delayed sixth quarterly review of the Extended Fund Facility with Russia, and — laying particular stress on the fiscal action plan agreed between the Russian authorities and the Fund staff in December — agreed to disburse a $700 million tranche, thus bringing the program back on track.
I. Achievements of the past six years.
Six years ago, Russia set out on the road to a market economy by liberalizing prices and beginning to dismantle the instruments of central planning. In these six years, Russia has made remarkable progress in important areas. ...
Market development: A large and increasing share of Russian economic activity is channeled through market mechanisms. In its latest Transition Report, the EBRD estimates that 70 percent of GDP is accounted for by the private sector.4 This vibrant private sector, for all its imperfections, has become the major agent of economic growth and change.
... The experience of other transition economies, as analyzed in a number of studies, suggests that Russia will move onto a sustained growth path as inflation falls and fiscal adjustment and structural reforms proceed. In many respects, Russia has an exceptionally favorable basis to achieve that end: important natural resources, including minerals and energy; a highly educated labor force, which is still employed to a large extent in the less productive state sector; and a potentially large domestic market with pent-up demand for consumer goods and social infrastructure. However, a major constraint to Russia attaining satisfactory rates of growth is that the process of structural reform has not gone far enough.
Indeed, empirical analysis has shown that the main reason why growth in Russia and other CIS countries lags behind the record of the Eastern European and Baltic countries is the slower pace of market-oriented structural reform.6 While Russia has made substantial strides in some areas of structural reform (notably small scale privatization, the liberalization of the trade and foreign exchange system and, to a lesser extent, natural monopoly regulation), there are important areas where much more progress is needed.
... With macroeconomic stability close to being attained, the focus now must shift to structural reform, particularly private sector development. A fast pace of economic recovery will demand substantial increases in efficiency and capital accumulation, and these in turn demand a competitive business environment. Certain elements of such a business environment (such as a market culture) cannot be developed rapidly or established by government action, but other major elements (including the legal and institutional framework) can be. Such efforts are under way in several areas:
1. Faster, more transparent privatization and improved management of state-owned enterprises. The privatization program was stepped up in 1997 after a disappointing record in 1996, and the Government’s privatization plan for 1998 envisages a further acceleration. The new privatization norms call for an open, transparent, and competitive process — elements of which were missing in earlier waves of privatization.
You know, there's an inherent trade-off between velocity and transparency of privatization schemes. The faster you push privatization, the more likely it is to turn out to be piratization. Is it really too much to ask that seven years or more after he began poking his nose in Russian affairs that Dr. Fischer might have figured that out by 1998?
... In summary, Russian economic reform is entering a less dramatic phase than that of the last few years: the most important battles in securing macroeconomic stabilization and creating a market economy have been won; but much remains to be done to secure the future growth of the economy.
Up to this point, the optimists on Russia have been more right than the pessimists. There is good reason to believe the optimists will continue to be right.
Eight months and eight days after Fischer's speech, Russia defaulted.
Dr. Fischer is a thoughtful man who is not always afraid to say he was wrong in the past, but nobody today seems to be interested in giving him a chance to publicly reflect upon anything he has learned from the world-historical mistakes that he and other elite economists made regarding Russia in the 1990s.
Who knows? Maybe he'd like to take this opportunity to apologize to the Russian people ...
But, even if Fischer's conscience is bothering him about the Rape of Russia, it's not that likely that he'll be given much of a chance to apologize for screwing up so badly. There really isn't much of a market for skepticism about the documented track records of Federal Reserve leaders.
Thus, for years Alan Greenspan was treated as a genius by the media, because ... what if he weren't really a genius? What if he were just some Ayn Rand cultist? Well, that possibility was too horrible to contemplate, so everybody agreed to keep him in office over and over until almost his 80th birthday in 2006. What could possibly go wrong?
Instead, it's best not to undermine confidence by asking our economic superiors to account for their track records.