Doug asked me a question a while ago, and I have been mulling it over, but I don't have an answer.
I do have some marginal notes on Paul Krugman's diagnosis of Russia's current crisis, which runs:
...Nor are the Russian banks that have just
crashed really banks in the Western sense of the word. By and large
they have few depositors. Mainly they are in the business of
borrowing money from foreigners and using it to speculate in Russian
markets, above all in the market for government debt. Essentially,
instead of borrowing money directly from foreigners, the Russian
government has relied on a layer of politically connected middlemen
to act as conveyors of foreign funds.
This wouldn't matter so much, except that that government
borrowing has spiraled out of control. The reason is not excessive
spending--on the contrary, the government has let many basic
services lapse and has become erratic at best about paying its own
employees (notably, and frighteningly, the military). Instead, the
problem is an inability to collect taxes.
You might be tempted to attribute this inability to raise taxes to
administrative incompetence in a country unaccustomed to
dealing with free markets. But with its industrial base shriveled
and the dollar value of gross domestic product stunningly low even
before the recent collapse--last year's dollar GDP was about the same
as that of Mexico--Russia's economy is now dominated by the
producers of a handful of exportable resources such as oil, gas,
diamonds, and gold. These sorts of traditional, homogeneous
commodities are the kinds of thing that even primitive administrative
systems normally are able to tax. What is more, the insider-driven
process of privatization--in which state assets were in effect
distributed to political supporters, much as a medieval king might
assign dukedoms to his lieutenants--has led to highly concentrated
ownership of these resources. It has been suggested, in fact, that
seven men control about half of the country's marketable wealth. (In
Russia property really is theft, pure and simple.) So in a sense all
the Russian government needs to pay its bills is for those seven men,
plus a fringe of smaller-scale oligarchs who would surely follow their
lead, to pay the necessary taxes.
But the oligarchs own more than gas fields and banks. They also
own politicians. And they decline to pay.
A simplified account of the crisis would then run as follows. For
several years now, the Russian government covered its deficits
through indirect foreign borrowing--that is, foreign lenders
have provided money to "banks," which in turn have lent that money
to the government. The willingness of foreigners to provide this
money was based on the belief that eventually the oligarchs would be
willing to pay their due, and if they did the country's huge natural
resources would make it possible to honor its commitments.
However, in the last few months this confidence has evaporated.
Foreign lenders have been willing to provide money only at very high
interest rates (recently nearly triple world market rates)--and fears
that the government would try to inflate away its debt, or simply
default on it, led to interest rates on that (ruble-denominated) debt of
as high as 150 percent. This pessimism about the government's
solvency then became self-fulfilling. Given the need to pay such high
rates on its debt, the government needed to borrow even more,
further weakening confidence and pushing the rates still higher.
The devaluation of the ruble was a desperate attempt to buy a
bit more time. By reducing the dollar value of the government's debts,
while hoping to raise the ruble value of its receipts, it could narrow
the financing gap. But instead the devaluation convinced everyone
that the game was up and that the ruble was about to become more or
less worthless, and that was that.
The most striking thing about this story is how self-destructive
the behavior of the oligarchs seems to have been. It is very
much in their collective interest to have the current regime
survive, so that they can continue to profit from their ill-gotten
empires. Why couldn't they get together and agree to pay enough
taxes to keep their rackets going?
Krugman is puzzled that Russia's robber barons appear to be acting much more like short-term loot-and-run plunderers than like people who are in it for the long haul. This surprises Krugman. This surprises the U.S. government--which thought by now to see a lot more people willing to pay taxes to the regime than we now see--and it surprises me.
One reason that it surprises me is that I had largely bought the argument of my ex-freshman-roommate Andrei Shleifer's report (cowritten with Maxim Boycko and Robert Vishny) on the 1991-1994 phase of Russian privatization, the book _Privatizing Russia_. In their book Boycko, Shleifer, and Vishny lament that privatization wound up creating a very concentrated distribution of wealth--that fortunes had to be given to those with economic and political power or else no privatization would have happened, for:
...the government did not really own Russian companies, and...
privatization required first and foremost the co-optation of the
[existing] stakeholders. This meant winning them over by
rewarding each stakeholder's [potential] power to block privatization
with control and cash flow rights [in the privatized companies]....
[P]rivatization gave cash flow rights to those who had significant
control rights in the first place...
But they go on to say that the unequal distribution of wealth to the ex-nomenklatura that resulted from the 1991-1994 phase of privatization was a necessary cost to pay for a very good thing--privatization. Privatization was a very good thing because it had created what most people reading this would call a *bourgeoisie*:
Firms are now legally controlled not by politicians with... no concerns
for efficiency, but by managers and outside investors. Because they
have cash flow rights as well, these new owners have a much greater
interest in maximizing profits than the ministries ever had....
Russia is also poised to further reform its institutions. Privatization has
created a substantial class of property owners who are increasingly
demanding reforms that assure protection of property and contract
enforcement....
But perhaps the most significant consequences of privatization are political.
Privatization has created a class of property owners who have become the
clear economic beneficiaries, and political supporters, of further liberalization
of the Russian economy and society.... [This bourgeosie] will throw their
weight behind such critical reforms as land privatization, stabilization, and
free trade. More importantly, the new property owners support the economic
reformers who continue their struggle against communists and nationalists.
Privatization and reform have created powerful political interests that are
injecting some liberalism into Russian politics....
Would Russian politics be less divisive and volatile with slower reforms? Go-
slow advocates are surely right that price liberalization has hit the poorer
members of society the hardest, and that their welfare payments have not
kept up with inflation. Reforms would have been more popular, and politics
less divisive, if social payments had received a higher priority....
Will the reform constituency eventually prevail in Russia?... [Or] will it
go through a long period of Latin American stagnation?... Or will Russia revert
to an even worse form of statism?... The experience of Eastern Europe shows
how important it is to get some reforms going, both because markets build on
themselves, and because of the political interests that they engender....
In essence, the program was supposed to achieve a shift in Russia from one mode of production--call it industrial-bureaucratic feudalism--to another: the capitalist mode of production, the economic and political dominance of the *bourgeoisie*. Even if the process of creating a bourgeoisie was... imperfect, it was still worth doing. For once you created a *bourgeoisie* the inner dynamic of the capitalist mode of production would take over and would carry you to economic efficiency, industrial development, and--someday--to industrial social democracy and (perhaps) beyond.
The image held by Krugman, Shleifer, Vishny, Boycko, and a host of others (including me) of a *bourgeoisie*--of what happens when you depoliticize the economy, and create a class of people who profit from market exchange and economic growth--is a very old one. It is a vision that believes that if you put the bourgeoisie in command and marvelous things happen. It is a vision that is at its bottom based on some guy's recognition almost exactly 150 years ago that:
The bourgeoisie, historically, has played a most revolutionary part.
The bourgeoisie, wherever it has got the upper hand, has put an end
to all feudal, patriarchal, idyllic relations. It has pitilessly torn asunder
the motley feudal ties that bound man to his "natural superiors" and
has left remaining no other nexus between man and man than naked
self-interest, than callous "cash payment."...
The bourgeoisie has... been the first to show what man's activity can
bring about. It has accomplished wonders far surpassing Egyptian
pyramids, Roman aqueducts, and Gothic cathedrals; it has conducted
expeditions that put in the shade all former Exoduses of nations and
crusades.
The bourgeoisie cannot exist without constantly revolutionizing the
instruments of production, and thereby the relations of production,
and with them the whole relations of society....
The bourgeosie, during its rule of scarce one hundred years, has created
more massive and more colossal productive forces than have all preceding
genrations together. Subjection of nature's forces to man, machinery,
application of chemistry to industry and agriculture, steam navigation,
railways, electric telegraphs, clearing of whole continents for cultivation,
canalisation of rivres, whole populations conjured out of the ground--what
earlier century had even a presentiment that such productive forces slumbered
in the lap of social labor?
Yet the bourgeoisie that the Yeltsin regime has created does not seem to be *this* kind of entrepreneurial, risk-taking, pro-development kind of bourgeoisie. It is a how-much-wealth-can-we-move-to-Cyprus before the situation blows up kind of bourgeoisie.
David Landes has said to me that the Russian reform program suffered from all the defects enumerated by Karl Popper in his attack on whole-scale social engineering: that it was a naive application of primitive and vulgar Marxism to imagine that by using the state to transform property relations you could totally transform the society. For much more than private property and a market economy were needed to create the classical nineteenth-century bourgeoisie. You needed the cultural patterns of northwest European Protestantism and the political patterns of limited royal administrative power and parliamentary control over finances that came out of the 500-year decay of feudalism as well--you needed a lot of things that were completely lacking in end-of-the-twentieth-century Russia (though, curiously enough, not completely lacking at the end-of-the-twentieth-century in Poland or the Czech Republic or in Eastern Germany). And it seems to me that Landes's is a fair criticism...
But that still leaves the question: what is to be done?
What would be a good next step for Russia?
BRad DeLong