>From the Progressive, year 2000.
Chris Doss The Russia Journal ----------------------------
Q: What did the Washington consensus tell the former Communist countries to do?
Stiglitz: Countries were told they had no incentives because of social ownership. The solution was privatization and profit, profit, profit. Privatization would replace inefficient state ownership, and the profit system plus the huge defense cutbacks would let them take existing resources and have a higher GDP and an increase in consumption. Worries about distribution and competition--or even concerns about democratic processes being undermined by excessive concentration of wealth--could be addressed later.
Q: How did U.S. Russia policy develop?
Stiglitz: In the early 1990s, there was a debate among economists over shock therapy versus a gradualist strategy for Russia. But Larry Summers [Under Secretary of the Treasury for International Affairs, then Deputy Secretary of the Treasury, now Secretary] took control of the economic policy, and there was a lot of discontent with the way he was driving the policy.
The people in Russia who believed in shock therapy were Bolsheviks--a few people at the top that rammed it down everybody's throat. They viewed the democratic process as a real impediment to reform.
The grand larceny that occurred in Russia, the corruption that resulted in nine or ten people getting enormous wealth through loans-for-shares, was condoned because it allowed the reelection of Yeltsin.
Q: What effect did the policies pushed by the United States and the IMF have on the Russian people?
Stiglitz: Both GDP and consumption declined. Living standards collapsed, life spans became shorter, and health worsened. Russia achieved a huge increase in inequality at the same time that it managed to shrink the economy by up to a third. Poverty soared to close to 50 percent from 2 percent in 1989, comparable to that of Latin America--a remarkable achievement in eight years.
Q: How did that happen?
Stiglitz: Put yourself in the shoes of one of these oligarchs who has been given a gift of $10 billion. Russia is in a deep depression. Nobody's investing. There is a widespread political consensus that the way you got your wealth is illegitimate. Through political connections, you got the government to give you a huge oil field. You sell oil. What do you do with the revenue? You have a choice: You can invest it in the booming New York stock market, or you can invest it in Russia, which is in a depression. If you invest it in Russia, you are risking that eventually there will be a new government that says, "Yeltsin was a crook, and you got the money in an illegitimate way." And the IMF invites you to take the money out, because free capital markets are the way of the future. Then, to make your life even easier, in August 1998 the IMF comes in and says we'll give you $5 billion or $6 billion to up the exchange rates so you can get more for your rubles to take over to Cyprus in the next day or so.
Q: What would you have done?
Stiglitz: The incentives worked.
Rather than providing incentives for wealth creation, privatization provided incentives for asset-stripping, with huge movements of capital abroad--$2 billion to $3 billion a month. Policies seemed almost deliberately designed to suppress new enterprise and job creation. The excessive focus on macrostabilization led to interest rates of 20, 30, 40, 250 percent. There is little domestic or foreign investment except in natural resources. How many Americans will start a business if the interest rates are 150 percent?