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. Last Updated: 07/27/2016

Heated Economic Debate and the Kalashnikov

In response to "How Russia Was Won," a comment by Anders Aslund on Nov. 21, and "Reforms on Autopilot?" a comment by Christof Ruhl and Julian Schweitzer on Nov. 15.

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Coming after the very interesting paper written by Christof Ruhl and Julian Schweitzer, Anders Aslund's contribution shows how thinking about the past influences our understanding of the present and future.

Generally speaking, I agree with Ruhl and Schweitzer: Russian growth is not on autopilot and the most recent economic data, if not hopeless, is not encouraging. The probability that Russia will experience economic stagnation next year is quite real. To understand why, however, involves not rewriting history -- an area in which Aslund has achieved unprecedented levels of excellence.

If we look back to before the 1998 financial crisis, the exchange rate issue is pretty much in evidence. But not for Aslund. He writes that Russia never had a current account deficit. Well, with all the money pouring in from the IMF and speculators mesmerized by GKO yields, what a surprise and what a discovery. A true revolution in economics.

It never occurred to Aslund that trade balance and the volume of imports were the true indicators of an overvalued exchange rate. And Russia's trade surplus declined fast from 1995 onwards, when imports were rocketing. As a matter of fact, imports would have been even greater but for the depression which dramatically reduced people's incomes.

If growth came so fast on the heels of the 1998 crisis, it was not because of reform-minded policies but because of the sharp devaluation. The economic policies of then Prime Minister Yevgeny Primakov helped too.

Remember that in the mid-90s, internal energy prices had been, more or less, raised to world market levels. Primakov and his deputy prime minister in charge of the economy, Yury Maslyukov (a Communist, horresco referens), let internal energy prices fall in relative value. Aslund seems not to remember that this government also raised export taxes on raw materials, which had previously been dismantled under IMF pressure. Such taxes have been instrumental in helping the Russian government to stabilize its budget policy.

Economic growth has been a fact since spring 1999 -- that is well before the much-vaunted tax reform and other reforms which seem so important to Aslund. Actually, when one looks at disaggregated data, there was growth as early as November 1998 in some industrial sectors.

Reading Aslund, one might think that growth began only after summer 2000, which is the very moment when the trend began to falter. Remember, too, that in spring 1999, Aslund's beloved IMF predicted a GDP fall of 7 percent for the year. The actual outcome is well known: growth of 5.4 percent, i.e. the IMF was off by 12.4 percent.

Facts are not Aslund's and his friends' forte; and not very surprising by the way. Acknowledging that growth came so much earlier would have downgraded the relevance of much of the "Gref reforms," which Aslund is so fond of. A lot of liberal reforms have been implemented since spring 2001 and sure enough, growth is disappearing.

To be fair, the Russian economy is going cold not just because of these reforms but because the government has let the exchange rate climb much too fast. Again and again, the exchange rate and the internal energy price variable emerge as the key issues.

The truth is that the 1998 devaluation greatly boosted internal producers' competitiveness. A comparison of the imports from September 1998 to August 1999 with those from September 1997 to August 1998, shows that imports decreased by nearly 50 percent, or a total yearly amount of $35 billion. In other words, the demand for locally-produced goods was considerably boosted even if total internal demand fell. Implementation of capital flow regulations significantly reduced capital flight. Profits accumulated through devaluation and low energy and utilities prices were then unable to leave the country and were thus available for investment projects.

Between 1999 and 2001, exports only account for about one-fifth of overall economic growth. This is significantly less than what most foreign observers expected.

However, after April 2000, the real exchange rate increased in two years by 33 percent. By summer 2001, the economy was again slowly going off track. The combination of strong exports returns and a too liberal exchange market organization led to a creeping real ruble overvaluation, which led to a progressive increase in imports. That sounded the death knell for the sustainable growth scenario and investment, but also industrial production growth rates declined sharply in 2002.

For all the impressive growth of the past three years, the country has still not crawled out of its depression hole. Even if the 4 percent growth target for 2002 is achieved -- which is highly questionable -- Russia's GDP would then just reach 75 percent of its 1991 level.

Even more disturbing is the fact that investment is still quite low as percentage of GDP. Even at the rebound apex, 2000 to 2001, investments never reached the required level, hovering around 14.5 percent of GDP. Between 1950 and 1970, Western European countries had figures above 20 percent and Japan consistently over 25 percent.

Another highly disturbing point is the fact that the federal authorities reduced to a considerable extent their investment contribution after the 1998 crash. With social and economic asymmetries across regions increasing rapidly (the gap between the poorest and the wealthiest region is now 1 to 23), such a policy raises a large number of highly sensitive economic and political issues.

Russia's current growth slowdown is spectacular and would have been much worse but for the re-evaluation of the euro against the U.S. dollar in a context where most imported consumer goods come from the euro zone. Any euro to U.S. dollar re-evaluation means a devaluation of the ruble to euro exchange rate. But for this process, industrial growth would have halted early in the fall of this year. With a euro to dollar exchange rate now stable at one to one, stagnation is to be expected by mid-2003 and the trade balance should deteriorate fast. Russia looks as if a new round of the Dutch disease is about to hit.

We are, then, far from the convoluted explanations of the past and present given by Anders Aslund; and Ruhl and Schweitzer are right when they warn about coming economic problems. Growth is not on autopilot and cannot be without due attention given to exchange rate control.

However, Aslund seems happy to stick to his virtual economic reality.

Jacques Sapir
Professor of Economics
School of Advanced Studies in Social Sciences

Aslund obviously never leaves his motorcade to see the way most Russians live. First these people recommend bad policies, and then when they fail, they claim that it was the "needed wake-up call."

Who woke up, Mr. Aslund?

Maybe Western pundits woke up to the fact that Russians can take care of themselves just fine, without spotlight-hungry academics telling them what to do. I have worked and lived in the former Soviet Union since 1995 and the only thing I have noticed about Western aid programs is that the funds were misappropriated, and even though everyone knew this, more funds were provided.

Now future generations of tax-paying Russians have to pay for this. Or worse, pay for haughty Western "aid" workers who charged $500/hour for lousy advice. Aslund should be ashamed of his comments, as they are condescending, incorrect and openly self-serving.

The Russian economic crisis was a disaster, leave it at that.

Tim McCutcheon
New York

Stellar Stiglitz Marred

In response to "Rewriting History," a comment by Joseph Stiglitz on Nov. 27.

The Moscow Times has been fortunate in its op-ed contributors this week, receiving an article from Joe Stiglitz, the Nobel-winning economist and former chief economist of the World Bank, in rebuttal to a piece by Anders Aslund, one of the original Western observers of perestroika. Unfortunately, Stiglitz's rebuttal is marred by a number of inaccuracies, to put it mildly.

The problem, and the reason for clarification, is not that a famous economist has made a few mistakes, or even that he may have twisted a few facts in the heat of a debate. The problem is that a star of Stiglitz's magnitude inevitably pulls lesser intellects into its orbit. There is a real possibility for his errors of fact and judgment to find their way into policy.

The distortions start at the beginning of his article, when Stiglitz claims that Russian GDP is currently still 30 percent below its pre-reform level in 1991. This point, which is not true, has already found its way into another article -- in The Moscow Times -- the very next day, followed by the attributive phrase, "economists say."

Yet if one thinks about this statistic for even a moment, it must obviously be a distortion. All of us who can remember 1991 in Russia know what a year that was: Fuel shortages caused aircraft to be grounded at random airfields throughout the country; there was no food, no shoes, no clothing in the shops, no gasoline at the gas stations, no parts for the few cars on the road. The authorities were warning that they would be unable to heat the city of Moscow during the winter. Sugar was rationed. Lines in front of the stores were many hours long. The West was sending humanitarian aid. Even casual recollection shows that Stiglitz must have got hold of a cooked statistic.

The way the GDP statistic gets cooked is very simple. Prices in the Soviet Union in 1991 were set by decree rather than by supply and demand. Thus the sum total of all goods and services produced, multiplied by their prices, gave a meaningless statistic, not comparable to today's GDP. An economist of Stiglitz's stature knows this perfectly well. But readers may not.

Similarly, Stiglitz claims that investment today is a mere 10 percent of its 1990 level, arguing that it must therefore be inadequate to sustain growth. Again, he knows better. First of all, like GDP, the 1990 measurement is based on state-set prices, as well as on wildly unrealistic official exchange rates and other misinformation. The black-market exchange rate in 1990, many will recall, was 10 times the official rate.

Second, in 1990, a very large percentage of the output of Soviet investment goods was devoted to the military -- no less than 80 percent of all machine-building throughout the 1980s, according to later studies. Does Stiglitz really believe today's investment levels should be compared with that? Third, in the late Soviet period the country had the equivalent of years of GDP locked up in dolgostroi, i.e., essentially permanent unfinished construction projects, some of monstrous proportions. Yet ultimately the Soviet Union collapsed because it was unable to provide real economic growth. Stiglitz, of all people, should know the absurdity of benchmarking today's investment volumes to this.

From this inauspicious beginning, Stiglitz's article moves on to further distortions.

He claims, for instance, that the IMF did not want Russia to devalue in 1998, when in fact it was the Russians who did not want to devalue. The strong ruble was the most visible and popular accomplishment of reform. By 1997, some 80 percent of all imports were consumer goods, of which Russian households were starved. It was clear that devaluation would curtail this, expropriating the real purchasing power of household savings. Naturally, the Russian political elite wished to avoid this. But Stiglitz appears to have forgotten the context, just as I have forgotten his pro-devaluation stance at the time. I cannot for the life of me remember him recommending devaluation, although he was in a very public role and claims that was his view.

Stiglitz then adopts a strange debating posture, when he pretends to think that "those like Aslund and the IMF" attribute Russia's post-crisis growth to land reform, banking reform, judicial reform and tax reform. Only Stiglitz, according to Stiglitz, understands that recent growth has resulted mostly from the twin blessings of (a) ruble devaluation and (b) high commodity export prices.

The audacity of this is stunning. I believe that every literate adult in Russia and every economist looking at Russia understands the terms of trade factors he mentions. Certainly, it is obvious that judicial reform, bank reform, etc., could not have sparked growth prior to their own implementation. Rather, these crucial reforms are hoped to provide the soil for growth once the direct external stimuli run down.

Strangely, Stiglitz actually denies that the 1998 collapse was a wake-up call for Russian policy-makers. He is terribly wrong to try to decouple the crash from the improved policies that followed the crash. Prior to 1998, the Russian fiscal deficit was regularly 7 to 8 percent of GDP. If that had continued after debt funding disappeared in 1998, it could only have been through the printing presses. Thus, there could have been no recovery and Russia would have fallen into hyperinflationary chaos once again, as it had earlier in the decade. Thanks to Russian policy-makers' refusal to ratchet up fiscal expenditures to match inflation, the chaos was unable to resume.

At various points in his article, Stiglitz alludes to alternative reform policies that could have been pursued. Apparently he believes that a more cautious approach relying on heavier regulation would have been more effective. As he explains, this would have meant postponing privatization, restructuring enterprises through state intervention, and, above all, a restrictive policy toward capital flows. Although clearly mistakes were made in Russian reform, some of them nearly fatal, this vision was not the answer. Postponing privatization would have given communist revanchism a serious chance. Restructuring enterprises through state intervention would have been an incompetent, corrupt, never-ending sham. And as to capital controls, they have existed all along. The real challenge remains, as it has been all along, to motivate investment, not to coerce it. Russia has had its share of the latter already.

Jim Nail
Pharos Financial Group

AK Harley-Davidson

In response to "Everybody's Favorite Gun Turns 55," an article by Simon Saradzhyan and Nabi Abdullaev on Nov. 21.

I read your article with regard to the venerable Kalashnikov design.

I served in the Canadian military for 21 years and have long been a weapons aficionado. I have had the opportunity to handle a multitude of foreign weapons during my career, but perhaps none which evoked the visceral reaction experienced with the Kalashnikov.

Its simplicity of design and almost indestructible nature make it a pleasure to shoot and inspire confidence. I have thought long and hard for a comparative term to describe this weapon from a Westerner's point of view.

The best analogy that I can offer up, as someone who is a devout motorcycle rider and mechanic, would be to state that the Kalashnikov is the Harley-Davidson of assault rifles.

There is simply no other comparison which fits.

Paul Prudhomme
Ottawa, Ontario