Successful reforms, bad privatizations

From time to time I come across articles in which the authors strongly criticize the economic reforms in several Eastern European countries and Russia in the early 90s (Big Bang), not missing the opportunity to mention the role of Jeff Sachs (usually in a very negative context). In this article I am not defending Sachs, but the economic reforms implemented at that time and in those countries. I emphasize "at that time" and "in those countries" because the circumstances at that time in Poland, Russia and Yugoslavia (three countries that I know relatively well, and whose reforms Sachs participated in) were something quite special, in many respects incomparable to some other examples macroeconomic adjustments. In the aforementioned reforms, which I believe were inevitable and successful, Jeffrey Sachs played a very positive role.

But that's not all I have to say: the frequent attacks on the Big Bang reforms can to some extent be explained by the insufficient knowledge of the situation at the time and the easy identification of macroeconomic reforms and privatizations, which were initiated at approximately the same time, but represent two independent processes. The big bang produced good results. After one year of declining production and real wages, the implemented reforms enabled Poland to embark on the path of accelerated economic growth. The results would probably have been similar in Russia, had not ill-advised and unfair privatization produced a kleptocratic oligarchy whose net contribution to innovation was zero and whose capacity to extract surplus value thanks to good political connections soon spiraled out of control.

These two topics (macrostabilization in the late 80s and early 90s and privatization) are enough for a whole book - and much more than a book. Here I will just try to offer a bird's eye view of the economic problems in Poland in 1989, Yugoslavia in 1990 and Russia in 1992. I know the case of Poland best because I worked and lived there for several months between 1987 and 1990, I knew or at least met most of the main actors. , including Sachs, and I spoke the language. I already am wrote about Polish stabilization (access to the text is paid, but if you write to me, I will be happy to send you the article) and, of course, I have written a lot about inequality and poverty before and after the reforms - for example, in this books and this one article).

The most important thing to remember is that by the time the reforms were implemented, the state had already lost control over the economy. That is why these were not standard macroeconomic interventions, as for example in Egypt or Argentina, where the economy normally behaves "normally", but there are certain fiscal or external imbalances. In the case of Poland, the economy was in free fall, several different exchange rates were in circulation in the country, hyperinflation was already heating up, companies were no longer under the control of state ministries, and had not yet transitioned to market functioning. Fights over jurisdiction (who decides on work discipline, to whom goods are sold, from whom they are bought, where loans are taken) were fought in every single company, up to the highest levels of management. Neither coercion nor incentives gave results anymore.

In such a situation, the only way out was reforms for macroeconomic stabilization or the Big Bang. The reform program only verified something that was largely happening in an extremely chaotic and unpredictable manner. Instead of turning a blind eye to the different courses, the reformers united them into a single course; instead of promising subsidies that the state was no longer able to provide because the tax system had collapsed, they formally abolished them; instead of pretending to impose price controls (or their freezing, as in Yugoslavia) that the state was no longer able to enforce, they legalized market-based price formation.

Hence, the Big Bang was less a usual program of macroeconomic reforms and more a simple confirmation (or legalization) of something that had already happened. The reforms accepted the fact that the state had lost control. It was practically announced that the state no longer has the political power to influence events in the economy, beyond its minimal functions, that the functioning of the economy must be left to the market, and one day, when it regains political legitimacy after the elections and a certain measure of stability is achieved, the state can try to build a more balanced economy. This is exactly what happened in Poland.

Privatization is a topic in itself. To tell the truth, in this case it is not always easy to distinguish it from the macro-stabilization program. The absence of a clear ownership structure created problems as soon as the macroeconomic situation improved (are the owners workers, the state or private capitalists?) since it was not known who was responsible for making economic decisions and who claimed the remaining income. However, formal and substantive privatization is a separate issue.

The best example for that is Russia. The causes of the events in Russia should not be sought in Gaidar's reforms, which were carried out under conditions more difficult than those in Poland - the country was on the verge of famine and perhaps civil war - but in the privatization process itself. Unlike macroeconomic reforms, privatization leaves long-term consequences that continue to this day. Privatizing the Russian economy was certainly no easy task, given the amount of wealth to be shared and the difficult initial conditions. (It should not be forgotten that in Poland and Yugoslavia, agricultural production was mostly in private hands.) Under pressure from Yeltsin's cronies, Russia chose the worst possible privatization strategy, which included (1) ostensibly egalitarian voucher privatization, in which vouchers distributed to the impoverished population were soon redeemed at token prices, and (2) top-down privatization that was legalized in 1996 under the slogan "loans for shares", even though these were actually loans by which the private sector corrupted an impoverished state. The inflows were used to ensure Yeltsin's electoral victory, and the state in return shared its most valuable assets at token prices.

The informal and formal privatization that began in Russia in 1988 and was crowned with "loans for shares" is the main cause of the problems of today's Russia, which could last for several more decades. These are problems of a political nature. Privatization produced a clan of "political" billionaires who believed they could replace the state (see my display books about Berezovsky by Paul Khlebnikov). Putin, brought to power by the oligarchs expecting to be able to control him, clipped the wings of those who were the most ambitious and reckless and brought in his own "cadres" to enrich themselves. The battle between the first group of billionaires, those who got rich during Yeltsin's time, dissatisfied with being excluded from the new distribution of the spoils, and Putin's "team" continues to this day, not only in Russia but also around the world. Many of the first group used the millions stolen in Russia to establish political institutes whose main task is to fight against Putin in the name of transparency and democracy, in the hope that when Putin falls, they will once again have the opportunity to manage the country's mineral wealth. To stay in power Putin's team applies the same rules; permits to enrich themselves are given only to the politically loyal.

That was not the case in Poland. The fact that Poland, despite its exceptional economic growth, has only a handful of billionaires shows that the problem was primarily in unfair privatizations, and not in the long-forgotten and basically successful macroeconomic reforms of the late 80s. These are two different topics that must be clearly separated in the criticism of the reforms from that time.

(Global inequality and more 3.0; Peščanik.net; translation: Đ. Tomić)