Vol. 14 No. 10 · 28 May 1992

Comrades in Monetarism

John Lloyd writes about the Russia over which Yegor Gaidar and his team preside

5733 words

Why is it so important for the rich states of the world that Russia and the other post-Communist states become capitalist democracies? Why are rich foreign countries so determined to lavish resources, generally perceived as scarce, on a country whose standard of living, though declining, is still much higher than that of most of the Third World?

The first reason is fear. We were always frightened of Russia in its Soviet imperial form. But the collapse of a system which claimed world domination, even if unconvincingly, was in retrospect only a start. Russia, with Ukraine, Belorussia and Kazakhstan, is the inheritor of the Soviet nuclear arsenal, and there is as yet no stable mechanism to oversee that arsenal’s destruction or diminution – or even to control it at all. At present, both Ukraine and Kazakhstan are insisting that they keep that part of the arsenal – strategic and tactical – located on their territories, in a bid to be admitted to the nuclear bargaining tables of the world and, especially in the case of Ukraine, because they do not trust a nuclear Russia which claims to be the sole inheritor of the weapons. The Ukrainian position, though disturbing, has some force: Russian nationalists, whose power is steadily increasing, are organising themselves around claims for the return of the Crimea, a Russian territory ‘given’ to Ukraine in 1954 by Khrushchev, and there is little doubt Russian pressure would rise to the nuclear level.

If the transformations of Russia, Ukraine and the other republics of the former Soviet Union (FSU) do not succeed, there are very significant forces within all of these states which would inevitably take them back to forms of authoritarianism and to efforts to export their aggression. At present, only one model of transformation to a stable state is available: that of a democratic pluralist politics based on a capitalist economy.

The second reason is, to put it at its worst, greed. The former Soviet empire, in its fullest extent, numbers over 400 million people, educated, among other things, to want what the advanced industrial countries make. The inclusion of this area in the capitalist ambit would, over time, give the market system a challenge and an opportunity which should keep it on the road for the lifetime of everyone likely to read this, and probably far beyond. The agents of the transformation will be, first, the Russian government and its as yet tentative entrepreneurs, and second, the Western businessmen now poking about in Moscow, fascinated, fearful and endlessly prevaricating. The more adventurous among them quickly grasp that there are fortunes to be made. Settled capitalist relations will take longer to establish – perhaps a great deal longer – and the magnitude of the effort required to establish them is vast. The sheer power of the system, and the dimensions of both its failures and its successes, all cry with one voice: don’t start!

It was, as we know, a centrally planned system, but until now we have had little understanding of what central planning really meant. In a recent conversation with Vitaly Naishul, one of the circle of neo-liberal economists who have provided the general staff for the present Yeltsin government, I was told that GosPlan, where Naishul worked for ten years, was by the late Seventies a demoralised and bewildered institution. Its senior people knew they could not do their job: they could not calculate the necessary inputs and outputs of the thousands of increasingly complex enterprises under their nominal control. In fact, the tables had been turned since Stalin’s time: like the debtor who owes the bank so much that he owns it, the enterprises were so much part of the stability of the system that they ‘owned’ GosPlan, GosBank and the Ministry of Finance. Thus while the state through its various agencies still allocated targets, and successfully kept producer from consumer, it did not exercise any effective control: it had theoretical property rights but few of their effective attributes.

This in turn meant that the workers in the plants became very powerful – much more powerful in many respects than their Western counterparts had ever been. They had huge negative control. They knew they could not be fired; and the state didn’t allow substantial differentials between enthusiastic worker and hopeless boozer: only the desire for advancement could impel an ambitious worker up the ladder which led to party or state office. The workers of Stalin’s time, overwhelmingly from the land, were easily cowed and disciplined: the second and third-generation workers of Brezhnev’s period, relatively well-educated, were a different breed. Their enterprises enclosed them much more efficiently than happens with Japanese companies: gave them flats, holidays, sport and recreation facilities, provided every service from the cradle to the grave. Nor was there, as there is in Japan, any real or implied contract that they give productive work in return, nor was there a management spurred on by world competition to innovate, organise or exhort. Brezhnev came as close as any Communist leader to achieving some part of the ludicrous imperative to ‘make the working class the ruling class’. Now, the workers are one of the largest constraints on a pro-capitalist government: to create capitalist structures, the government must strip them of power, security and, in the first stage at least, their old living standards. One of the many ironies of the transformation, and one of which the present Russian government is very well aware, is that they are embarking on a period of democracy with a programme and practice no democratic electorate would tolerate for half a year. Yet if it fails there will be no democracy.

There was a market in Communist times, of course, but it was largely criminalised. People wanted scarce goods. The state allocated these in too small quantities or not at all. There were bound to be those who took the (diminishing) risk of supplying them for a premium. In other countries, there are merchants: in the Soviet Union, there were only criminals; and since they needed protection, the criminals criminalised large sections of the Party and the state, creating an enormous hinterland of deceit, coercion and inefficiency. These are the people who are now most active in the private markets. Most ‘decent’ citizens still regard them as criminals, or mafiosi. At a recent auction of shops in Nizhny Novgorod (formerly Gorky), the shopworkers stood outside the city’s main Palace of Culture, where the auction took place, with placards saying: ‘Don’t sell what we have built with our own hands to the mafia!’ One might feel sympathy for these women, were it not for the fact that it is they and their counterparts everywhere who offer surliness and aggression to anyone who comes through their front door, while peddling state goods for profit out of the back.

There were no real prices in the command economy. Position or corruption (or both) bought the most desirable goods, and the ‘basics’ came via the state as a kind of welfare provision. The Kosygin reforms of 1965 did make enterprise managers pay more attention to profits and to the use of inputs, but that only lasted four or five years, partly because of the odium associated with ‘reform’ after the crushing of the Prague Spring, and partly because the antitovarniki (those opposed to any kind of commodity relations) could secure Brezhnev’s ear with the argument that Kosygin’s reforms would dilute their power base. Aganbegyan, Gorbachev’s economic adviser, who was associated with Kosygin’s reforms, says in Moving the Mountain that ‘by the early Seventies the authorities had slipped into a kind of administrative hysteria which affected both industry and agriculture.’

Investment criteria were set by politicians in association with the engineers who were also the industrial managers. Many of these decisions were taken for reasons that had nothing to do with the economy. For example, the development of a heavy industrial sector in the Baltic States, especially Latvia and Estonia, represented the last great surge of the Russians into new lands in a kind of industrial equivalent of the Ulster plantations. The Ministry of Finance and the State Bank were mere allocatory agencies: the only ‘Westernised’ banking sector was the one that dealt with foreign loans and with foreign branches of the state banking system – not surprisingly, many of those who are now struggling to put a banking system into operation passed through the London-based Moscow Narodny Bank or others like it in Paris and Hong Kong.

The 15 union republics were bound together by supply chains and, since many plants had either full or virtual monopoly over the goods they produced, they were quite tightly bound together. No republic had any real power or capacity to influence what was produced for which markets: most managers had no idea who their customers were, and some did not even know who their suppliers were. They were simply in charge of whatever processes went on within their walls.

As we know, the system worked: indeed, it is now much missed – the present chaotic situation lends a rosy glow to the past. Until the Sixties, it actually worked not too badly: labour inputs were very cheap, discipline was relatively high, and living standards for those who had experienced real poverty – in many cases real hunger – were rising. But as we also know, the system was widely perceived to be reaching its limits by the late Seventies or early Eighties: in fact, it had been kept going throughout the Seventies by an inward flood of Western credits and technology and an outward flood of highly-priced oil.

Mikhail Gorbachev inherited an enfeebled colossus, whose weaknesses were much more sharply appreciated by the reformers than by most analysts in the West – including, famously, the CIA, which has been under fire for consistently overestimating Soviet economic performance. After a brief attempt to continue the Andropov policy of improvement through greater discipline, Gorbachev turned to the reformers and began to implement an updated version of the Kosygin reforms – exactly the agenda which economists like Aganbegyan had long and fruitlessly championed.

The 1987 Law on State Enterprises (introduced on 1 January 1988) and the 1988 Law on Co-operatives were designed, in the first place, to give more autonomy to industrial plants, and in the second, to found a private sector under the cover of Lenin’s approval (expressed in one of his last essays) of the co-operative movement. Both had benign, and unexpected, consequences. Though deeply disliked when it began to take hold, and though the administrative system tried its hardest to ensure its stillbirth (and still consistently works against it), the co-operative movement did begin to bring to the surface the entrepreneurial activity that had been submerged for decades. It did so, not by allowing individual entrepreneurs to found restaurants or produce things in workshops, but by allowing the directors of state enterprises to set up phoney companies which they called co-operatives and under whose auspices they sold goods and services at prices they themselves set. The entrepreneurs began to flourish and the enterprises to decline. Thanks to khozrashchot, or self-financing, a stiffening dose of chaos was introduced into the hitherto regulated world of production, distribution and supply. The provision which gave the workers the right to choose the managers meant that many were elected who had little incentive to raise productivity and every incentive to raise wages. Wages had shown a tendency to outstrip production for some time: with the 1988 law that process was built into the system, and the Soviet Union joined the People’s Democracies of East-Central Europe in what can now be seen as the last stage of Communist rule, when ever more strenuous efforts were made to retain social peace by accelerating the money-printing processes.

By 1990, wages were rising very fast: most of the reform politicians and economists saw the ‘rouble overhang’, or mass of unspent roubles, which in that year totalled some 103bn, as the main harbinger of chaos, of a vast inflation waiting to explode. There was talk of riots, of hunger, of famine and of impending catastrophe. This was made much of in the foreign media but did not, of course, materialise.

This was the time of radical programmes. Abalkin, then the Deputy Prime Minister in charge of economic reform, Nikolai Petrokov, Gorbachev’s economic adviser, and Stanislav Shatalin each produced his programme. The boldest was Shatalin’s ‘500 Day Plan’, written with Grigory Yavlinsky, which called for the introduction of real market relations. It was at once a sign of progress and a challenge, and Gorbachev ducked it. He withdrew into a circle of orthodox Communist military and intelligence chiefs, who apparently convinced him that a disciplinary crackdown was needed – especially over the burgeoning independence movements in the Baltics – if what he called at the beginning of 1990 his ‘sacred task’ of holding the Union together was to be fulfilled.

After some bloodletting in Lithuania and Latvia, Gorbachev turned away from that task, but by then the economy was more or less in free fall. Valentin Pavlov, the tragic last prime minister of the Soviet Union, tried a money reform by confiscating large-denomination notes – which only strained the social fabric even further. The republics tested the limits of central authority, and finding them infinitely elastic, used new powers or misused old ones to divert huge flows of central funds into local social programmes. The tables turned on Pavlov with dizzying speed: in his period in office the relationship between the centre and the regions, districts and cities flipped over. One minute the centre controlled the peripheries through appointment, patronage, fear, subsidy and the files of the KGB. The next minute the periphery controlled the centre through money – or rather, the withholding of it. The progressive deterioration of Moscow’s supplies provided the physical evidence of this overturning of the ‘natural’ order of things. Traditionally the best-provided Soviet city, it became one of the worst as farmers and suppliers consumed in their regions produce once ordered to be sent to the capital.

The budget deficit now began to grow and grow. Less than 3 per cent of the GNP in 1986, it had jumped to 11 per cent in 1989 and last year was running at 20 per cent. If internal indebtedness had risen to these unsustainable levels, foreign indebtedness stood at over $80 billion: not too much for a country with the basic resources of the Soviet Union, but with substantial interest payments due on short-term debt in 1991 and 1992, completely unserviceable. In short, the state was in hock to its citizens, in hock to the better-off among its former socialist partners, in hock to the capitalist world. Those who owed it money were its former client states in the Middle East and Africa, and of course Vietnam and Cuba, which were in a worse position than itself to repay.

This was the main reason for the August putsch: the reason Pavlov threw his lot in with it (and having done so, remained drunk or in bed throughout most of it), and the reason men like Victor Gerashchenko, the chairman of the State Bank, went along with it – they were desperate for money, and could see no way of getting it if the disintegration continued. It also explains the flaccid nature of the putsch. The men who carried it out did not want to kill people, or even to institute a reign of terror. What they really wanted was to balance the books again.

Balancing the books meant reasserting the power of the Union: and the immediate trigger for the putsch was the union treaty, due to be signed the day after the putsch was launched, which gave away many of the powers the centralisers thought essential for a functioning economic unit. In this they were quite right: the union treaty merely ratified the seizure of power by the republics. After the putsch collapsed, Gorbachev doggedly resumed his search for the philosopher’s stone which would turn a disintegrating empire into a functioning union. The coda of his political life was his effort to bring the republican leaders to sign something which could paste over the widening cracks between them.

In this he was assisted by Grigory Yavlinsky, the economist who had worked on the ‘500 Days’ programme with Shatalin and cooperated, with a group of US academics largely drawn from Harvard, on the ‘Window of Opportunity’ programme which represented the last of the efforts to force the Soviet Union to market. An intense and spirited man, Yavlinsky had refused to go with Gorbachev to the Group of Seven meeting in London last July to support a plan which he felt had been too much diluted by the Gorbachev circle. He did, however, agree to join that circle after the putsch in the hope of stitching together an inter-republican agreement, which would have included provisions for a common currency, free trade and a banking union. He got it, on paper, but throughout that tedious exercise had to shut his ears to the noise of republican leaders – the Ukrainians especially – returning to their capitals and denying the import of what they had signed.

Yavlinsky, though his credentials on economic reform were good, wasn’t part of the group which was then preparing for power. These were all trained economists in their thirties and forties. Some had relatively high positions, though mostly in academia. All of them had taken a close interest in market theory since the early Eighties. Chief among them was Yegor Gaidar, grandson of a man who had been both a hero of the Civil War and a popular children’s writer – a cross, as it were, between Oliver Cromwell and Enid Blyton – and who still has many streets named after him. Gaidar had been deputy editor of Kommunist, the main theoretical journal of the Communist Party, and economic editor of Pravda, before becoming head of a research institute under Abel Aganbegyan’s National Institute of the Economy. Others included Alexander Shokhin, who had been economic adviser to Eduard Shevardnadze while the latter was foreign minister; Anatoly Chubais, economic adviser to Anatoly Sobchak, the mayor of St Petersburg; Konstantin Kagalovsky, who set up an Institute of the Market with backing from the neo-liberal Institute of Economic Affairs in London; Peter Aven, who had worked for some time in Vienna; Boris Feodorov, who had recently taken up a job with the London-based European Bank for Reconstruction and Development. Many of these men knew each other well: Kagalovsky, an inveterate networker, arranged seminars and conferences and round tables from his dingy little flat on the outskirts of Moscow. With the exception of Shokhin, all of them were professional intellectuals, but Gaidar was the ‘natural leader’ – in part because he spoke and wrote well, in part because his upper-Nomenklatura background had given him the confidence and contacts to make the transition from senior Communist ideologue to free-marketeer. This is not to impute opportunism: nearly all these men were formally Communists, but their intellectual development was not restrained by this, at least not in the Gorbachev years.

They knew, after the putsch, that the Soviet game was up. At a round table in the Praga restaurant last October with Kagalovsky, Gaidar and Shokhin (who was already minister of labour in the Russian Government) strenuously argued that efforts to cement economic treaties at Union level were doomed, that Russia should now realise the potential of its own economy. At the time, Gaidar was also talking to Yeltsin and to other members of the Russian President’s staff: what he was proposing was, essentially, a programme for the economic revival of Russia – a concept which, eight months before, had still been rather shocking.

Yavlinsky, officially the ranking economic figure, was furious. He told me recently that he and Gaidar confronted each other in his office high up in the former Comecon building overlooking the Moscow River – the two men, though not close, had worked and talked together for years. Gaidar told Yavlinsky that the union game was up. Yavlinsky accused Gaidar of tailoring his views to suit the new masters. Ideally, the new men would have wanted to get Yavlinsky on their side, but they were too far apart. Until everything collapsed with Gorbachev’s resignation at the year’s end, Yavlinsky went on working away at futile agreements. Gaidar and his colleagues were now in charge.

These men, ranging in age from their late twenties to their mid-forties, make up the most extraordinary of the extraordinary reform governments which have been seen in East-Central Europe since the collapse of Communism. They were keenly aware of their comrades in monetarism in the former satellite states and they were particularly close to the Polish reformers who had worked with Leszek Balcerowicz, the former deputy prime minister and finance minister (three of the Russian advisers are Poles). When they first came to office last January, ‘Gaidar and his team’, as they are always referred to in the Russian press, were lighthearted, almost boyish. ‘We will leave here either to return to obscurity or to go to prison,’ Kagalovsky said – not implausibly. Both of these things had happened to the members of the last Soviet government. Gaidar himself spoke of the government lasting no more than a few months, since that had been the fate of every other government which came to power to tidy up the Communist mess. Gaidar may have been used to the world of power and influence, but none of the others, save briefly Shokhin, had climbed the long Soviet ladder to power: they had been catapulted into office at what was for a gerontocratic country a ludicrously young age.

They soon attracted a circle of foreign advisers who remain there still: some coming and going, others lodged in grubby offices in ministries or in the former Central Committee headquarters in Old Square, where the Cabinet of Ministers works. The best-known is Jeffrey Sachs, an explosive Harvard economist who has had well-advertised successes in advising the Bolivians and the Israelis out of hyperinflation, and has helped the Poles down the same route: but they also include Anders Aslund, a former Swedish diplomat turned professor who wrote what is still the best book on Gorbachev’s economic reforms, and who had spotted all the members of Gaidar’s group years before they became a team, and Richard Layard, an LSE professor specialising in labour markets and wages, who with his wife Molly Meacher, another labour-market specialist, embraced the reform process and Russia and moved into a flat in Central Moscow to work full-time with Shokhin. Round them was a small ring of even younger people connected with Sachs, who provide direct assistance in ministerial cabinets; a looser group of consultants; and the now rapidly growing body of professionals who work for the International Monetary Fund, or the World Bank, or the European Bank for Reconstruction and Development, or for consultancy companies, or for merchant banks like the majestic Goldman Sachs, which has landed the contract to advise the Russian Government on foreign investment. They come to Moscow and work themselves ragged producing plans and laws and programmes which are, in effect, the basis of the new Russian order. They are all very careful not to claim anything more than an advisory role; and to be sure, the Government decides everything, with Gaidar meticulously checking every suggestion. Far from being the passive recipients of advice, these ministers are at one in their neo-liberalism both with their advisers and with the international institutions. But the resources available to the Government in human and technical terms are so thin, and the expertise which the advisers bring is so desperately needed, that it is inevitable that a very great deal of actual drafting is done by foreign hands. So much must be accomplished by so few in such a short time that it cannot be otherwise. From being a system as far as possible impervious to foreign intervention, the Russian Government has become one of the most porous in the world.

Gaidar and his team don’t have parliamentary approval: their only authority comes from Yeltsin himself. In a speech to the Russian parliament in October, Yeltsin insisted on the necessity for a radical programme after years of prevarication; he also asked for, and got, extraordinary powers to appoint ministers and legislate by decree – powers which he still, precariously, has, despite the battering the Government and its programme received during the Congress of Russian Peoples Deputies in April. In this system Yeltsin is first and last and his adherence to reform is, ultimately, all that keeps it going. Should he fall ill – he has a history of heart trouble – or change his policies, the Russian turn to liberal capitalism will almost certainly collapse. Yeltsin is distrusted by many in the West who regret Gorbachev’s departure but, at least in its commitment to economic reform, Yeltsin’s record is much the better.

It soon became obvious why Yeltsin asked for extraordinary powers. The Government’s first move was to free most prices, but once liberated, they shot up to heights which the Government said it had not expected. The reason, in retrospect, was simple enough. In the Soviet system the only group about whose interests an enterprise really cared was the ‘work collective’ – its own labour force. Russian managers, as Feodor Prokopov, the deputy labour minister, told me recently, were not only wholly unused to firing their workers: they regarded themselves as part of the work collective, with the real bosses elsewhere, in the ministries and, above all, the Party. Of course, the boss of a big plant would also be an important figure in the Party, but the culture was collective-egalitarian. Thus the managers saw it as their first duty to protect the collective from a hostile world and they would do anything rather than fire workers or lower prices. Most of them expected that if they held out the Government would weaken and start pumping money through the system once more.

In this instance, however, the Government didn’t do that. Instead, more Acts were passed. An Act allowing anyone to sell anything to anyone anywhere has filled the streets of Central Moscow with people peddling here a pair of shoes, there some wretched toys or a few bottles of juice. Ever new and very high taxes were imposed: 29 per cent VAT at every stage of the production process; a profit tax of 32 per cent; a 60 per cent flat rate tax on all incomes above 10,000 roubles a month. After a battle with the Russian Central Bank, credit was tightened to the point where cash was so short that workers were not getting their pay.

Russia is now a perfect location for Communist agitation or would be if the Communists, though increasingly vociferous in their discontent, had not had their chance over the past seven decades, and been seen to have blown it. However, nothing is for ever in politics: and were the Communist-nationalist grouping (the ‘Red-Brown alliance’) in evidence in the recently-held Congress to produce a really talented and charismatic individual, then they might have a second chance. (Communists are overtly in power in Uzbekistan, the poorest of the poor former Soviet Central Asian republics: and are, as of the end of April, being confronted by thousands of Islamic demonstrators, backed, it is said, by Iran.) All over the former Soviet territory, there is a vast, immiserated industrial working class which is clearly losing out to a rapacious bourgeoisie sanctioned neither by tradition nor by its support of public works. The state is weak, unable to impose its authority to levy taxes or even in places to raise an army. Everywhere in positions of high authority are leaders who long not so secretly for the old ways: everywhere, in the desolate housing estates and the communal flats and hostels of the big cities, are families who agree with them. This extraordinary government tiptoes across a minefield towards a distant goal of which most of the people they are trying to govern have little conception and which many of those who do have a conception of it actively detest. Their best hope is that many seem to want foreign commodities: they prefer a Japanese to a Russian car, American to Russian tobacco, hamburgers to kolbassa, Marks and Spencer shirts to the ‘selection’ at the local clothing shops. But, as a recent fascinating survey produced by the advertising company BBB and O on Russian consumers pointed out, many of them are not prepared to work for these commodities, or to submit to the disruption which upgrading their industrial culture would entail.

Disruption, after all, has hardly started. The system has been running down, rather than fundamentally changing, though fundamental change may now be beginning, as enterprises run out of credit. The Government meanwhile is trying to move on to the next stage, perhaps the most important and certainly the most fraught politically: that of trying to get the principle and practice of private property accepted. This is generally known as ‘privatisation’ – a word which, with its connotations of the selling-off of British Gas, is inappropriate. The British privatisations, the best-known till those of East-Central Europe began and much studied by officials from these countries, involved some 5 per cent of the economy, took place in a country where private property was not fundamentally in question; and resulted in no very fundamental rearrangement of ownership patterns (though its political importance was great). In the FSU, privatisation is seeking to create a system never really experienced before: the Stolypin reforms under Nicholas II, which were designed to make the more vigorous and richer peasants owners of their own land, were cut off by war and then by revolution. The present reform is designed to effect an irreversible shift of wealth and power from the state to private hands – a massive reversal, not just of seven decades of socialism, but of centuries of autocracy at the end of which private property was still only a marginal phenomenon.

Not surprisingly then, Anatoly Chubais, the privatisation minister, has, with the assistance of a group from the World Bank, concocted a plan which seeks to buy off as much potential trouble as possible before allowing those who have the money to buy state-owned companies. In a recent interview, he made clear that workers first of all (who will get 25 per cent of the shares free), then managers (who will get 5 per cent free), and then the population (which will get vouchers allowing them to own some shares for free), must be cut in before citizens rich enough to afford to buy, or foreigners, are allowed near the privatisation process. Indeed, Chubais is presently thinking of selling shops and small businesses to foreigners in a separate auction, so that they can be sold at a much higher price than the ridiculously low exchange rate of the rouble would offer foreigners changing money at the market rate, and to prevent unrest among a people who are well aware of foreigners’ hugely superior buying power.

Gaidar and his team are believers in privatisation – apostates from the faith of their fathers and grandfathers – who have taken it up with the intensity of a Thatcher, and are under much more severe pressure than the Iron Lady had to withstand. Their chief supporters are each other; unlike the lonely Balcerowicz in Poland, they have a group inside the Cabinet among whom ideas can be floated and experiences shared, as well as the co-operation of foreign governments and international financial institutions. It’s astonishing to think that only five or six years ago the Soviet Union was still threatening to overtake the advanced industrial nations in material wealth.

At the April meeting of the boards of the IMF and the World Bank, Lewis Preston, the Bank’s Chairman, enthused that only now, with the destruction of the wall separating capitalism from Communism, has it become possible for these institutions to take on their main task – that of improving the standard of living of the whole world. That’s not the only way of looking at it, however. James Morgan, writing in the Financial Times, described the Fund and the Bank as ‘the new imperialists’ spreading a new gospel – the ‘Structural Adjustment Programme’. ‘The essence of the SAP is to encourage governments to follow the right kind of reform policy. A developing country can receive large, cheap loans if it adopts the programmes embodied in the orthodoxy of (more or less) balanced budgets, devaluation, privatisation and a hearty welcome for foreign investment. The evolution of [such programmes] has involved total integration of the IMF and the World Bank into the life of the target countries.’ This is what is happening now in Russia and will happen in the other republics as soon as they can develop policies to allow them to accept this ‘new imperialism’.

This phenomenon has gone largely unnoticed in the rich countries whose representatives have fashioned it, but it is a fact of life in poor countries, including those of the FSU. More than that, it is a determining element in their politics. We have only to remember the contentious part played by the IMF in British politics in 1976. At present there is no obvious alternative, and I’m not sure what kind of alternative might be envisaged even in theory. The ‘orthodoxy of balanced budgets, devaluation, privatisation and ... foreign investment’ has perhaps acquired the numbing effect of all orthodoxies. Unrestricted lending, in order to effect improvements in the infrastructure and to upgrade the industrial culture, has been tried, in both East-Central Europe and the Soviet Union: it propped up dictators and ultimately only deepened the crisis in those countries. At some point, all economies need to get transparency into their monetary and fiscal policies; they have to loosen the grip of the state on industries which have proved unable to develop to world standards under state tutelage; and they have to get experience of these standards by inviting in the companies which set them. It is the old gamble of Adam Smith: we must rely on the greed of the tradesman, not on his benevolence, with the further assumption that this greed can be benign if it is contained within the rule of law which protects private property and market relations. Greed is beginning to flourish in Russia and in its former satellites: what is now needed is containment.

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Vol. 14 No. 13 · 9 July 1992

John Lloyd (LRB, 28 May) writes that one of the main reasons men such as Pavlov, the Prime Minister, and Victor Gerashchenko, chairman of the State Bank, threw in their lot with the anti-Gorbachev putsch was that they were desperate for money. Liberalisation and deregulation of the Soviet economy had emptied the bank vaults of all available cash; how the Gorbachev reforms could be sustained was seemingly beyond comprehension.

In a Financial Times interview, published the day the putsch began, Gerashchenko announced that he had recently struck a deal with Salomon Brothers, the New York merchant bank run by John Gutfreund. Salomon Brothers, perhaps more than any other finance house in the United States, had come to represent the grotesque excesses of deregulated, ‘liberalised’ America, and Gutfreund to symbolise personal greed.

After the coup, Gerashchenko went to jail, the deal between Salomon Brothers and the State Bank was torn up and, a fortnight later John Gutfreund was fired for illegal dealing in US securities. There were many desperate men around last August, but it is important to remember they were not all Russian.

Henry Jebb
New York

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