To Capitalism, in Stages

In the wake of the financial collapse in Russia, the United States has been having a self-serving debate on “who lost Russia?” It would be better if we were debating who is losing Russia today.

The International Monetary Fund visits Russia repeatedly, and the hope for its aid has frozen the Russian government into a stalemated combination of left-wing rhetoric and the old right-wing policy. The crisis only deepens.

The advice given to Russia for a decade reflected, in the words of World Bank Chief Economist Joseph Stiglitz, a “Washington consensus” widely shared by neoliberal economists: that if property was privatized, government regulation reduced, a free-trade policy introduced, inflation controlled, money supply kept tight and prices set free, investment would automatically flow and produce prosperity.

Neoliberal economists now explain the failure of reform by the lack of a balanced budget and a loose money supply, but American presidents from Franklin Roosevelt to Ronald Reagan have always embraced a deficit in a serious economic downturn. All the rest of the neoliberal policy was introduced and even inflation was brought under control.

But, as Alan Greenspan, chairman of the Federal Reserve Board, said a year before the this past August’s crisis in a criticism of IMF policy, “Much of what we took for granted in our free market system and assumed to be human nature was not nature at all, but culture. The dismantling of the central planning function in an economy does not, as some had supposed, automatically establish a free market entrepreneurial system.”

The massive corruption was not some external force that destroyed reform, but the predictable consequence of the reform path chosen. Russians acted as classic “economic men” and, rationally, put all effort into trying to control the raw materials industries that produced hard currency. There was little regulation to prevent them from diverting much of it to private use.

Corruption is endemic in early capitalism, but in a healthy economy, the corrupt invest their ill-gotten gains at home. As the corrupt invest in respectable business, their children and grandchildren become respectable pillars of society.

In the mid-1990s, Americans poured money into emerging markets. Russia was seen potentially as the best, for its assets were undervalued and its population educated. Why would corrupt Russian insiders with all their knowledge of the local scene put their money in Swiss banks with their low returns rather than invest in their own emerging market?

Clearly, the declining inflation and interest rates were not enough to persuade corrupt Russians to keep their money at home. They understood that the reform would not work. In the early stages when a capitalist culture inevitably is lacking, government must take a greater role if capitalism is to work. It must have protectionist tariffs as the U.S. did. In modern industrial society, it must take an active role in investment, as Japan and South Korea did. It must reassure business people by having a close relationship with them. And, of course, it must create the regulatory environment that even the most extreme right-wing American takes for granted in the U.S.

Today the IMF says that the role of the government must be emphasized in Russia, but that Russia should follow the same noninstitutional economic policy that it followed before. It thus continues to have the same effect on Russia that it has had for eight years. By dangling money, it forces the Russians to give lip service to IMF policy and prevents them from taking steps that are needed.

But because people can’t be allowed to starve, the Russian government takes off-budget steps to try to keep up consumption. Because there is no investment in the real economy, it gradually grinds to a halt. Grain production in 1998 was 40% of 1990 levels because agriculture gets no machinery and little fertilizer or pesticides.

We desperately need to change our approach and see capitalism in terms of stages. An advanced economy such as ours should be open. Japan had a good model for an earlier stage of development, but now it should become more open and consumer-oriented. China and India, however, have thrived in the crisis because they have many of the controls that South Korea and Thailand loosened too completely. Russia, with its total lack of markets, needs to look at the Chinese experience more closely.

Europe at the beginning of the 20th century was at the early and middle stages of capitalism. Fascism and communism were natural political responses to the openness of the global economy, not only in Eastern Europe but also in Germany, Italy and Spain. Our top priority today is not to defend a doctrinaire ideology we don’t even follow at home, but to work to ensure that Asia and Russia (and later Africa) do not repeat the European experience in the next century.