Making a Mess of Russia
BROCKWAY, GEORGE P.
The Dismal Science MAKING A MESS OF RUSSIA BY GEORGE P. BROCKWAY THE NEWS from Russia these days reduces one very quickly to hysterical laughter or hysterical tears. We sometimes seem to be well...
...all expenses increase the cost of doing business...
...Let's start with the end...
...As an example of what is likely to happen after shock treatment, I would cite almost any country in sub-Saharan Africa or South America...
...He tried another shocker ?The Great Proletarian Cultural Revolution"—and that, too, passed away, but not before thousands of people were killed and thousands more ruined...
...It was a form of privatization more meaningful than selling shares of stock on a trumped-up exchange...
...Now, there is in the world a good example of what can happen if you tell the IMF to go peddle its papers...
...The plans were subject to veto, but they had the virtue of getting some people to think about what they were doing...
...It certainly would be better for everyone (except, perhaps, American, Canadian and Australian wheat farmers) if Russia boosted its own wheat production...
...After all, interest is an expense, just as rent and wages are expenses...
...It may be that the Interfax news agency, or someone representing the agency, actually said something like what the Times attributed to it...
...We sometimes seem to be well on the way toward Cold War II or World War III...
...Hyperinflation comes about when a nation has debts it can't repay that are denominated in foreign currencies...
...It makes me sick to think of it, because it was not very long ago, when Paul A. Volcker was chairman of the Federal Reserve, that many thitherto profitable American companies found themselves saddled with such an array of "finder's fees," "lawyer's fees," "compensating balances" and so on (not to mention a 21.5 per cent prime) that they were paying what was effectively more than 40 per cent interest for their money...
...It is inconceivable that the best-run medium-size businesses (who are given the prime rate) should be expected to survive paying 420 per cent for their money...
...Recently Deng has accepted substantial investments by "round-eyes" and has relaxed some controls, especially those on retail trade...
...They forget that the inflation ran for more than three years, and that those who really got shocked were the bankers and investors who lent Germany money to"pay" the War debts, which were ultimately forgotten...
...Yeltsin wouldn't mind that sort of shock...
...With us, the term has a precise meaning and requires a developed banking system, which Russia is having difficulty organizing...
...They would do better to sell their assets for whatever they could get for them and lend the proceeds to the suckers still trying to earn a living by working for it...
...No, the Times (like the Wall Street Journal and all lesser media) is possessed of the curious fancy that interest expense has the mysterious property of lowering prices, whereas all other expenses raise prices...
...And it is, I suppose, no secret that the purpose of farm machinery is the more expeditious production of food...
...According to the Federal Reserve Board, "Discount rates are the cost to member banks of reserve funds obtained by borrowing from Reserve Banks...
...But it is nothing compared with the free fall of the ruble, which is tumbling because Russia has lost its export markets in Eastern Europe and consequently is unable to import in the style it was accustomed to...
...and all costs have to be covered by prices charged...
...They couldn't do it alone...
...It may also be that "discount rate" is an accurate translation from the Russian...
...With us the prime rate is usually about double the discount rate...
...No less important will be the casual mistranslation, miscomprehension, or misrepresentation of the news by the daily press and television...
...So even if Russian firms make the best farm machinery (for all I know, they do: Poland is said to make the best golf carts), economists would advise Moscow to import farm machinery on a shock program (shock programs are good because they are good), rather than "subsidize" Russian manufacturers with loans at usurious rates...
...The foregoing diatribe could have been prompted by almost any day's news, but was in fact inspired by the lead story in the New York Times a couple of days after Vladimir V Zhirinovsky's surprising showing in the election...
...and no, I do not favor the extension of China's most-favored-nation status...
...Yes, I remember Tiananmen Square...
...I do not, however, believe that is what the Times story meant...
...The other sort is what is happening to the Russian ruble on the international money market...
...More important, it is this kind of inflation that can get out of hand and pass over into hyperinflation, as it did in the Weimar Republic and then several other places...
...In contrast, the Times never mentions the prime rate without pedantically telling its financial section readers what it is, and always makes sure businesspeople understand that when the bond market rises, the interest rate falls...
...The Russian CPI, whatever it is, is undoubtedly very bad because of the usurious interest rates...
...President Coolidge observed that when many people are out of work, unemployment results...
...The two are not closely related, for when all is said and done, even in the brave new global village, domestic markets are many times larger than the import-export business...
...Mao tried shock treatment long before Harvard thought of it...
...The loans were for farm machinery enterprises at 25 per cent interest a year, far below the Central Bank's discount rate of 210 per cent, the Interfax news agency said...
...He followed Mao in scorning foreign loans, in not breaking up the less-than-state-of-the-art factories, in plowing with oxen when tractors were not available, in encouraging (or requiring) teams of workers to plan their year's work...
...I cite China as an example of what can be done if you take a little time and eschew international finance...
...In the early 1980s, for instance, when our CPI kept on setting new double-digit records, our dollar was far "stronger" against foreign currencies than it is today...
...They'll need the help or at least the acquiescence of the statesmen and bankers of all countries, particularly the United States...
...Crucial will be the austere devotion to austerity of the International Monetary Fund...
...We are told that Russian agriculture is in a bad way, and that Russia needs billions of dollars in foreign aid in order to feed its people...
...How else will the Russians be able to compete in the global village (where they were, only yesterday, sufficiently competitive to scare us silly...
...Let's put those farm machinery manufacturers in a larger context...
...But let's not forget about those lucky (or well-connected) farm machinery manufacturers who got the "subsidized" loans at "only" 25 per cent, thus somehow throwing the budget out of whack and lighting a fire under inflation...
...But maybe not...
...A discountrate of 210 per cent is not so outrageous as the GI loan shark's "six for five" (a loan of $5 today to be settled with $6 on payday, next week), but it is bad enough to stop all business except gambling and thievery dead in its tracks...
...discounts for member banks are usually of short maturity—up to 15 days...
...If, as economists never tire of repeating, we consumers are sovereign and get what we demand, it will in the end be our fault, and the world will suffer for our stupidity, our ignorance and our laziness...
...All of them are crushed by debts denominated in foreign currencies...
...I am an authentic old China hand, having spent three weeks there in 1976, when Chairman Mao was still alive...
...I'll agree that a loan at 25 per cent is inflationary (not so inflationary as 210 or 420 per cent, but sufficient unto the day...
...When it is said Russian inflation is in excess of 20 per cent a month, that does not mean today's $2 loaf of bread will be $2.40 next month and $5.97 in six months...
...All of a sudden China is being hailed as an economic miracle, more miraculous than Taiwan...
...He called it "The Great Leap Forward," and had befuddled peasants trying to make steel in their backyards...
...I myself have observed that when many people raise prices, inflation results...
...It proved a disaster...
...Most of them, bowing to the advice of their IMF masters, have tried to balance their budgets by destroying their civil service, whose officers then supplement their starvation wages with extortion...
...How this magic works is never explained...
...In Volcker's day we got it both ways: the highest unemployment rate since the Great Depression, and the highest inflation rate since World War I. The Russians are getting it both ways now and, oddly enough, they don't seem to like it...
...The enthusiasts for shock treatment cite Germany's successful ending of hyperinflation in 1924...
...Of course, the economists won't be entitled to all the glory...
...But economists know, if they know anything, that international trade is good because it is good, as they have recently taught us in regard to nafta and gatt...
...The Times correspondent wrote: "In what may be a sign of a weakening of economic resolve after his electoral rebuff on Sunday, President Boris N. Yeltsin today granted new heavily subsidized loans that could aggravate the budget deficit and inflation...
...For more on the mysteries of interest, I refer you to "Why a Low Interest Rate Is the Proper Preventive of Inflation" in a forthcoming issue of the Journal of Post Keynesian Economics...
...But assuming the inflation were due to the supposed subsidy, it still could not hold a candle to the inflation caused by unnecessary importing...
...Our contribution to Russia's troubles is a clutch of economic advisers, mostly from Harvard, who seem determined that Russia must destroy the industry it has and borrow to import state-of-the-art factories from us...
...It is this second kind of inflation that exercises the International Monetary Fund, since it is the Fund's purpose to make all the world's currencies interchangeable...
...Deng is an eclectic gradualist...
...Those who survived the shock treatment did so by firing people, cutting production and raising prices...
...It merely means that if you want to show your neighbor what a wheeler and dealer you are, you had better buy your Mercedes today, because it will cost you three times as much if you wait six months...
...The alleged subsidy is, they say, inflationary...
...After Mao's death and the defeat of the "Gang of Four," Deng Xiaoping, who had twice been disgraced by Mao, took over...
...So it should be obvious even to an economist that it would be a smart idea, as well as less inflationary, to get cracking on the production of farm machinery...
...Otherwise they couldn't have paid their bankers' bills...
...It is also this kind of inflation that attracts the attention of Western reporters, who exchange Western for Russian currency to pay for their food and shelter and entertainment...
...Now he is regularizing the currency...
...and if we achieve one or the other (or both), we'll have the economists of the world, with our economists in the vanguard, to thank...
...There are two sorts of inflation...
...The sort we're familiar with is what happens to our Consumer Price Index...
Vol. 77 • January 1994 • No. 1
