>From George Soros's "Who Lost Russia" in the latest NY Review of Books, at
www.nybooks.com
I had set up a foundation in the Soviet Union as early as 1987. When
Gorbachev phoned Andrei Sakharov in his exile in Gorky and asked him to
"resume his patriotic activities in Moscow," I realized that a
revolutionary change was in the making. I have described my experiences
elsewhere.1 What is relevant here is that in 1988 I proposed setting up an
international task force to study the creation of an "open sector" in the
Soviet economy, and somewhat to my surprise-I was then an obscure fund
manager-my proposal was accepted by officials in the USSR.
My idea was to create a market sector within the command economy, selecting
an industry like food processing which would sell its products to consumers
at market rather than command prices (with an appropriate system for
transfer from command prices to market prices). This "open sector" could
then be gradually enlarged. It soon became evident that the idea was
impractical because the command economy was too diseased to nurture the
embryo of a market economy. That is, the problem of transfer pricing could
not be solved. But even such a harebrained idea from an insignificant
source was supported at the highest level. Prime Minister Vladimir Ryzhkov
ordered the heads of the major institutions-Gosplan, Gosnab, and so on-to
participate. It is true that I was able to attract Western economists like
Wassily Leontief and Romano Prodi to participate from the Western side.
Later on I put together a group of Western experts who provided advice to
different groups of Russian economists preparing competing economic reform
programs. Then I arranged for the authors of the principal Russian proposal
for economic reform, the so-called Shatalin Plan, led by Grigory Yavlinsky,
to be invited to the 1990 International Monetary Fund/World Bank meeting in
Washington. Gorbachev wavered over the plan and finally decided against it.
He balked at two issues: the privatization of land, and the simultaneous
dissolution of the Soviet Union along with the formation of an economic
union. I still think the Shatalin Plan would have provided for a more
orderly transition than did the actual course of events.
Soon afterward, Gorbachev fell from power, the Soviet Union disintegrated,
and Boris Yeltsin became president of Russia. He entrusted the economy to
Yegor Gaidar, the head of an economic research institute who had studied
macroeconomic theory from the standard textbook of Rudi Dornbusch and Stan
Fischer. He tried to apply monetary policy to an economy that did not obey
monetary signals. State-owned enterprises were continuing to produce
according to plan even if they were not getting paid for it. I remember
calling Gaidar in April 1992 to point out that debt between companies was
rising at a rate which was equal to one third of the GNP. He acknowledged
the problem but carried on regardless.
When Gaidar failed, an uneasy balancing act followed and eventually Anatoly
Chubais, the head of another research institute, emerged as deputy prime
minister in charge of the economy. He gave priority to the transfer of
property from state to private hands. He believed that once state property
had private owners, the owners would start protecting their property and
the process of disintegration would be arrested.
That is not how it worked out. A scheme for distributing vouchers which
citizens could use to purchase state-owned companies became a free-for-all
aimed at expropriating the assets of the state. Managements took control of
the companies by cheating the workers out of their vouchers or buying up
shares on the cheap. They continued to siphon off earnings and often assets
into holding companies based in Cyprus, partly to avoid taxes, partly to
pay for the shares they acquired, and partly to build up their assets
abroad because they had no confidence in what was going on at home.
Fortunes were made overnight, while there was also an extreme shortage of
money and credit, both in rubles and in dollars.
Out of these chaotic conditions, the rudiments of a new economic order
began to emerge. It was a form of capitalism but it was a very peculiar one
and it came into existence in a different sequence from what could have
been expected under normal conditions. The first privatization was the
privatization of public safety, and in some ways it was the most
successful. Various private armies and mafias were set up and, where they
could, they took charge. The managements of state-owned enterprises formed
private companies, mainly in Cyprus, which entered into contracts with the
state enterprises. The factories themselves ran at a loss, did not pay
taxes, and fell into arrears in paying wages and settling debts between
companies. The cash flow was siphoned off to Cyprus. New banks were formed,
partly by state-owned companies and state-owned banks, partly by newly
emerging trading groups. Some banks made fortunes by handling the accounts
of various state agencies, including the Treasury.
Then, in connection with the scheme for privatizing state companies by the
distribution of vouchers, a market for stocks was born before the
mechanisms for registering stocks and efficiently settling transactions
were properly in place, and long before the enterprises whose stocks were
traded started to behave like companies. A culture of lawbreaking became
ingrained long before the appropriate laws and regulations could be
enacted. The proceeds from the voucher privatization scheme did not accrue
either to the state or to the companies themselves. At first, the managers
had to consolidate their control and service the debts they had incurred in
the process of acquiring control; only afterward could they start
generating earnings within the companies. Even then, it was more
advantageous to hide the earnings than to report them unless they could
hope to raise capital by selling shares. But only a few companies reached
this stage.
These arrangements could be justly described as robber capitalism, because
the most effective way to accumulate private capital if one had hardly
anything to start with was to appropriate the assets of the state. There
were, of course, some exceptions. In an economy starved of services, it was
possible to make money more or less legitimately by providing them, for
example repair work or running hotels and restaurants.
Louis Proyect
(The Marxism mailing list: http://www.marxmail.org)
