Saturday, April 30, 2022

The novelty of technologically regressive import substitution

 In the next decade or so, the history of economic policy will be enriched by a new, never imagined, experiment: how to accomplish technologically regressive import substitution? This is the problem that Russia will have to face and that is entirely new. To explain why it is new, consider first what is import substitution. It was originally, at the time of Alexander Hamilton and Friedrich List, a policy whose objective was the technological catch-up of less developed countries through the use of high tariff barriers to enable local production of things that were  previously imported. The policy was imitated by many other countries, including the Imperial Japan after the Meiji Restoration and Czarist Russia under the Prime Minister Sergei Witte. Soviet industrial policies in the 1930s and even after World War II were also in the same mold. And, finally, domestic policies in Brazil and Turkey in the 1960-80s (among other countries) defined the meaning of import substitution for several generations of economists.

            In all these cases, not surprisingly, the aim of policies was technological modernization. No one has ever tried to implement import-substitution policies with the objective of going backwards in the development chain. Neither would Russia were she not under the pressure of Western economic sanctions. Why does it have to go backwards? The reason is that Russian “inclusion” in the world economy over the past thirty years has left the country fully dependent on foreign technologies, as Russia has specialized in the production of raw materials, food and relatively unprocessed products. The industrial areas that are normally the backbone of traditional (predigital) development  were well developed in the Soviet Union, but have been abandoned, left to deteriorate and, even if barely existing, are today technologically obsolete. Almost all of what is technologically advanced was produced, or was dependent in part, on Western-made technologies.   

            In the next decade Russia will try to revive these industries (e.g. machine building for petroleum and gas exploration, avionics, car production) on the basis of technologies that have been left rusting for thirty years. For sure, Russia would prefer to catch up with Boeing and Airbus, but an endeavor of that kind requires years and years of development and tens of thousands of specialists. Instead, as the Russian Ministry of Transport’s just published plan for the period up to 2030 envisages, in order to (re)create domestic aviation industry Russia will have to go back to the Tupolev-like technologies and that of the rather unsuccessful Sukhoi Super Jet. Even if Russian regressive import substitution is successful in terms of output, which is very doubtful as it projects the increase of production from 18 domestic aircrafts in 2022 to almost 200 in 2030 (the rate of growth of 35% annually!), once the Russian market gets reopened and sanctions lifted, all that effort will be shown to have been in vain because the new and created-from-scratch Russian models would be less efficient than Western.  Thus, in the year X when sanctions are removed, Russia will be, under the most optimistic scenario, in the same position that the USSR was in the 1980s: it will have an industrial base but that base will not be internationally competitive.

            To further complicate the matters of technologically retrograde import substation, we need to take into account the labor force. In past import substitution episodes, workers were relatively low-skilled and import substitution policies were supported by policies of improved education in order to have workers able to “man” the new and more sophisticated machinery. In the Russian case now, the problem is exactly the reverse. Russia has a labor force that is highly  educated and tends to move towards post-industrial areas, like in other advanced economies. But here it would have to go down in its skills levels to be adequate for the operation or (re)creation of the technologically regressive  import substitution. To put it in graphical terms:  while the original import substitution required that semi-literate peasants learn a bit of arithmetic in order to “service” the machines, here we would expect software engineers to become metal-bashing workers or foremen in large factories. This is because the demand for their (advanced) kind of skills will be reduced as Russian economy is cut off from the global market, and domestically there will be few similarly advanced sectors that would employ them.

            There will be thus a mismatch between the skill level of the labor force and the skill level technologically needed. Suppose that workers  of high skill level (HW) are needed to work with highly sophisticated machines, say robots (HM).  But if HM are unavailable  because previously they were all imported and they cannot be produced at home, the technological level of home-produced machines will be medium, call it MM. For MM however, one does not need HW workers but medium skilled workers MW. Thus, one needs to proceed to the deskilling of high-skill workers or just simply to ignore their level of education and “allocate” them to the jobs for which they are over-qualified. It is hard to believe that workers would find such repositioning attractive whether in terms of income, or challenge of, or interest in, the work they do.   

From the economic point of view this forced experiment will be interesting to observe since, as I mentioned, nothing similar in modern history has ever  happened, but I do not think that it will be very much fun for the participants.

 

Saturday, April 16, 2022

The lessons and implications of seizing Russian oligarchs’ assets

 The first and the most obvious lesson that we can draw from the confiscation of Russian oligarchs’ assets is that the pre-February 24 Russia was not an oligarchy, as many believed, but an authoritarian autocracy. Instead of being ruled by a few rich people, it was ruled by one person. To draw this (rather obvious) conclusion, we need to go back to the initial rationale given for the threat of asset seizure. When US government spoke of the seizure of oligarchs’ assets, it was before the war and with the expectations that the oligarchs, faced with the prospect of losing most of their money, will exert pressure on Putin not to invade Ukraine.  We can assume that 99%, or perhaps all, targeted oligarchs (and even those who feared to be possibly targeted) realized the stakes and must have been against the war. But their influence was, as we know, nil. Ironically, they lost their assets because they were not powerful.

If their influence on such an important matter, on which their entire assets and lifestyle depended, was nil, then the system was clearly not a plutocracy, but a dictatorship. I wrote about that in my July 2019 piece “Oligarchs and oligarchs” distinguishing between the early Russian billionaires who manipulated the political system (one should not forget that it was Berezovsky who brought Putin to Yeltsin’s attention because he thought that Putin could be easily controlled), and more recent billionaires who were treated as custodians of assets that the state may, by political decision, take from them at any point in time. It happened –unexpectedly—that it was not the Russian state that took their assets, but the American state. But it did so precisely because it thought (probably not accurately in all cases) that billionaires were “state oligarchs”.

This is the lesson about the nature of the Russian political system. But what are the implications of the seizure of assets?  They are, I believe, two kinds of implications: global and Russia-specific.

The global implication is that foreign plutocrats who often moved their money from their own countries to the “safe havens” of the US, UK and Europe will be much less sure that such decisions make sense. This applies in the most obvious way to Chinese billionaires who might experience the same fate as Russian. But this may also apply to many others. The frequent use of economic and financial coercion means that If there are political issues between the West and (say) Nigeria or South Africa or Venezuela, the same recipe will be applied to the billionaires from these countries, whether simply as a punishment or because of the expectation that they should influence the policy of their governments. Under such conditions, they would be very unwise to keep their money in places where it may be as insecure as in their own countries. We can thus expect the growth of other financial centers, perhaps in Gulf countries and India. Financial fragmentation is very likely, and would be driven not solely by the fears of billionaires but by obvious fears of potential US adversaries like China that their governments’ assets may too prove to be just pieces of paper.

What are the likely implications for Russia? Here we have to take a longer-term view, and to look past the Putin regime. The conclusion that billionaires and people close to power will draw is the one that was drawn a few times in Russian/Soviet history only to be forgotten. Leaving aside the conflicts between boyars and the czar, consider similarities with what happened now with Stalin’s regime. Stalin too was able, through skillful maneuvering to move from being a “gray blur” (as characterized by Trotsky) to the position of complete power including, in the last years of his rule, over the entire Politburo. Putin has not yet started executing people around him, but he has shown that politically they do not matter at all. The conclusion that the future Russian oligarchs will draw is the same that the Politburo members did: it is better to have a collective leadership where individual ambitions will be checked rather than to let one person take the full power.

I think that the future oligarchs (who are probably now making their first steps) will realize that they can either stick together or hang together. Under Yeltsin when they did dictate government policy, they preferred to fight each other, brought the country close to anarchy and even the civil war, and by doing so facilitated the rise of Putin who introduced some order.

Another implication is very similar to what I called the global implication. Again, it is useful to go back in time. When the original privatizations happened in Russia, the commonly-used economic logic was that it does not matter (for efficiency) who gets the assets because they would be bid out by better entrepreneurs, and everybody will have an incentive to fight for the rule of law simply to protect their gains. Communists will not be able to come back: “once the toothpaste is squeezed out, it cannot be put back” (that was a preferred metaphor used to argue for fast and inequitable privatization). The comparison was made with American “robber barons” who also often became rich by illicit means, but had the interest to fight for the safety of property once they became rich. The expectation was that the Russian billionaires would do the same.

These expectations were upended by billionaires’ finding a (seemingly) much better way to make their money safe: move it to the West. Most of them did so and it seemed an excellent decision—all the way to about six weeks ago. The new post-Putin billionaires will probably not forget that lesson: so we may expect them to favor a weak central government, that is, a true oligarchy, and to insist on the domestic rule of law—just because they will have no longer any place where to move their wealth.

 

 

 

 

 

Tuesday, April 5, 2022

The evolution of Karl Marx: a review of Kevin B. Anderson’s “Marx at the Margins”

 The goal of this very well-researched and well-written book is to show the evolution in Marx’s thinking away from the unilinear view of historical evolution, going  from primitive communism to slave-owning societies to feudalism to capitalism and, in the future, to socialism and communism. This unilinear scheme of history that in Capitalism, Alone I called the “Western path of development” (WPD) is the ”bread and butter”  of classical Marxism. It was based though, as many have argued, and Kevin Anderson very persuasively shows, on a generalization of West European history. It could not be transplanted elsewhere nor used to explain the rest of the world.

Marx was aware of that and introduced his famous “Asiatic mode of production” characterized by land ownership in common (whether by consanguine communities or not) and by an overarching hierarchical authority on the top. It was a prototype of what was later defined by the Marxist scholar Karl Wittfogel as the Oriental or “hydraulic” societies.  The Asiatic mode of production always sat rather uneasily within the Marxist framework because one could not say much about its evolution: whether such societies tended on their own to become capitalist, including by creating private ownership in land, or not. Even less could be said about their socialist prospects: but if so, how could “scientific socialism” argue for global validity?  

 Anderson shows that Marx in his early period, which we may date to the late 1850s, was both Eurocentric and, in a few passages where he discussed the Asiatic mode of production he assumed that it was ahistoric and unchangeable.

Things began to change in the 1860s, under the influence of political developments outside Europe. They led Marx to begin studying much more seriously non-(west) European  societies: the origin, history and class structure of agricultural societies without private ownership of land, their similarities and differences with such early European societies (of Germanic and later Slavic kind). The political events of late 1850s-early 1860 that attracted Marx’s attention and on which he wrote prolifically (mostly as the European correspondent of the New York Daily Tribune and also for Die Presse in Vienna) were the Taiping uprising in China (1850-64), the Sepoy rebellion in India (1857), the end of serfdom in Russia (1861), and the American Civil War (1861-65).

Anderson dedicates a whole chapter to Marx’s and Engels’ writings and mutual correspondence regarding the American Civil War.  As is well-known, both were strong supporters of the Union, and admirers of Lincoln—even if Marx tended to criticize him for timidity—but only to be pleasantly surprised and impressed when Lincoln fired General George McClellan and issued the Emancipation Proclamation. Engels, who had considerable military training, was less sanguine about the chances for an outright Northern military victory. Marx, who paid more attention to the social forces and the position of various classes and groups both in the South and the North, never doubted Northern victory, even at the times when Britain was on the verge on intervening on the side of the South.

The discussion of the American Civil War is important because it lets us see how Marx approached and combined the racial and the class questions. Perhaps this quote from a 1866 letter to François Lafargue (later repeated verbatim in Capital), “labor in the white skin cannot emancipate itself when in the black skin it is branded” summarizes best his opinion. But it leads us astray from the main point of the book, namely non-European nations’ transition to capitalism. Here India and, especially, Russia played a key role in the evolution of Marx’s thinking.

In the period up to the publication of Capital (volume I), Marx regarded Russia, as European liberals of the age did, as an extraordinary reactionary power, dictatorial internally and supporter of anti-revolutionary forces externally: “It is in the terrible and abject school of Mongolian slavery that Muscovy was nursed and grew up…Even when emancipated, Muscovy has continued to play its traditional role of a slave as a master” (p. 48; written in 1856). Russian  intervention on behalf of Austria in 1848-49, the creation of the Holy Alliance, the Crimean War, and bloody suppression of several Polish uprisings all fitted that image.

The change in Marx’s views, and greater interest in Russia, began after the publication of Capital when the Russian translation (which was the first translation of Capital, in 1872) attracted not only an unexpected interest among intellectuals and revolutionaries in Moscow and St Petersburg but also very astute and pertinent commentaries, quoted by Marx in extenso on several pages in his introduction to the second German edition of Capital.  

Marx new-found interests in things Russian, which led him to learn the language and read a number of Russian books in the original, had another important consequence. Russian Marxists posed the following question: could socialism in Russia sidestep capitalist development and use the land held in common (the Russian mir) as the basis for future socialization of the means of production? The question was whether the “natural” evolution was always such as to move from communal land ownership to private small-holding and then eventually into socialism, or could private small-holding be simply skipped?  

The same problem was faced elsewhere: in India and Algeria. In both cases, to which Marx directed his attention, the colonial authorities encouraged privatization of land. That was the way in which the colonists hoped to get hold of the land. If each parcel of land is held in common by a clan or extended family and cannot be alienated, how are French and British colonists going to get any of it? But if it is parceled out into private holdings, these individual lots can be either more easily expropriated or purchased from the new owners. This is why the French were keen to break clan ownership in Algeria, and the British helped zamindars become formal owners of land (zamindars were originally tax farmers who collected taxes from the peasantry and kept a part for themselves but did not own the land).

Everywhere thus, including in the Russian case (the land privatizations after the end of serfdom), the movement seemed to be towards the breaking-up of the communal ownership and the introduction of “land capitalism.” Still, the more Marx studied non-European societies, the more aware he became, Anderson argues,  that the WPD did not necessarily apply to them:  there was no equivalent to West European feudalism, and the future of rural communes was not preordained. It is in that context that Marx’s famous 1881 letter to Vera Zasulich, the Russian revolutionary, was written. The importance of Marx’s letter cannot be overestimated. It is shown by the fact that Marx, a compulsive and fast writer, made no fewer than five drafts of the letter, each more detailed than the short letter he finally sent. He explicitly circumscribed the validity of his analysis: “The ‘historical inevitability’ of this course [i.e. his analysis in Capital] is therefore expressly restricted to the countries of Western Europe”; and he allowed for the possibility of skipping the capitalist stage: “The analysis in Capital therefore provides no reasons either for or against the vitality of the Russian commune. But the special study I have made of it, including a search for original source­ material, has convinced me that the commune is the fulcrum for social regeneration in Russia. But in order that it might function as such, the harmful influences assailing it on all sides [meaning most likely the privatization of land] must first be eliminated, and it must then be assured the normal conditions for spontaneous development.”

Towards the end of his life, through an evolution driven largely by political events outside Europe and Marx’s extensive readings, Marx came to believe that the evolution he and Engels sketched in 1848 was valid for Western Europe alone and perhaps confined to it. It is only within this context that we can understand the apparently barren last decade of Marx’s life when, rather than completing the remaining volumes of Capital, he spent an inordinate amount of time studying the minutiae of Russian and Indian land ownerships, geology, the pre-historical societies and the like.

David Ryazanov, the first editor of Marx’s and Engels’ collected works, criticized Marx for this apparent waste of time: “Why did he waste so much time on this systematic, fundamental summary [of various books] or expend so much labor on one basic book on geology, summarizing it chapter by chapter. In the 63rd year of his life—this is inexcusable pedantry” (p. 249). However, according to Anderson, the “waste” can be understood  if we realize that Marx, unsatisfied with the WPD and his non-historical “Asiatic mode of production”, was, albeit unsuccessfully, trying to generalize the pathways of transition to capitalism by looking at the world as a whole, no longer Europe alone.

 

Friday, March 11, 2022

Long term: Difficulties of import substitution and delocalization

 When we look at Russia’s long-term economic prospects, it is also useful to begin with some assumptions and to look at historical examples. We can make two assumptions. First, that the current Russian regime, in one form or another, might continue for some ten to twenty years.

Second, we can assume that American and Western sanctions will continue throughout the entre period of say, 50 years that we consider here. The arguments for this are as follows. US sanctions once imposed are extraordinary difficult to lift. As of today, there are already 6,000 various Western sanctions imposed against Russia which is more than the sum of sanctions in existence against Iran, Syria and North Korea put together. History shows that US sanctions can last almost without any time limit: sanctions on Cuba are more than 60 years  old, on Iran, more than 40 years old, and even the sanctions on the USSR (e.g. the Jackson-Vanik amendment) that were imposed for one reason continued on the books during twenty years after the end of the USSR even after the original reason that led to sanctions (Jewish migration) had entirely disappeared.

When the post-Putin government tries to have sanctions lifted, it will be faced by a such a list of concessions that would be politically impossible to satisfy. Thus, sanctions, perhaps not in the exactly the same form, may be expected to last for the entire duration of what we call the long-term here (50 years).

It seems obvious then  that Russian long-term economic policy will have to follow two objectives: import substitution, and the shift of the economic activity away from Europe towards Asia. While these objectives are, I think, clear the realization will be extremely difficult.

As before, consider the historical precedents. Soviet industrialization can be seen as an attempt to substitute imports by creating a strong domestic industrial base. That process however was based on two elements that would be missing in Russia’s future.

First, Soviet access to Western technology that was at the origin of most large Soviet complexes like the Krivoy Rog  and the largest factory of tractors in the world in Tsaritsyn (later Stalingrad). The surplus extracted through collectivization, and hunger and death of millions, and even the gold taken from Orthodox churches, were used to purchase Western technology. There was never any doubt among the Bolsheviks, from Lenin to Trotsky to Stalin to Bukharin, that for the USSR to develop,  it had to industrialize and to do so it needs to import technology from the more developed countries. (That conscience of relative underdevelopment of Russia was extremely strong among all Russian Marxists who were all modernizers.)  The ability to import similarly advanced Western technology that could provide the basis for  downstream import substitution, will not exist under the regime of sanctions. Therefore such technology would have to be invented locally.

There is, however, a huge temporal break. Had anyone proposed import substitution approach in the 1990s, it would have been difficult to implement but not impossible: the USSR (and Russia) had at that time a broad industrial base (production of airplanes, cars, white goods; largest producer of steel etc.). The sector was not internationally competitive but, it could have been improved, and with right investments made competitive,. But most of these industrial complexes have in the meantime been privatized and liquidated, and whatever was not, is technologically obsolete. In thirty years after the beginning of the “transition”, Russia has not been able to develop any technologically advanced industry except in the military area.

Take the example of passenger airplanes. In 1970s, USSR was certainly ahead of Brazil, and even of ahead of Europe that began developing Airbus only in 1972. But that industry was destroyed during the transition, and the only remnant of it is Sukhoi Superjet that is currently used by several Russian airline companies but has not been sold (almost) anywhere else in the world. In contrast, Brazilian Embraer operates in 60 countries.

Doing import substitutions in conditions where both the base of such substitution will have to be recreated and then new industries created without much (or any) input through investments from the more advanced parts of the world is almost impossible to do. This is the problem that China was able to solve only after a dramatic foreign policy shift in the mid-1970s. But that option, by definition, will be unavailable to Russia.

The second factor underpinning Soviet industrialization was the increase in the labor force. It came from the supply of the surplus agricultural labor, increased overall population, and very important, from the improving level of education. The USSR in the 1930s used to produce annually hundreds of thousands of various types of engineers, scientists, doctors etc. None of these elements will hold in the next half-century. The Russian population is urbanized, shrinking in size, and is well-educated. Hence gains cannot come from any of the three sources that were used in the 1930s.

Of course, highly educated labor force is a plus. But that labor, in order to produce its maximum, needs also to work with top technology. If top technology is unavailable (for the reasons  explained above), highly educated labor will be wasted. Due to the shrinking population, even the overall pool of such labor will every years be smaller. Since it will not find adequate use and adequate pay in Russia it will tend to emigrate thus further shrinking the available number of highly skilled workers. It is not impossible that Russia might return to the Soviet policy of not allowing free migration—now under the pressure of economic factors. It was precisely the outflow of highly qualified workers that led East Germany to erect the Berlin Wall.

We can thus conclude that factors that made import substitution feasible in the 1930s and 1950s in the Soviet Union will not work in tomorrow’s Russia.

What are the prospect of shifting the center of gravity of the economic life from West to East? Technically, one can imagine a new type of Peter the Great move where Russia opens not a window on Europe (what St Petersburg was supposed to be) but a window on East Asia, by, for example, moving its capital to Vladivostok and trying to shift as much as possible of economic and bureaucratic life, together with the population East. If things could be moved by a decree, such a shift could even be arguably seen as quite reasonable. East Asia is, and will remain, the fastest growing part of the world. Leaving Europe, which in many ways is also a declining continent, could be seen as a right move. Russia is, with the United States, the only country in the world that can make such a radical move; for others, geography is much more of a destiny. Politically too, Russia is unlikely to be exposed to sanctions and political pressures by China, India, Vietnam or Indonesia in the same way as it is by UK, France and Germany. Finally,  a Pacific vocation could be seen as a replay of the American thrust to open the new frontier a century and half ago. Climate change might also help by making the Northern Russian territories more habitable.

            How feasible is such a change? It would require massive investments in infrastructure, including much better communication between the two far-flung parts of Russia: the flight from Moscow  to Vladivostok takes almost 10 hours and the train ride more than a week. Developing new cities along the way, expanding the existing ones etc. does not only require investments that a shrinking Russian economy cannot provide. It would also require creation of new jobs in such cities, the only thing that could attract the population to move from the European to the Asian Russia. The Soviet Union tried to do so by opening many Northern outposts in Siberia, paying workers higher salaries to move there, and did have some limited success. These towns and settlements have almost all died in the past thirty years though. It is difficult to see how such a massive shift of activity can be accomplished without huge investments and indeed some comprehensive urban and production planning.

            Both policies, namely import substitution and shift towards the East, will therefore meet with almost insuperable obstacles. It does not mean that they cannot be undertaken; some of them will by done, by necessity: Russian softwares will have to be produced to replace the 95% of western-origin software that is currently used in automated Russian companies (Russian newspaper sources). Closer economic ties with China would also imply some movement of companies and people East. A Siberian or a Pacific city can become the second capital (as Ankara did in Turkey). But a significant success in either of these two domains seems—the best that can be seen from today’s perspective—simply unreachable.

            So what happens then? As I mentioned several years ago in the introduction  to the translation of my “Global inequality” in Russian, the future of the Eurasian continent looks very much like its past: the maritime areas along the Atlantic and the Pacific coasts will be fairly rich, much better-off that the significant large continental areas in the middle.  The opens up the question of how politically viable will be such an uneven distribution of economic activity: will migrations, or political reconfigurations “solve” such disequilibria?

 

Russia’s economic prospects: the short-run

 I will consider in two parts what seem  to me the short-term and long-term prospects for the Russian economy. 

            I begin with the short term. It is based on the assumption that the shooting war in Ukraine ends within months (that is, that it does not continue at its current intensity for years) and that there are no drastic internal changes in Russia, in the form of a coup, revolution etc.

            To answer the question of the short-term effects, it is useful to go through some history for which, unfortunately, Russia, thanks to its circular economic history, provides several examples. The most calamitous declines in income in the past 100 years occurred during the later stages of the First World War and the ensuing Civil War, as well as during the transition to capitalism in the 1990s. (Enormous decline in GDP, and especially consumption, happened also during the Second World War but they are more difficult to interpret.)

Between 1917 and 1922, Russian GDP was halved (all numbers given here are in real terms, i.e., adjusted for inflation); the industrial output in 1921 was 18% of the pre-War level; the agricultural production was 62% of the pre-War level. (The data are from Kritsman, 1926, quoted in Pipes, 1990; and from Block 1976; see also chapter 1 of my “Income, inequality and poverty during the transition from planned economy”). During the transition episode, Russian GDP per capita decreased between 1987 and 1995 by almost 40% (much greater decline than during the Great Depression in the United States).  The greatest one-year decline was in 1992 (16 percent), followed by the next two years of respectively 8 and 13 percent. (The data are from the World Bank.)

We can also take the third example of the 1998-99 financial crisis and the Russia’s default on government debt. In 1998, Russian GDP went down by 5 percent. The financial crisis and the general disorder of 1998-99  probably led Yeltsin to the realization that he could no longer control the Russian society and the economy: in a quick succession he appointed several Prime Ministers (all of them in one way or another linked to KGB—seemingly realizing than no one else could salvage the situation), and the rigmarole ended with Putin’s appointment on 31 December 1999. This  opened to Putin the venues of being elected president after Yeltsin’s early resignation (Yeltsin’s term would have normally ended in June 2000).

            The 1920s Civil War (obviously) and the transition were both greater economic shocks that the current one. The period of the early 1990s involved a wholesale change in the way enterprises functioned, the break-up of almost all economic ties with other Soviet republics, privatization, government’s inability to implement policies, and corruption on an epic scale. Today’s sanctions, however onerous for the economic activity, are unlikely to have the same impact in the short-run. But they would certainly have much more of an impact than the 1998-99 financial crisis. One can thus, very roughly,  put the expected decline in 2022—23 at high single digits, or low double digits: it is not going to be as sharp as in 1992, nor as (relatively) mild as in 1998.

            It is of course unclear how the costs of the decline will be distributed. Russian government has recently introduced a new, more favorable, indexation of  pensions (30% of Russia’s population are pensioners) but it is doubtful that, under the new conditions, it would be able to delivers that policy. The same is true for greater income-tested child benefits, voted in by the Duma. The withdrawal of many foreign firms, de facto embargo on a number of imports, and surely a decline in foreign and domestic investments, will increase unemployment. Currently, Russian unemployment is low, but it could go back to 7-8% or more, as it was in the 1990s. Russian safety net is simply not institutionally nor financially strong enough to maintain these people’s incomes at a reasonable level. The institutional weaknesses were revealed  by the effects of covid: the total number of registered covid deaths was 360,000 and Russian excess deaths are, according to some estimates, among the highest in the world. One can compare these results with those of China, which had 4,600 registered covid-related deaths, i.e. about 1% of Russia’s, with a population almost ten times as big as Russia’s.

            Inflation that will accompany the fall in the ruble will also affect the poorest the most. Although Russia’s food prices may not increase as much as in food-importing countries, they will go up (domestic production in some areas not being able to compensate for lower imports, and foreign inputs increasing due to the depreciation of the ruble). Sporadic shortages might develop, The news already report the run on a number of essential items, including the shortage of sugar. Faced with such unstable and volatile relative prices, under the condition of return of high inflation, the prudent policy would be to impose rationing for all essential items.  In the Soviet Union, rationing was eliminated in 1952, and then briefly reintroduced for some goods in Russia during the early 1990s. It may have to be reintroduced again, probably more broadly. The rationale of rationing is of course to protect the welfare (and even the survival) of the poorest classes, but it obviously blunts the incentives for producers. In the Soviet Union, this did not matter much since production was based on planning, but in Russia of today, incentives do matter.

            Government policies, unveiled so far, whose objective is reduce the impact of sanctions, are very weak. To declare a temporary tax holiday for small and medium size enterprises makes sense in order to avoid massive layoffs, but it cannot be a medium-term policy. It obviously affects the budget, and also  opens the way to what seems inevitable, namely a monetary expansion followed by inflation. As already mentioned, inflation was extraordinarily high in the early 1990s (the annual level was at three figures between 1992 and 1995) and also in 1999, when it reached 90 percent. It is hard to see how it may not return:  already by February, the inflation was 10% on an annual basis. The March numbers will be certainly higher. 

Another government measure aims to encourage repatriation of Russia’s foreign investments. But why would people bring back to Russia money that, under the regime of capital controls which are already in place and will become stricter, will be impossible to move back abroad, if needed?

The problem is not that the government is making wrong policy choices; the problem is that, in the current situation, there are almost no good policy choices to make. The range of what the government can do is extremely limited, and is determined by foreign policy decision made by Putin (probably without any consultation of the economic ministries) and by foreign sanctions. Between the two, there is very little that any economic policy can do other than be led by the events in becoming more and more restrictive. It is important to point out that the restrictiveness will be mostly forced by the events. Ideologically, the Russian government is technocratic and neo-liberal. Putin himself had always had a neoliberal approach to the economy. The first day after the invasion of Ukraine, he called a meeting with the big business and promised them a “fully liberalized economy” (actuality, practically asking them to do whatever they want). He, and probably them, might not have  been at the time fully aware of the deleterious effects of sanctions. As that becomes increasingly clear, the field of decision-making for economic policy will be drastically reduced. It will no longer be the question whether one likes price controls or not: it would be a question of having massive riots without them. Thus restrictive policies will be dictated by the events. But once adopted, they will be difficult to alter.

            Another aspect should be also mentioned. Sanctions and any kinds of limitations always call for work-arounds. They are indeed  possible: imports may be made from (say) Armenia and then resold in Russia; Russians abroad might share their credit cards with cousins at home etc. But such “creative solutions” are expensive. People who engage in them take risks for which they have to be compensated. The Russian papers have already reported the emergence of “speculators”, a term which hails back to a revolved era. The increase in prices due to clever work-arounds is not the only effect. A more socially pernicious is the emergence of smuggling and crime networks that will control such schemes. This is the same as with drugs. Once a good is illegal, underpriced or difficult to obtain, it will be brought to the market but at a high price and by people who are willing to defy the law. The criminalization of the Russian society,  which has gone on since the 1990s and that exploded under Yeltsin, will come back in force.

            The coming years of Putin’s rule will thus look very much like the worst years of Yeltsin’s rule. Putin was brought out of the deep shadows with the idea that he would protect the gains of Yeltsin’s family and the oligarchs while reimposing some degree of internal stability. In his first two terms, he was successful in doing that. But at the end (or whatever the current point it is) of has reign, he brought all the original diseases back and made them in some sense worse because his policies stuck the country in an impasse and thus closed off all the venues of escape.

            In the next post I discuss the longer-term prospects.    

Wednesday, March 2, 2022

The end of the end of history: what have we learned so far?

 Wars are the most horrible events. They should never happen. The entire human effort should be directed toward making wars impossible. Not just illegal, but impossible, in the sense that no-one would be either able or have incentive to start them.

But we are, unfortunately, not there yet. The humankind has not evolved that far. We are now in the midst of a war that may become a very murderous war.

Wars are also an opportunity  (however cold-hearted this might seem) to reassess our priors. Things are suddenly thrown into a much sharper focus. Our beliefs are transformed into illusions. The nostrums become meaningless. We have to deal with the world as it is, not with the world we imagined until a day before.

So, what have we learned after one week of the Ukraine-Russia war? I will try not to speculate about the outcome. Nobody knows it. It can end with the occupation and subjugation of Ukraine, or it can end with the break-up of Russia. And everything in between. Neither I, nor the reader, nor Putin, nor Biden know it. So I will not speculate on it.

But what do we seem to have learned so far?

1. Power of oligarchy. The power of oligarchy when it encounters le raison d’état is limited. We tended to believe that Russia, being an oligarchic capitalist economy, is also one where the rich decisively influence policy. Perhaps that in many everyday decisions that is the case. (I do not have in mind here the oligarchs who live in London and New York, but those who live in Moscow and St Petersburg and who may be also heads or large shareholders of powerful private and semi-state-owned companies.) But when the matters of state are serious, for the organized power, that is, the state, oligarchy is no match. The threat of sanctions, so visibly displayed and trumpeted by the US weeks before the war started, might have influenced Russian oligarchs to move their yachts as far as possible from US jurisdiction, or to engage in fire-sales of their property, but it made no difference to Vladimir Putin’s decision to go to war.

Nor did all the buying of influence by the rich Russians among the Tories in the UK or both political parties in the US matter. Neither did the “sanctity of private property” on which the United States was created (and which so much attracted  the oligarchs to move their stolen wealth there in the first place). The US proceeded to probably the largest inter-state transfer of wealth in history. It is the equivalent of Henry VIII’s seizure of church lands. While we have seen such gigantic confiscations within countries (the French and Russian revolutions) we have never seen it, in one fell swoop, in 24 hours, between the countries.

2. Financial fragmentation. The corollary of this point is that extremely rich people are no longer safe from political forces—even if they change citizenship, contribute to political campaigns, or dedicate a wing of a museum. They can fall victim to geopolitics they do not control and which are much beyond their remit—and at times beyond their understanding. To remain excessively rich would require more than ever political nous. Whether the globally rich will interpret this confiscation to mean that they must more seriously than ever capture the machinery of the state, or they interpret it to mean that they should find other new havens for their investments is impossible to tell. Most likely it will lead to the fragmentation of financial globalization and to the creation of new and alternative financial centers, probably in Asia. Where will they be? I think the strong candidates are the democratic countries with a degree of judicial independence, but also enjoying sufficient international political clout and margin of maneuver not to yield to the pressure of the US, Europe or China. Bombay, Djakarta come to mind.

3. The end of the end of history. We—or at least some people--tended to believe that the “end of history” meant not only that the ultimate political and economic system was discovered in one night in November of 1989, but that the old-fashioned tools of international struggles will not reappear. The latter was shown wrong several times already, from Iraq and Afghanistan to Libya. A more brutal demonstration is in the process of being executed right now where borders are being redrawn using the instruments that the world has practiced for 5,000 years of recorded history but that were thought obsolete.

The current war displays to us that the complexity of the world, its cultural and historical “baggage”, is great and that the idea that one type of system will eventually be embraced by all is a delusion. It is a delusion whose consequences are bloody. To have peace, we need to learn to live while accepting differences. These differences are not trivial differences that go under the current title of being open to variety, in way we dress, in our sexual preferences or the food we eat. The differences we need to accept, and to live with, are much more fundamental and they relate to the way societies function, what they believe in, and what they think is the source of legitimacy of their governments. That of course can change in the course of time for any one given society, as it did many times in the past. But at a given point, it will differ from country to country, from region to region, from religion to religion. To assume that everyone  who is not “like us” is somehow deficient, or not aware that they would be better off being “like us” will –if we maintain this flawed belief—remain the source of endless wars.  

 

Thursday, February 24, 2022

How modern bombings look: The bombing of Belgrade in 1999

 The Russian bombing of Kiev brought back very painful memories of a similar bombing of Belgrade (1.5 million people) by NATO forces in the Spring of 1999. I was not then in Belgrade and I watched the bombing, as long as I was able mentally to do so, on US evening news. I noticed that while watching I almost had no feelings: seeing streets and houses which I knew well, including the building where I lived and where I still have an apartment, getting suddenly lit by the flame from the nearby explosions left me almost numb—as if my mind migrated somewhere else. The bombing lasted 78 days. I think I stopped watching the news after a couple of days. That whole period is just a blur for me. (I could not watch the much more brutal bombing of Baghdad in 2003, nor can I watch now the bombing of Kiev.)

Many of my family and friends were in Belgrade during these 78 days. There are several interesting experiences that are useful to share about high-precision bombing as was practiced at the end of the 20thcentury. NATO bombing was always conducted at night. The planes flew at high attitude at which the Serbian air defense could not reach them. Only one US plane was brought down (the pilot catapulted) out of probably hundreds of sorties that were made. Most of the sorties were from an air base in Italy, eponymously called Aviano, but some planes flew ten or more hours from US bases, just to bomb for a hour or so and then fly back to the US.

At first,  NATO thought that Serbia will surrender quickly (meaning that President Milosevic, the then autocratic even if democratically elected leader of Serbia, would withdraw the troops from Kosovo where they were engaged in, or about to start, conducting military operations and atrocities). So, at first NATO targeted only non-civilian objects, many of them empty: different ministries which were previously evacuated (especially Ministry of Defense and Ministry of Internal Affairs), the HQ of the General Staff, Milosevic’s personal residence, the building of Socialist (formerly Communist) party etc. They were all fully or largely destroyed. These were  ritualistic bombing because almost nobody was left in these building and  all documents were taken out or burned. The only exception was Milosevic’s residence where NATO did hope to catch him and kill him. (More on that later).

How did my family and friends react? They were not too scared and they also believed that the bombing would last only a few days. Three days, many thought. Some slept in the basements of large buildings, others in their bedrooms. A friend refused to ever move out of her bedroom as she believed that Americans were not going for civilian targets and were so precise that the only thing she feared was that the Serbian air defense might bring down a US bomber and the debris might fall on her building. A bit like Obelix.

Since the bombing was always at night (it was in the months of March, April, May and early June) life during the day was more or less normal. There were no shortages of essential goods. The sirens would blast at the sunset or later and then people would run to the shelters, or just head back home. The US weapon of choice was the smart Tomahawk cruise missile. A  friend told me that he watched it from his window fly several meters above the water for a kilometer (Belgrade lies on two rivers), make a turn exactly where the river bends and hit its target on the shore. Like in a video game.

But as the surrender was not forthcoming, NATO decided to up the ante. They began targeting thermal plants, factories, refineries (which led to frightful fires) etc. I was later working with a team that tried to assess the damage. It was difficult to do: do you use the accounting value of  destroyed factories or the net present value of future income? I think we came up with $25 billion. (I will try to find the booklet and get the correct number.)

Yet the surrender was still not forthcoming. So NATO then decided to invent what its inimitable spokesman, cynic and liar, the brother-in-untruth of Maria Zaharova,  Jamie Shea decided to call dual-use facilities. These are things that could be used for both civilian and military purposes, like,  for example, a bakery: it sells bread both to solders and to civilians. Things started getting ugly. In addition, NATO came up with the so-called carbon bombs which disable the system of electricity transmission (they accumulate on the wires) and thus leave the city entirely in darkness until things are fixed. This sometimes  took a whole day. But when there is no electricity, there is also no water in large apartment blocks, and when there is no water toilets do not function properly. Elevators also do not work. I had a friend who lived on the 20th floor of an apartment building. He  almost never went out, to the ground: neighbors would organize teams of several young persons to buy bread, milk etc. and bring it up.

Belgrade was fortunate that the bridges on which the city depends were spared. Without them the city would have almost died. Every night, crazily brave groups of some 100-200 people would gather on the bridge, singing songs and expecting (but hoping not) to die. Luckily, it never happened. Apparently, French President Jacques Chirac refused to clear bridges as targets. However, in the second largest city in Serbia, Novi Sad, two bridges were destroyed.

NATO used cluster bombs and depleted uranium (both banned by international conventions to which the US is a signatory). Several kids were killed by cluster bombs. Depleted uranium has long-term effect on higher cancer rates (although  these finding are disputed by some). The effect of the depleted uranium was the greatest (because the delivery was the greatest) in Kosovo. But, since Kosovo’s  population saw the bombing as liberation, there was not much incentive to research later if bombing was linked to the increase in diseases. The overall civilian toll was between 1500 and 2000 deaths (less than a half of that in Belgrade).

When I talk (rarely) about this episode, people always ask me about the US bombing of the Chinese embassy. The embassy happens to be some 300 meters  from my apartment (as I said, I was not there then, but my friend was). She heard a powerful blast that broke many windows on the nearby buildings, but not hers. It killed three Chinese journalists, injured more. Was it a mistake or not? The ostensible ritualistic target was, according to the US, the Federal Office of Special Goods Exports (i.e. of arms exports). But that building is much bigger, has an entirely different shape, is two blocks away, and even the angle at which it sits is different. So I am skeptical. I think that the bombing was motivated by the stories that circulated –even I heard them—of Milosevic staying overnight in the Chinese embassy on the assumption that the Americans would not bomb a diplomatic compound. So I do not think it was an accident,                            

Of course, it was also the time when Novak Djokovic trained during the day only and in a swimming pool. This is often presented in the news as some funny story, but it was far from funny. As he himself has said, it has been a traumatic experience that had marked him for life.

War is not fun. It is not good in Belgrade. It was  not good for the victims of the Sarajevo siege shelled by Serbian forces; it was not fun in Kosovo. And it is not fun in Kiev today. I wish that some of those who decide to bomb cities spend some time being bombed themselves. Perhaps they would think twice about ordering such attacks. We should all hope that none of them ever happens again..