Distinguishing post-communist privatizations from the Big Bang

 From time to time there are articles that criticize the initial 1990s reforms (the Big Bang) in several East European countries and Russia, and they invariably mention the role of Jeff Sachs (often in a negative context like here). This is not a piece written in defense of Sachs, but in defense of the Big Bang reforms at that point in time and in those countries. I emphasize “at that point in time” and “those countries” because the conditions faced by Poland, Russia, and Yugoslavia (the three cases I know reasonably well and where Sachs was involved) were very special and in most respects incomparable with other cases of macro adjustments. In these reforms which (I believe) were both inevitable and successful, Jeffrey Sachs played a very positive role.

But my point is broader: the opprobrium that is often heaped at the Big Bang comes in part from the lack of knowledge of the contemporary conditions, and from easy conflation between macroeconomic reforms and privatization, which indeed began at approximately the same time, but were two distinct processes. While the Big Bang was successful and after a year of output decline and reduced real wages allowed Poland to grow fast, and would have certainly done the same for Russia, the hurried and inequitable privatizations created a kleptocratic oligarchy whose net contribution to innovation was close to zero but whose ability to extract surplus from political connection was infinite.

These two subjects (macro stabilization in the late 1980s-early 1990s and privatization) are topics for a whole book—and more. I want to give here just a bird’s-eye-view of the problem as it existed in Poland in 1989, Yugoslavia in 1990, and Russia in 1992. The Polish case is the one that I am most familiar with because I worked on Poland, spent months in the country between 1987 and 1990, know or at least have met all the main protagonists, including Sachs, and used to speak the language. I have written about Polish stabilization here (unfortunately it is pay-walled with an outrageous price, but if you write to me I will be happy to send you the article) and of course, I have written a lot about inequality and poverty before and after the reforms—like e.g. a book here here or an article there).

The most important thing to know is that  by the time reforms took place, the government no longer controlled the economy. This was therefore not a standard type of macro adjustment, like in (say) Egypt or Argentina, where the economy is behaving “normally” but there are fiscal or external-sector imbalances. In the Polish case, the economy was in a free fall, several exchange rates existed, hyperinflation was already present, enterprises were neither under the control of government ministries, nor subject to market; the power battles (who decides on work discipline, to whom to sell the goods, from whom to buy, where to borrow) were waged within every single enterprise, and all the way to the top of government. Neither coercion nor incentives were any longer operative.

Under such conditions, macro stabilization or the Big Bang had no alternative; its role was simply to validate what was already happening but in a most pernicious and chaotic way. Instead of closing eyes before multiple exchange rates, to unify them in one; instead of promising subsidies which the government could no longer deliver because its taxation ability collapsed, to eliminate them formally; instead of pretending to impose price controls (or the price freeze like in Yugoslavia) which the government had no ability to enforce, to legally allow all prices to be market-determined.

So the Big Bang was less a standard program of macro adjustment than a simple validation (or legalization) of what was there. It was acceptance of the fact that  government’s writ was no longer. It essentially said, in economics, and as of now, the government has no political power to do much beyond its minimal functions; it will have to abandon the rest to the market, and at some further point, when political legitimacy is restored after elections and some degree of stability is reintroduced, it will try to create a more balanced economy. This is indeed what happened in Poland.

A different issue was privatization. It was not entirely separated from macro stabilization because once macro situation improved, lack of clear ownership (either by workers, or by the state or by private capitalists) meant that it was not obvious who would make economic decisions and who would be the residual income claimant. But formally, and substantively, it was a separate issue.

Here of course Russia is the best example. It was not Gaidar’s reforms, which took place under even worse conditions than in Poland—when the country was on the verge of famine and even a possible civil war—that were responsible for what happened since but privatization. Privatizations’ effects, unlike those of macro stabilization, were long-term and they continue today. For Russia to privatize its economy would have never been easy, given the amount of wealth that existed and needed to be distributed, and difficult starting conditions. (One should not forget that in both Poland and Yugoslavia agriculture was mostly private.) But Russia under political pressure of Yeltsin’s cronies, chose the worst possible privatization strategy that included (1) an ostensible egalitarian voucher privatization, where vouchers were quickly bought for quasi-nothing from the impoverished population, and (2) a top-driven privatization that in 1996 was legalized under the title of “loans-for-shares”, a misnomer which actually meant private sector’s loans to corrupt and penniless government so that it could conduct the electoral campaign and make Yeltsin reelected. And in return the government would then give away, for nominal amounts, the most valuable state assets.   

Informal and formal privatizations, which in Russia began as early as 1988, and were “crowned” by the loans-for-shares, are the root cause of Russian problems  today and might continue for a number of decades. These problems are political. Privatization created a set of “political” billionaires who presumed that they could become the government (see my review of Paul Klebnikov’s book on Berezovsky). Putin, whom they brought to power in the expectation that they will control him, clipped the wings of the most ambitious and ruthless amongst them, and brought in his own “cadre” to let them be enriched. But the struggle between the first set of billionaires, many of whom Westerners, who enriched themselves under Yeltsin, and were unhappy from being excluded from the next division of the spoils, and the second set of billionaires, the Putin’s “team”, continues to this day, not only in Russia but across the world. Many of the first group have used millions that they have stolen from Russia to set a number of political think-tanks whose main role is to fight Putin, under the pretext of transparency and democracy, but in reality in the hope that they would again be able to exploit the mineral resources.  Putin’s team in order to stay in power applied the same rules: the permission to get rich is given only in exchange for political loyalty.

None of that existed in Poland, and the fact that Poland, despite massive economic growth has been a country with only a handful of billionaires, shows that it was inequitable privatizations that are at fault, not the long-forgotten and indeed successful macro stabilization of the late 1980s. In criticizing what went wrong then, we need to keep these two issues separate.  

Climate change, covid and global inequality

I have criticized yesterday what I regard as “magical” or quasi-religious thinking among degrowers. This is not the first time. I have criticized Kate Raworth's interesting, but thoroughly “magical”, book here, and have had a debate with Jason Hickel here. So the question can rightly be asked: what is non-magical thinking in dealing with climate change?

I am not original in this. This is an area that many (hundreds) have studied and know much better than I. But it is an area where I think that the knowledge of global inequality can be used to produce some tentative answers.

High global inequality, otherwise a scourge, can here be used to our advantage. We know that the top decile of world population (call them “the rich”) receives about 45-47% of global income. We also know that the elasticity of carbon emissions with respect to income is about 1 which is a fancy way of saying that as real income goes up by 10%, we generate 10% more emissions. This then implies that the top global decile is responsible for 45-47% of all emissions. That percentage can be calculated with even more precision because we have detailed consumption data (by a number of categories, running into hundreds) and we can assign to each consumption category its precise carbon footprint. It is not unlikely that we would find that the carbon emissions of the top decile are even above one-half of  total emissions. (Some such work has already been done.)

The question thus gets simplified. Suppose that we draw a list of goods and services such that are (a) carbon intensive and (b)  consumed predominantly by the rich. We could then in a concerted international action try to curb consumption of such goods and services while leaving entirely free other decisions: no limits to growth, no degrowth in either poor or rich countries.

The entire onus of the adjustment falls on the rich. Who are the rich, viz. the global top decile?  About 450 million people from Western countries, or the entire upper half of Western countries’ income distributions; some 30-35 million people from both Eastern Europe and Latin America, that is respectively about 10% and 5%  of their total populations; about 160 million people from Asia or 5% of its population; and a very small number of people from Africa.

Curbing consumption can be done either through rationing or draconian taxation. Both are feasible technically although their political acceptability may not be the same.

If one were to use rationing, one could introduce physical targets: there will be only x liters of gas per car annually and no family will be allowed to have more than two cars; or y kilograms of meat per person per month; or z kilowatts of electricity per household per month (or rolling blackouts). Clearly, there may be a black market for gas or meat, but the overall limits will be observed simply because they are given by the total availability of coupons. Some people might think that rationing is extraordinary, and I agree with them. But it has been done in a number of countries under wartime, and at times  even during peacetime conditions, and it has worked. If indeed we face an emergency of such “terminal” proportions as the advocates of climate change claim, I do not see any reason why we should not resort to extreme measures.

But another approach (draconian taxation) is possible too. Instead of limiting physical quantities of goods and services that fulfill criteria (a) and (b) we would impose extremely heavy taxes on them. There is always a tax rate that would drive consumption of a good down to the level that we have in mind. It is here that I think we can use—again if we believe that the climate emergency is so dire—the lessons of covid.

Let me illustrate that by using air transport, one of important sources of emissions. No one in the world could have imagined that air traffic could be cut by 60% in one year. This is what happened in 2020. What is our experience? That it is indeed an inconvenience but did the world survive? Yes. Did we reorganize our lives so as not to travel, and especially not to travel far because many countries have closed borders which has further dampened travel? Yes. So, is a permanent decrease of 60% in air travel possible to envisage? Yes.

If we were serious, we could, in this case, as in the others, argue for such a tax that would keep air travel at its 2020 level indefinitely. The tax might mean that the ticket between New York and London would not cost $400, but $4,000, that people in rich Western countries might travel to foreign countries once in a decade rather than once per year, but as we have learned from the experience of 2020, we can do it and we can live with it.

Economic dislocations would  be huge. It is not only the question of the entire upper middle class and the rich in advanced countries (and, as we have seen, elsewhere) losing significant parts of their real income as prices of most “staple” commodities (for them) increase by two, three or ten times; the dislocation will affect large sectors of the economy. Go back to the example of travel. A permanent 60% decrease will more than halve the number of airline employees, will practically leave Boeing and Airbus with no new orders for airplanes for years and possibly lead to a liquidation of one of them, will decimate hotel industry, will close even more restaurants than were closed by the pandemic, will make parts of the most touristy cities that currently complain of excess of tourists (Barcelona, Venice, Florence, probably even London and New York) look like ghost towns. The effects will trickle down: unemployment will increase, incomes will plummet, the West will record the largest real income decline since the Great Depression.

However if such policies were steadfastly pursued for a decade or two, not only would emissions plummet too (as they have done in 2020), but our behavior and ultimately the economy would adjust. People will find jobs in different activities that will remain untaxed and thus relatively cheaper and whose demand will go up. Revenues collected from taxing “bad” actvities may be used to subsidize “good” activities or retrain people who have lost their jobs. We may not be able to drive to visit friends and family every week, but we shall be able, using our covid experience, to see them on screen. Secondary homes could be taxed in such a confiscatory manner that most people will be eager to sell them. Governments could then buy them, create a kind of Paradores (Spanish state-owned hotel chain that uses vacated monasteries), and people in (say) England, rather than jetting off on vacation to Thailand, would spend their annual holidays nearby in some of the formerly privately-owned mansions.

This is not magical thinking. These are policies that, with intergovernmental cooperation, knowledge of economics, data on global inequality, and the experience of covid, could be implemented. Is there appetite for such policies? I do not know. I tend to doubt it. I think that most of the population of rich countries would not be excited if told that a quasi lock-down will have to continue for an indefinite future. But if conditions are so dire, if climate change is but a long-term covid, if we have learned to live with covid and to survive, could we not adjust to this “new normal” too? I do not know—but I think it would be fair and candid of the partisans of radical change to put these questions squarely in front of the public and not try to hoodwink them with the sweet talk of “thriving” monastic lives.

Degrowth: solving the impasse by magical thinking

 The difficulty of discussion with degrowers comes from the fact that they and the rest of us live in two different ideological worlds. Degrowers live in a world of magic, where merely by listing the names of desirable ends they are supposed to  somehow happen. In that world, one does not need to bother with numbers or facts, trade-offs, first or second bests; one merely needs to conjure up  what he/she desires and it will be there.

Now degrowers are not irrational people. The reason why they are pushed in this magical corner is because when they try to “do the numbers” they are led to an impasse. They do not want to allow for significant increase in world GDP because it will, even if decoupling (of which they are skeptical) happens, drive energy emissions too high. If one wants to keep world GDP more or less as now one must (A) “freeze” today’s global income distributions so that some 10-15% of the world population continue to live below the absolute poverty line, and one-half of the world population below $PPP 7 dollars per day (which is, by the way, significantly below Western poverty lines). This is however unacceptable to the poor people, to the poor countries, and even to degrowers themselves.

Thus they must try something else: introduce a different distribution (B) where everybody who is above the current mean world income ($PPP 16  per day) is driven down to this mean, and the poor countries and people are,  at least for a while, allowed to continue growing until they too achieve the level of $PPP 16 per day. But the problem with that approach is that one would have to engage in a massive reduction of incomes for all those who make more than $PPP 16 which is practically all of the Western population. Only 14% of the population in Western countries live at the level of income less than the global mean. This is probably the most important statistic that one should keep in mind. Degrowers thus need to convince 86% of the population living in rich countries that their incomes are too high and need to be reduced. They would have to preside over economic depressions for about a decade, and then let the new real income stay at that level indefinitely. (Even that would not quite solve the problem because in the meantime, many poor countries would have reached the level of $PPP 16 per day and they too would  have to be prevented from growing further.) It is quite obvious that such a proposition is a political suicide. Thus degrowers do not wish to spell it out.

They are  brought to an impasse. They cannot condemn to perpetual poverty people in developing countries who are just seeing the glimpses of a better life, nor can they reasonably argue that incomes of 9 out of 10 Westerners  ought to be reduced.

The way out of the impasse is to engage in semi-magical and then outright magical thinking.

Semi-magical thinking (that is, thinking where the objective—however laudable- is not linked with any tools of achieving it) is to argue that GDP is not a correct measure of welfare, or that better outcomes in certain dimensions can be achieved by countries or peoples with a lower GDP (or lower incomes). Both propositions are correct.

GDP does leave out non-commercialized activities that are welfare-enhancing. It is,  like every other measure, imperfect and one-dimensional.  But if it is imperfect at the edges while fairly accurate overall. Richer countries are countries that are generally better-off in almost all metrics, from education, life expectancy, child mortality to women’s employment etc. Not only that: richer people are also on average healthier, better educated, and happier. Income indeed buys you health and happiness. (It does not guarantee that you are a better person; but that’s a different topic.)  The metric of income or GDP is strongly associated with positive outcomes, whether we compare countries to each other, or people (within a country) to each other. This is something so obvious that it is bizarre that one needs to restate it: people migrate from Morocco to France  because France is a richer country and they will be better-off there. American Blacks are worse off than American Whites in all dimensions, not least in terms of their income. This is the background to the Black Lives Matter movement that wants to make Blacks better off and equal in income and health to Whites.

Since this fails, the next approach taken by degrowers consists in pulling out individual cases of countries the have performed exceptionally well on some metrics (like Cuba on health) and those that have performed exceptionally badly (like US on life expectancy) and to argue that a certain desirable outcome can be achieved with much less money. It is indeed true that some countries or some people, despite their lack of income, have achieved excellent things while others have used their income inefficiently or wastefully. But it does not follow from such individual examples that they overturn the regularities described In the previous paragraph. What degrowers do is to first metaphorically run a regression of a desirable outcome on GDP or income, and when they observe that the two are closely correlated, forget about the regression, pull out an outlier, and claim that the outlier shows that the relationship does not exist.

That is clearly wrong too. So the next stage in semi-magical thinking consists in trying to convince people that they are wrongly pursing the Golden Calf of wealth and that much more modest lives would be better, or at least are feasible. To that effect they use baskets of goods and services that allow “modest” standard of living and satisfy all basic needs. But they fail to show us how such “modest needs” are to be implemented: how will people be obliged to consume only so much and not more? In war situations, this is done through rationing. Indeed, one could ration the number of square meters of textile that each household may be able to buy, introduce meat and gasoline coupons and so forth. It has been done many times. But degrowers know that a wartime economy in the peacetime would not be politically acceptable, so they just do the basket calculation, show that it is compatible with “planetary boundaries”, and leave it at that. How we are going to have that basket accepted by people, or implemented despite their will, is not something they desire to be disturbed with.

After this comes direct magical or religious thinking. Its first component, in an asceticism reminiscent of the early Christendom, is to point out to the vanity of all material acquisitions. People indeed can live happy lives with much less “stuff”. That is true for some special people like Christian or Buddhist monks. For example, Simeon the Stylite, an early Christian monk is reputed to have lived several decades on a top of a pillar. But this is not true for the remaining 99.99% of the people who are not attracted by monastic lives. And it certainly is not true today when capitalism, and thus both the relentless search for profit and the value system that places wealth on the pedestal, is more dominant than ever (see Chapter 5 of “Capitalism, Alone”). Had degrowers preached material abstinence in 13^th century Europe or 10^th century Byzantium it might have had more appeal. Commercial society, capitalism, numerical abilities were far less developed than today. But now, the relevance of moral preaching of abstinence is close to zero.

When all arguments and quasi-arguments are exhausted, magical thinkers  move into the realm of rhetoric. Thinking is now replaced by phrase-mongering: “thriving”, “flourishing” and “self-fulfilling” lives are possible and they are just around the corner. Everybody can be happier with much less. We can just cultivate our own gardens. If you string all the desirable words together, “no exploitation, “living wage”, “ethical business”, “self-sufficiency”, “fair price” they will somehow take the life of their own and the Elysian fields will open up in front of us. For all and forever.

 

Limits to autocracy. Review of Charles Hucker’s “The Censorial System of Ming China”

 Charles Hucker’s book was published in 1966. Charles Hucker was one of the foremost American scholars of Chinese literature and history. The objective of “The censorial system of Ming China” was to empirically review and analyze the role of  the censors and the censorial system during two different periods of Ming dynasty: the first 1424-34, the one of relative domestic tranquility, and the second 1620-27 when, almost at the end of the Mings, Northern borders were assaulted by the Manchus and domestic politics were in turmoil. As Hucker writes, the archival documents during the Ming era are enormous, and as a solution to make a study of the censorial system practicable Hucker selected two different periods—to see if the system and its actors behaved differently under different conditions.

What is the censorial system? It is a part of civil service (with officials, in principle, competitively chosen although—interestingly—with  an “affirmative action” in favor of candidates from Northern and Western provinces) whose role is to surveil the realm and check how  government policies are implemented, to control lower-level administrators who are in charge of applying such polices, but also to remonstrate with the Emperor and the “inner court” when some policies, according to the censors, are wrong or unimplementable. The censors’ role even includes possible rebuke of emperors if they decide to ignore sensible censorial recommendations (“the speaking [to the Emperor] officials”). Censors are thus both an arm of government and its controllers. In modern systems like the American, their role could be seen to combine that of the  Government Accounting Office with the court system. The censors in effect had a judiciary role because they were empowered, without further check with top authorities, to impeach, demote or punish lower level officials whom they found incompetent, venal or immoral (p. 244). One of striking parts of Hucker’s book is the amount of extant empirical evidence regarding censors’ decisions. For example, at least 261 civilian and 398 military officials were denounced during the ten-year period 1424-34.  Among them at least 67 were nobles and category 1 (highest rank) officials. Despite the fact that demotion and punishment was more likely to be meted out to lower ranks (see the graph below), the top officials were not exempt from denunciation and about one-half of them were demoted or otherwise punished.   

Source: Calculated from Tables 2 and 3 in the Appendix.

I do not think that a similar type of organization existed in centralized European autocratic systems. In Byzantium, government officials applied policies, but there was no systematic government agency (short of government spies) to check on them. Much less on the Emperor. The same is true for Imperial Russia. The French intendants de finances had strong powers over pays d’elections devolved from the Center, viz. the up-to-down power, but they had no power to stay the execution of King’s orders nor to check royal authority.

The censorial system was one of two elements that during the Ming dynasty (and probably throughout most of China’s imperial history) were destined to temper, limit and mollify autocracy.  The first was education of emperors, teaching them Confucian doctrine of imperial virtue and responsibility towards people “([the emperors] had continually to listen to the lectures of moralistic Confucian scholars who were probably dour and seldom entertaining” (p. 43)). The second check on imperial power was the censorial system which owes (as Hucker writes) much more to the Legalist tradition than to Confucianism.

It is thus most interesting to see how effective were censors in opposing the emperor more than how effective they were in ensuring that the central policies were implemented. As one would expect, and as Hucker in the last chapter very nicely summarizes, the results were contingent on many factors: with better emperors, more conscientious of their duties and less willful, the censors did influence many decisions, whether positively by proposing certain policies, or negatively, by stopping wrong decisions. This was more the case in the first period of relative peace and “better” rulers. But even then, more impetuous emperors would at times get angry with top censors, demote them or even imprison them, often only to release and promote them later. The number of cases of censorial see-saws discussed by Hucker is so immense, and varied (censors who were sent to their provinces, those punished with loss of several years of salaries, those kept in semi-exile for a decade or more, only to be recalled when a different faction became ascendant at the Court or the emperor changed his mind) that the modern-era three-time purge of Deng Xiaoping appears like a rather unextraordinary fate.

During the latter Ming period the situation darkened. Political factionalization become much more severe as the external situation of the empire became more precarious and as the emperors were weaker, lazier and less competent. This allowed, in the most famous case, the silent coup of Wei Chung-hsien, the chief eunuch who was the head of the Eastern Depot (the secret police), to usurp imperial functions, install own puppets in the government administration,  and then to punish the censors who tried to warn the emperor of inequitable taxation, promotion of corrupt individuals, and Wei’s budding cult of personality. With Wei firmly in charge of dynastic policies, he unleashed a rule of terror that decimated the censorial corps. Many positions remained unfilled for years, and censors brave enough to challenge Wei were sent to languish in prisons or were beaten to death or executed (often by strangulation). According to one calculation, 365 were punished or driven out of service, more than 20 of them executed (p. 271). As for ordinary people, the Ming History says, “Those who were murdered are beyond calculation; on the streets men used only their eyes” (p. 173).

To every student of history, this usurpation of rulers’ absolute power by the head of secret police comes as no huge surprise: one can see in it Sejanus gradually undermining Tiberius’ authority as the latter spent most of his time at Capri, or Beria slowly and slily accumulating more power for himself and NKVD, or finally even in Lin Biao planning to overthrow Mao. In all these cases, as indeed in Wei’s too, the attempt failed. A few upright and undaunted censors still remained, and in an extraordinary passionate and forthright memorandum quoted in extrenso by Hucker, one of them warned the emperor  of Wei’s twenty-four "great crimes", some of which went directly against the emperor and his progeny and set the stage for the substitution of the emperor by Weng or his puppets. Such insolence eventually led to Wei’s downfall.

Therefore even in the tumultuous latter-Ming period, censorial check-and-balances continued to function, however unevenly or haltingly.  

One obviously thinks whether the current anti-corruption campaign and the role of CPC’s Central Commission for Discipline Inspection may mimic the role played by the censorial system. Hucker briefly mentions the influence of the censorial system both on Taiwan (the Control Yuan, one of the five yuans) and the People’s Republic. Today’s CPC’s Central Commission also has the right to investigate officials, to implement the rules of behavior but cannot by itself punish officials. They have to be brought to court. Also, it is unclear to what extent the Commission might investigate top officials even if its activities have moved to the levels that until recently were thought “untouchable”, indicting one member of the Standing Committee of the Politburo, a vice-chair of the Central Military Commission, and at least (2018 data) 20 out of 205 members of the Central Committee. So even the “tigers” were no longer  beyond the reach. However, it is likely that the authorization to go after a given “tiger” must still come from the top, i.e., the Commission is not fully autonomous in letting the cases lead it wherever they do. One however does not get the impression from Hucker’s book that, in a more serene atmosphere of the early Ming, the censors feared too much to go after their corrupt colleagues or eunuchs, their permanent nemesis. But whether the “bad elements” would be punished depended, then as now, on the correlation of forces at the top. Checks and balances worked—at times.