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Privatizations and Failures in Russia’s Economy

The departure of college rectors is typically is not the topic of national news, let alone a story dominating global press coverage for a week.  The exit of Sergey Guriev as rector from Russia’s New Economic School, however, has proved just that.  From Russian internet media to frontline international frontline outlets such as the New York Times and The Guardian, and the Financial Times, Mr. Guriev’s exodus has created quite a stir.  The hand-wringing tone of such articles present somber assessments on the state of Russian freedom, in addition to laments that Russia could be losing such a significant talent in Mr. Guriev.  While the question of political freedom should always be open to inquiry, however, so should the value of Mr. Guriev’s intellectual contributions.

His withdrawal from Russia’s academic scene should be a matter of major discussion, but not for the reasons it currently is.  The global press presents a portrait of an earnest economist of talent who is leaving his post out of some combination of political pressure and fear. I am in no position to comment on that motivation, other than of course state that if he has been intimidated this would be egregious indeed.

Yet, one might ask, what explains Mr. Guriev’s meteoric rise to the rector of the New Economic School at the young age of 33?  One normally attributes these rare leap-frogging events to the front of academic institutions to be the result of groundbreaking theoretical contributions that redefine an academic field.  Reviewing Rector Guriev’s career, however, one finds no such innovations made.  Dr. Guriev is certainly talented.  His academic credentials are excellent.  He has published in respected peer-reviewed academic publications, yet no more so than that of an associate professor at a good university.  What this means, in effect, is that he has been a loyal and talented exemplar of the Anglo-American economic model that brought about the 2008 economic crisis.  That model, internalized by largely German and Swedish economic policymakers at the European Central Bank, has also brought austerity and stagnation in the wake of that crisis. In the hands of Guriev and in the Russian context, it represents what the 1930’s Hungarian intellectual Laszlo Nemeth referred to as “self-colonization.”

This suggests that it is his rapid career rise that has been a political act, just as much as his departure.  Thus, it is at this point that Russia might reflect on the highly politicized state of economics.  On this point, there is no doubt. Indeed, even before the Great Global Economic Crash of 2008, young economists began questioning the ideological character of neoclassical/neoliberal economics. In France, this began with the “Post-Autistic” movement by young economists to open inquiry in the highly circumscribed discipline of economics.  At the London School of Economics in 2008 even the Queen of England rightly asked, referring to the onset of the Great Crash, “Why did nobody notice it?”  Of course, some did see the structural signs that a crisis was on the way–just nobody from the mainstream of economics.  George Soros, educated in economics before the rise to dominance of neoliberals, became frustrated with the closed state of the discipline in recent decades.  In response he created the Institute for New Economic Thinking four years ago to fund intellectual production outside the rigidly defined and controlled discipline.  Mr. Guriev has embodied neoliberal economics that figures from George Soros to the Queen of England have questioned the value of since the 2008 crisis.  Of course, billions in the Global South have been victimized by this model since the 1980s, as have the Post-Soviet Bloc’s middle class, pauperized by privatization in the 1990s, and only mitigated by the rise of Russian energy prices, and thus money pouring into (and out) Russia thereafter.

Sergei Guriev is right in identifying corruption as a major hindrance to Russia’s successful development.  Unfortunately, he seriously errs in prescribing privatization as the cure.  In fact, a century back in the US, Progressive Era politicians and activists confronted corruption and rent-seeking of private suppliers of every day goods from water to garbage collection. Prices charged were high and quality low.  By making them public utilities the municipal governments brought costs down and quality up.  In more recent decades, rail privatization in the United Kingdom resulted in prices spikes for transportation.  Moreover, their privatization resulted in their owners neglecting maintenance (cost “savings”).  This indeed saved their private owners money, but it resulted in accidents and later the public having to pay the costly repairs once the private owners were unable and/or unwilling to do so.  In short, profits were privatized, and costs were externalized to the public.

Mr. Guriev also advocates privatizations in Russia’s military along the lines in the US.  But, here too this has often wildly inflated costs.  Salaries for private soldiers in Iraq have been a full ten times the per soldier salary of regular army soldiers.  The privatization of the US war in Iraq proved a feeding frenzy of corruption as contractors with “blaht” charged the US government exorbitant rates for services.

But, again, this all misses the point.  Privatization nor public ownership purely in and of themselves will save the economy or curb corruption. In fact, the feeding frenzy created by privatization leads to massive corruption.  In Russia, corruption has resulted from the privatization of public assets whether “bought” (typically at grossly undervalued prices) or by government officials in effect taking private control of assets still officially publically owned.
Corruption results when dishonest people take power (private or public power) and when common people feel society is not fairly organized.  The key to Russia’s future is to provide it with a positive mission that people believe in and act on.  This need not be as messianic as the Soviet vision, but it must be a vision and plan for a better future.  Nearly every state that has successfully developed has done so by incentivizing, mobilizing, and organizing the private and public sectors to create value, not just profits.  Profits can be made by either destroying or creating value.  The same also applies to the state.  But, historically, it has only been the state which has had the power to create an environment launching value creating economic development.  The idea that privatizations can achieve development on their own is dangerous, naïve, and historically without merit.  Mr. Guriev may sincerely believe privatizations are the cure for Russia’s corruption, but what he, and Russia, will discover if they pursue this path is yet more fuel being poured on the fire of corruption.

Moreover, Mr. Guriev’s call for increased currency reserves is foolhardy.  Large countries endowed with many resources are less subject to volatility in the world economy.  Russia could be even less impacted by this volatility if it produced more goods for domestic consumption.  The best way to achieve this is to spend currency reserves on infrastructure now, which in turn will reduce costs for both private and public sector economic activity.  Historically, money (savings) are all too often wiped out.  The best protection for an economy is to develop it through spending on infrastructure, which unlike money, can’t be taken away.

Thus, Russia should ask, what kind of economics does it wish to advance?  The answer should be many kinds. Respective practitioners should then test their ideas against each other in light of real experience.  In short, when theory fails to match predicted results, as we have seen with economics since the 1980s, then it’s time to look for new theories.  Given the catastrophic failure of neoliberal economists to not only fail to see the onset of the crisis, but to then propose failed austerity policies afterwards, one should reduce the value of neoliberal economics to that of penny stocks.

Thus, the departure of Guriev should spark a debate on the need to expand the scope of economics.  The need is urgent.  Russia’s failure to develop its economy the past two decades should serve as an alarm that it risks falling even further behind leading economic powers and the fast rising China.  The wealth of Russia’s “Dutch Resource Curse” has allowed it to experiment at the margins of its economy, but not to seriously explore alternatives to its hybrid economy that mixes elements of neoliberalism and statism.  Russia’s vast energy inheritance has allowed the powerful oligarchs to become dizzy with [personal] success, while just enough wealth trickles down to keep much of the country cobbling along like a beggar–albeit with expansion of the middle class in its cities the past 10 years.  This model is not sustainable.  Recent developments in fracking and horizontal drilling promise a continuing drop in energy prices that will make it impossible to maintain Russia’s current economic model.

In short, Russia’s development model is a phantom, given what will be static or even declining energy prices.  It is a “dead man walking,” but it does not yet realize that it is dead.  The question is, will Russia die with it?  The answer, in part, depends on whether Russia’s reassesses its position both at home and abroad, and listens to economists who have successfully predicted past crises, and present a coherent understanding of past, present, and future trends anchored in the real experience of economic history.

Mr. Guriev represents a model for Russia as a country of “normal” bankers of the type that brought about the crash of 2008.  It’s time to put the ideas they represent out to pasture before they kill off Russia itself.  The time for a discussion of a new economics and a refocus on investment and production over finance is now. Perhaps Mr. Guriev’s departure can, ironically, spark that desperately needed debate.

JEFFREY SOMMERS is an associate professor of political economy at the University of Wisconsin-Milwaukee, and is visiting faculty at the Stockholm School of Economics in Riga.  He is co-editor of the forthcoming book The Contradictions of Austerity. In addition to CounterPunch he also publishes in The Financial Times, The Guardian, TruthOut and routinely appears as an expert on global television programs.  He is part of the Post Globalization Initiative. He can be reached at: Jeffrey.sommers@fulbrightmail.org

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Jeffrey Sommers  is a proud Dairy Stater and Visiting Professor at the Stockholm School of Economics in Riga His book on the Baltics (with Charles Woolfson), is The Contradictions of Austerity: The Socio-economic Costs of the Neoliberal Baltic Model

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