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Home Publications Blogs Beat the Press Can We Blame Larry Summers for the Collapse of Russia?

Can We Blame Larry Summers for the Collapse of Russia?

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Friday, 02 August 2013 20:26

Between 1990 and 1998, Russia’s economy suffered perhaps the worst downturn of any major country that was not the victim of either war or natural disaster. The proximate cause of course was the collapse of the Soviet Union and the replacement of its system of central planning with a market economy. Larry Summers played a large role in shaping this transition, first as chief economist for the World Bank, then as the undersecretary for international affairs at the Treasury Department and later as the Deputy Treasury Secretary.  

Since Russia’s economy had been guided largely by central planning for close to 70 years, this transition would have been difficult even under the best of circumstances. However the actual transition was hardly the best of circumstances. Corruption infested every aspect of the privatization. Those with connections in the government were able to become billionaires almost overnight, as they were allowed to buy Russia’s businesses and resources at a small fraction of their market value.

According to the World Bank, Russia’s government was paid just $8.3 billion from privatizing assets over the years 1990-1998, a period when most of its economy was turned over to private control. By comparison, Lukoil, Russia’s largest private oil company, had a market value of $268.8 billion on August 2, more than 30 times as much as the payments that Russia’s government received for all the assets it sold over this 8-year period. 

The data clearly show the devastation that this failed transition imposed on the Russian people. According to the United Nation’s Human Development Report, Russia’s per capita income fell by one-third between 1990 and 2000, a decline that dwarfs the falloff in the Great Depression in the United States. This had enormous consequences in the daily lives of the Russian people as the system of social supports that provided basic services collapsed with nothing to replace it. The Development Report shows a drop in life expectancy fell from 68 in 1990 to 65 in 2000, a drop implying that millions of people would be dying at a younger age than would have been the case a decade earlier.

The Development Report has no shortage of grim statistics about the plight of the Russian people in the 1990s. (Those getting depressed by this story should know that Russia made rapid progress in most measures of economic and social well-being after breaking with the Summers agenda in 1998. By 2012, the losses of the 1990s had been more than completely reversed.) However, the question remains whether we can blame Larry Summers for this disaster?

At the American Economic Association convention in January of 1994, Larry Summers gave a talk about the successes of the first year of the Clinton administration. He boasted how “this administration” (a phrase repeated many times) had created more than 1.8 million jobs. He also boasted about the 2.0 percent growth the economy had seen to date. [Note: These were weak numbers. The economy was coming out of the 1990-1991 recession. We might have reasonably expected 3-4 percent growth and 3 million jobs.]

This was peculiar for two reasons. First, the economy almost always creates jobs and grows; the relevant question is the rate of job creation and the pace of economic growth. Boasting that jobs are being created and the economy is growing is a bit like taking credit for the sun rising. The other reason that Summers’ talk was peculiar was that he was making these boasts to economists, all of whom know that the economy typically creates jobs and grows.

Alan Blinder, who was also on the panel and one of Summers’ colleagues in the administration as a member of the Council of Economic Advisers, provided an interesting contrast in his own presentation. Blinder managed to talk forthrightly about the fact that the economy was not growing as fast as the administration wanted, nor was it creating as many jobs as was hoped. He did this in a way that provided useful insights to the audience while not providing any of the reporters in the room with fodder for embarrassing headlines in the next day’s paper.

But the point of this digression is Summers, not Blinder. Summers apparently felt that the Clinton administration deserved credit for the meager number of jobs and slow growth that the economy had generated up to that point. If that’s the case, then by the Summers standard, surely we can hold Mr. Summers accountable for the devastation that Russia’s transition inflicted on its people in the 1990s.

Call it item # 412 in the case for Larry Summers for Federal Reserve Board chair.      

Comments (9)Add Comment
Oh, great - trying to outdo himself!
written by Pauley, August 02, 2013 10:30
He's been doing to us what he did to Russia: turning us to oligarchic fascism. Gee, thanks a lot, Larry!
Larry Summers, the Boris Yeltsin of America
written by Last Mover, August 03, 2013 6:02

http://www.newyorker.com/onlin...ally.html

When all too many people think of Summers, they still remember him frustrating efforts by Brooksley Born, the former head of the Commodity Futures Trading Commission, to regulate derivatives during the late nineties, or his statement to a Fed conference in 2005 about the rapid growth of securitization on Wall Street, and the development of complex products such as credit-default obligations, when he said, “It seems to me that the overwhelming preponderance of what has taken place is positive.”
...
written by Chris Engel, August 03, 2013 6:29
Larry the Liquidator at the helm of the Fed. What could possibly go wrong?
Maybe Summers was lining up his ducks in May when he defended Reinhart-Rogoff?
written by John Wright, August 03, 2013 8:46
I remember being somewhat surprised to see Summers write a May 5, 2013 op-ed (http://www.reuters.com/article...B920130505) in which he defended the work of "my Harvard colleagues (and friends) Carmen Reinhart and Ken Rogoff" and furthermore stated "Rogoff and Reinhart are rightfully regarded as careful, honest scholars."

I didn't understand why he would defend R-R given that Rogoff and Reinhart gave strong evidence they were not "careful scholars", at least in this important work.

But perhaps this op-ed was written to signal to the economics profession (and Republican economist Gregory Mankiw) that Summers, as a future Fed chairman, would defend the indefensible and protect the "economic profession" from attacks by the great unwashed.

This could explain why Summers was willing to suffer some risk to his reputation by penning this op-ed.

He had his eyes on the Fed post.
Democracy Fail in Russia
written by leo from chicago, August 03, 2013 2:19
Wow, Dean, thanks for addressing this -- at least partially.

I've been wondering for a while if maybe the kind of 'economic reform' that was fashionable in the 90s had a deleterious effect on Russian democracy.

I mean, democracy and hard times don't seem to mix, particularly in cases where that democracy is just getting off the ground.
Very timely
written by DavidS, August 03, 2013 10:01
Dean,

What you left out of this otherwise excellent and very timely post is that the long term geopolitical impact of the neo-liberal policy recommendations you describe are far more significant than is widely acknowledged.

You can draw a direct line from this early 1990s episode to the present day, where Putin and the Kremlin now oppose the US at every possible opportunity that presents itself.

I personally find it very funny that Obama is lobbying for Summers for Fed chairman when Summers is the man who is almost directly responsible for keeping Edward Snowden out of Obama's hands.

Perhaps more seriously, the Kremlin learned a great deal from this experience with the American policy elite, namely that smoke and mirrors are the only products America knows how to make.
We can blame economics intelligentsia as a whole
written by Matt, August 05, 2013 7:06
How about we blame the entire field of economics for continually failing to note that land and natural resources are not property in the sense that goods are, and should be taxed by value?

If Russia had taken Tideman's advice it'd be a world power by now.

But then, if the rest of the world would take Tideman's advice today we could end this global recession. But hey, let's continue ignoring it. It's probably politically difficult and stuff.
Somehow the link disappeared
written by Matt, August 05, 2013 7:18
Somehow the link disappeared, so here's Tideman's advice: http://en.wikisource.org/wiki/...Gorbachev_(1990)
http://insurancefacts.net/blogs/post/503
written by http://insurancefacts.net/blogs/post/503, August 06, 2013 12:09

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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