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Wednesday, December 16, 2009

The Green Revolution(s)

Last updated: December 16, 2009

June 26, 2009

Published: June 23, 2009

. . .

In a 2006 speech entitled “The Collapse of an Empire: Lessons for Modern Russia,” Yegor Gaidar, a deputy prime minister of Russia in the early 1990s, noted that “the timeline of the collapse of the Soviet Union can be traced to Sept. 13, 1985. On this date, Sheikh Ahmed Zaki Yamani, the minister of oil of Saudi Arabia, declared that the monarchy had decided to alter its oil policy radically. The Saudis stopped protecting oil prices, and Saudi Arabia quickly regained its share in the world market.

“During the next six months,” added Gaidar, “oil production in Saudi Arabia increased fourfold, while oil prices collapsed by approximately the same amount in real terms. As a result, the Soviet Union lost approximately $20 billion per year, money without which the country simply could not survive.”

. . .

Source: The New York Times

December 16, 2009

Tribute to Yegor Gaidar

Yegor Gaidar, the head of Russia's first post Communist government, died at the age of 53. My response to accusations that Gaidar has leveled Russia socially and economically with his policy of shock therapy in the comments section of an obituary by the Economist.

This debate about shock therapy is missing the point. When Gaidar took over the economy was completely demonetized. Companies switched to barter trading. In provinces local authorities were setting checkpoints to stop people moving goods out. The amount of money printed under the previous governments was such that probably decades of economic growth could not have neutralized it. Let alone that the economy could not grow anymore because of the demonetization, it was literally and figuratively disintegrating. Any government would have had to lift price controls in such situation.

The first few months of the reform were actually stunningly successful. The trade balance and current account went positive in a matter of weeks. Inflation was rapidly coming down and the rouble has become a money again, lines disappeared. If Russia has followed this line, it would have had today a normal economy. Poland enacted very similar reforms advised by the same Sachs and it's now one of the most successful economies of the region. Shock therapy had been implemented by several countries of the region from Poland to Estonia and it was mostly successful. Russia is one of those countries that did not, besides the first couple of months under Gaidar, and for some reason is now cited as an example of a failed shock therapy. People should check the facts better, and in particular the monetary inundation organized by Russia's Central Bank within months after Gaidar started with the reform. One can argue pro and contra Gaidar's reforms as much as he wants, but a shock therapy it was not as the reform was almost immediately sabotaged both by the Central Bank and by the Parliament. Shock therapy is based on abrupt monetary normalization, balanced budget and the stuff. This is something that did not exist in Russia for years before and after Gaidar.

And China is a very poor example for comparison as China's heavy industry has collapsed just as it did everywhere in Eastern Europe. North China is packed with areas that for all practical purposes are monuments to this industrial demise. But the share of this industry in the economy was very limited. The Chinese did not face such a problem. Their reforms started in the countryside. For a predominantly agrarian nation this is a very easy way to immediately boost production without having to invest a penny and without having to deal with a massive insolvent industry. There was little place in China for whatever kind of shock therapy.

Rest in peace

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Proclaimed un monstruooo muy monstruoso at 7:58 AM