After the Rain : how the West lost the East Part 22

Question: Women start one-third of new businesses in the region: now can this contribution to economic growth be further stimulated?

Answer: By providing them with the conditions to work and exercise their entrepreneurial skills. By establishing day care centres for their children. By providing microcredits (women have proven to be inordinately reliable borrowers). By giving them tax credits. By allowing or encouraging flexitime or part time work or work from home.

By recognizing the home as the domicile of business (especially through the appropriate tax laws). By equalizing their legal rights and their pay. By protecting them from s.e.xual or gender hara.s.sment.

(Article written on October 15, 1999 and published November 22, 1999

in "Central Europe Review" volume 1, issue 22)

Return

Lucky Russia

As early as August 17th, a few minutes following the devaluation, the financial markets predicted that the Rouble would stabilize around 18-20 Roubles to the US dollar. This was the price quoted for CME forward Rouble contracts. Moreover, not everyone think that hyperinflation is imminent. Simply, there is not enough purchasing power to generate this kind of surge in prices.

Russia is lucky. I am not being cute: this crisis could not have come at a more opportune time. Russians have witnessed (if not actively enjoyed) the advantages of a consumer capitalist economy. For one thing, most of them have some kind of private property and the abundance of all types of products together with the elimination of queues and shortages served to provide a foretaste of the "capitalist heaven". They are not likely to go back, politically or economically.

That capitalism is not well entrenched is a blessing in no disguise: this crisis does not deprive people sufficiently to foster a revolution. Social unrest, a dramatic rise in crime rates, more crony capitalism and other malignant forms of "get rich quick" schemes - perhaps. But not another revolution.

Russia and Russians are p.r.o.ne to dramatic extremes. Russia is simply going through a crisis which will ultimately engulf all of Eastern, Central and Southern Europe and, more generally, all the protective, etatist economies. From Macedonia to the Czech Republic, from Kazakhstan to China, from Slovenia to Bulgaria - all are likely to experience a similar shock. This is because none has really reformed.

Under the banner of "capitalism" a small, corrupt elite of oligarchs and politicians robbed the a.s.sets of the state. Industry is still protected against outside compet.i.tion, tax collection is a farce, the banking system a shambles, Western handouts the only pillar of the economy. This cannot and will not go on. The invisible hand of the market will devalue overvalued currencies, force industry to restructure, force the banking system to amalgamate, force inept and corrupt politicians out. The Day of Judgement is here. Russia is lucky to go through all this now - because it will be uniquely positioned, as a result.

The Russian banking system will be forced to restructure. Hundreds of banks will go insolvent and bankrupt. The rest will consolidate. But this will only result in the formation of a few "bad banks". The next stages will involve the formation of healthy retail activities, where none exist today. Banks will begin to compete for savings. They will diversify their portfolio and, as a result, their exposure (risk) will diminish. Then they will have to invest this money to generate the kind of returns that will attract the savers. They will not risk another a.s.set bubble. They will not invest in brokerage operations, speculate, or bet against the Rouble anymore. Their future profits will be the result of investments in real a.s.sets: industry, the services sector, new and small businesses. These are very good news: the banks have been taught a lesson they will not easily forget. It is: paper profits and paper a.s.sets are on paper only. Here today, gone tomorrow.

A devalued Rouble will enhance the compet.i.tiveness of the Russian industrial and commodity production sectors. Rouble inflation will not fully reflect the devaluation for a long time. This difference will allow Russian manufacturers and commodity producers to compete vigorously.

Russia was long subjected to the quack "medical experiments" of the IMF. It was led down the path of deflation, which the IMF has plunged half the world into. It needed to reflate urgently. It could not have "chosen" a better way to do so. The devaluation will reflate the economy. It is equivalent to the infusion of new blood to a body dilapidated by endless austerity and economic bloodletting.

It might sound outlandish - but Russia is showing the way to other countries in the Third World as it has so often done in the past. It, in effect, has acted against the IMF dictates and by devaluing its currency it has readopted the path of John Maynard Keynes. It was about time.

(Article published August, 1998 in "The New Presence"

and October 28, 1998 in "Argumenti i fakti")

Return

Russian Roulette

The more involved the IMF gets in the Russian economy - the more controversy surrounds it. True, economies in transition, emerging economies, developing countries and, lately, even Asian Tigers all feel the brunt of the IMF recipes. All are loudly complaining. Some economists regard this as a sign of the proper functioning of the IMF - others spot some justice in some of the complaints. The IMF is supposed to promote international monetary cooperation, establish a multilateral system of payments, a.s.sist countries with Balance of Payments (BOP) difficulties under adequate safeguards, lessen the duration and the degree of disequilibrium in the international BOPS of member countries and promote exchange rate stability, the signing of orderly exchange agreements and the avoidance of compet.i.tive exchange depreciation.

It tries to juggle all these goals in the thinning air of the global capital markets. There is little dispute that the IMF is indispensable.

Without it, the world monetary system would have contracted more readily and many countries would be worse off. It imposes monetary and fiscal discipline, forces governments to plan, and introduces painful adjustments and reforms. It serves as a convenient scapegoat: the politicians can blame it for the economic woes that their voters endure. Lately, it began to lend credibility to countries and to manage crisis situations. But, this scapegoat role allows politicians in Russia to hide behind the IMF leaf and blame the results of their incompetence and corruption on it. Where a reformed market economy could have provided a swifter and more resolute adjustment - the diversion of scarce human and financial resources to negotiating with the IMF seems to have prolonged the agony. The abrogation of responsibility by decision makers poses a moral hazard: if successful - the credit goes to the politicians, if not - the IMF is always to blame. Negative feelings, which would have normally brought about a real, transparent, corruption-free, efficient market economy are vented and deflected.

The IMF money in Russia encourages corrupt and inefficient spending because it cannot really be controlled and monitored. The rule is: the more resources the Federal and regional governments have - the more will be lost to corruption and inefficiency. The IMF cannot rationalize spending in Russia because its control mechanisms are flawed: they rely too heavily on local, official input and they are remote (from Washington). They are also underfunded.

Despite these shortcomings, the IMF a.s.sumed - and not only in the case of Russia - two roles which were not historically allocated to it. It became a country credit risk-rating agency. The absence of an IMF seal of approval could - and usually does - mean financial suffocation.

Russia experienced it last month. No banks or donor countries extend credit to a country lacking the IMF's endors.e.m.e.nt. On the other hand, as authority (to rate) shifted - so did responsibility. The IMF became a super-guarantor of the debts of both the public and private sectors.

This encourages irresponsible lending and investments ("why worry, the IMF will bail me out in case of default"). This is the "Moral Hazard": the safety net is fast being transformed into a licence to gamble. The profits accrue to the gambler - the losses to the IMF. This does not encourage prudence or discipline. There is no better example than the bloated and wrongly priced Russian market for short-term government obligations, the GKOs.

The IMF is too restricted in both its ability to operate and in its ability to conceptualise and to innovate. It, therefore, resorts to prescribing the same medicine of austerity to all the sovereign patients, which are suffering from a myriad of economic diseases. And it is doing so with utter disregard and ignorance of the local social, cultural (even economic) realities. Add to this the fact that the IMF's ability to influence the financial markets in an age of globalisation is dubious (the daily turnover in the foreign exchange markets alone is 6 times the total resources of the IMF). The result is fiascos like South Korea and Indonesia where 40-60 billion USD aid packages was consumed by sick economies in days to no avail. More and more, the IMF looks anachronistic and its goals untenable. The IMF also displays the whole gamut of problems which plague every bureaucratic inst.i.tution: discrimination (why help Mexico, which shares a border with the USA and not Bulgaria, which doesn't?), politicisation (South Korean and Indonesian officials complained that the IMF officials tried to surrept.i.tiously introduce trade concessions to the USA into an otherwise financial package of measures) and too much red tape.

The problem is that the IMF forces governments to restrict flows of capital and goods, and to reduce budget and balance of payments deficits. Consequently, governments find themselves caught between non-compliance with the IMF performance criteria - and addiction to its a.s.sistance. The crusader-economist Michel Chossudowski wrote once that the IMF's adjustment policies "trigger the destruction of whole economies". This looks a trifle overblown. But the process that he describes is, to some extent, true and fully applicable to Russia.

The inevitable devaluation of the Rouble (supposed to encourage exports and stabilize the currency) will lead to increased inflation. The higher prices will burden businesses and increase their default rates.

The banks will increase their interest rates to compensate for higher risks and for inflation. Wages in Russia are never fully indexed or paid timely so the purchasing power of households will be further eroded. Despite recent posturing, tax revenues will fall as a result of a decrease in wages and the collapse of many businesses. Thus, the budget will be either cruelly cut or the budget deficit will increase.

The options of raising taxes or improving the collection methods are fantastic in the chaotic environment euphemistically known as the Russian Economy. The Rising costs of manufacturing (fuel and freight are denominated in foreign currencies and so do many of the tradable inputs) will lead to the pricing out of the local markets of many local firms. A flood of cheaper imports will ensue. The comparative advantages of Russia will disappear as it slides into ever growing trade deficits. Finally, The Russians believe, Western creditors will take over the national economic policy. Communism will be replaced by IMF-ism. No country is independent if the strings of its purse are held by others. Russians, too nationalistic to acquiesce, will rebel. The price will be partly paid by the likes of the Prague Stock Exchange.

(Article published October 2, 1998 in "The New Presence")

Return

Foreigners do not Like Russia

Russia's New Economy

With no Russian in sight, foreigners like to belittle and mock Russia.

"It is a criminal gangland" (an American term which better fits Italy), "corrupt" (Belgium is more corrupt), "bureaucratic" (try Germany). They point to its 160 billion USD in foreign debt. But this is one of the lowest rates in the world (c. 40% of GDP). The USA owes almost twice as much per its GDP.