Shock-Therapy Rent-Seeking or Mercantilist Rent-Creation?
Transportation, Credit, and Raw Materials in the Russian Transformation
I would be very grateful for comments. Write to me at arno@daastol.com
Published in: On Political Economy of Transformation: Country Studies, edited by Jürgen G.Backhaus and Günther Krause, Metropolis Verlag, Marburg, 1997, a three volume work on transformation of planned economies. It has also been published as the Conference Papers 1999 of ISINI (see below).
This first draft of this article was presented at the fall meeting 1995 of the German Association of Political Economy, in Frankfurt an der Oder - on the border to Poland. The meeting was entirely devoted to transformation problems and a follow-up of the similar meeting in 1990 in Berlin (also edited by J.G.Backhaus and published on Metropolis).
The article has later been presented at the annual meetings of the Norwegian Association of Economists, Bergen January 1997; of ISINI (International Society for the Intercommunication of New Ideas) in Maastricht, August 1997; and of EAEPE (European Association of Evolutionary Political Economy), Athens, November 1997.
Arno Mong Daastøl
Department of Public Economics, University of Maastricht,
Postbus 616, NL-6200 Maastricht MD, The Netherlands.
Ph: +31.433 88 36 36, fax: +31.433 25 84 40
Permanent address:
Arno Mong Daastøl
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CONTENTS
Abstract *
Approaching a necessary perspective *
Civilisation and the need to industrialise *
The infrastructural situation in Russia *
"Primitive Socialist accumulation" *
Bukharin and Stalin *
Planning-instruments of the bureaucracy *
Western subsidies and the scissors dilemma: food as a weapon *
Star Wars and Perestroika *
Privatisation *
Shock-therapy rent seeking: Mafia privatisation *
A short story on credit *
The new credit cartel *
Transition so far *
Monopolies and inflation: SAP-monetarism *
Removal of a protectionist curtain *
A breakdown in infrastructure, industry, and the armed forces *
What kind of policy is preferable? A-priori utopianism and generalisation of strategies *
Testing by experience *
Experience - in Russian history *
What characterised the success stories in history: How did they do it? *
The emergence of markets -spontaneously or willed? *
Administration: Co-ordination, tax and credit systems *
Possible strategies: Basic necessities- or high-tech. production *
Demystification of "The Asian Miracle" *
The forgotten role of public goods *
Railroads and space-programs: Expanding the frontiers of knowledge *
International development of infrastructure and the Delors-plan *
A major obstacle: crowding out? *
Another major obstacle: Inflation? *
A non-inflationary investment policy *
Technology-orientation is the clue *
A tax-revenue and welfare creating approach *
Austerity against Europe *
The TEN and Park Corridors *
Obstruction of the IGCs and the historical experience *
Maastricht and the divided Europe: A straitjacket and a scapegoat *
The shock and the hope of the army *
Taxation and credit *
Banking: National or "independent" credit? *
Cheap export or internal development through a Eurasian transport link? The Russian tradition *
Development corridors *
Look to China: another path *
Internal Eurasian development: not exclusively coastal *
Helped to develop rather than pushed into defence *
East and West suffer from the same problem: Change the financial landscape *
Summary or … *
This article has intentionally been written "without focus" trying instead to gain perspective. It is about geopolitical economics and concerns economics as an ingredient in international power politics. The article addresses the failed efforts to reform the communist system as well as the failed efforts to introduce a radical market system. An alternative is suggested with strong roots in Russian and Western historical experience. This alternative is based on Minister Count Sergei Witte's (1849-1915) successful and state-led grand investments into infrastructure, as a vehicle of economic growth and general welfare. On the road to US President Clinton`s 2nd inauguration, the "most-likely-to-become-Russian President", General Lebed, claimed January 12th in a TV6-interview, that the whole of the Russian society is on the edge of collapse. (Aftenposten, Jan.13, 1997). January 15th, at a press conference in Bonn, Germany, he claimed that, "Russia has to proceed on the basis of the Stolypin reforms, and the reforms of Sergei Witte." This article will look into the nature of these reforms. Witte was inspired by Russian experience, but especially by Friedrich List (1789-1846), and thereby indirectly by Alexander Hamilton (1757-1804) and James Steuart (1712-1780). Witte believed that this policy in particular had three characteristics. First, investments in infrastructure would unify Russia, and also unify Eurasia into one market promoting international division of labour and economics of scale. This would eventually promote international friendship across borders. Secondly, investments in infrastructure would create public and private demand for capital goods and later on demand for consumer goods, and thereby act as a locomotive for general economic growth. Thirdly, the policy was deliberately protectionist according to the infant industry argument, so as to establish Russian industry in the face of strong foreign competition.
A little acknowledged problem in economics nowadays, but still a key theoretical problem, is the nature of rent, revenue, or surplus. This is in this article is seen mainly as a result of exclusive comparative advantages in knowledge and (knowledge based-) production, and less as a result of comparative advantages in, for instance, natural resources. The theoretical basis for this article may be termed, a statist trickle down and double-step rent-creation strategy. The double step concept refers to the process through which a government may arrange the rent-seeking process by regulating individual actors on the market, so as to create a rent-generating process: rent-creation. The direct rent or revenue emerging from these individual activities may be taxed, thereby yielding a tax-revenue. These activities can also indirectly, and over a longer period of time, generate social- or general industrial rents emerging from (actual and potential) productivity gains from improved infrastructure of all kinds. This may create an even larger base for tax-revenue in a future positive feedback process. The statist trickle down concept refers to the initiating role of government in this process: creating demand and innovation in infrastructural goods and thereby likewise in capital goods and consumer goods, thereby creating a tax-revenue base.
The general policy-approach - rent creation by means of governmentally initiated investments into infrastructure and in this case a material part of it, transportation - is a matter of general consideration. It is, however, likely to be especially applicable to the Russian situation because of the vast distances of this country. The existence of low population densities requires a special twist to this approach: infrastructure corridors, so as to reap the advantages of an "artificial" high population density.
The article discusses infrastructure and new technology as public goods that generate, in particular, high rents or surplus to a national economy, partly due to so-called externalities. It is claimed that the Soviet system tended to under-invest in these activities, as does current economic policy, in Russia as well as in the West. Obstacles to "a Witte-strategy" in Russia, and a similar and connected attempt in the EU and China / Central-Asia, both within economically rooted ideas, and within political circles, are also discussed.
Keywords: Russian transformation, Eurasian transportation, railway, rent-seeking, public goods, credit-creation, intervention, regulation.
JEL numberss: B 15, N 17, O 010
Approaching a necessary perspective
'The Russian railways have a clear run of 6000 miles from Wirballen in the west to Vladivostok in the east. The Russian army in Manchuria is as significant evidence of mobile land-power as the British army in South Africa was of sea power. True that the Trans-Siberian railway is still a single and precarious line of communication, but the century will not be old before all Asia is covered with railways. The spaces within the Russian Empire and Mongolia are so vast, and their potentials in population, wheat, cotton, fuel and metals so incalculably great, that it is inevitable that a vast economic world, more or less apart, will there develop inaccessible to oceanic commerce. ...
'... Russia replaces the Mongol Empire. ... The oversetting of balance in favour of the pivot state, resulting in its expansion over the marginal lands of Euro-Asia, would permit of the use of vast continental resources for fleet-building, and the empire of the world would be in sight. This might happen if Germany were to ally herself with Russia. ...
`In conclusion, it may be well expressly to point out that the substitution of some new control of the inland area for that of Russia would not tend to reduce the geographical significance of the pivot position. Were the Chinese, for instance, organised by the Japanese, to overthrow the Russian Empire and conquer its territory, they might constitute the yellow peril to the world's freedom just because they would add an oceanic frontage to the resources of the great continent, an advantage as yet denied to the Russian tenant of the pivot region.' (Mackinder, 1904, pp.260-264)
'In times of disorder the interlocking of productive habits breaks down step by step, and society as a whole becomes progressively poor, though robbers of some kind or another may for a while enrich themselves. Even more serious, however, is the failure of the habit of discipline, for that implies the loss of the power of recuperation. Consider to what a pass Russia was brought by a year of cumulative revolutions; her condition was like that terrible state of paralysis when the mind still sees and directs, but the nerves fail to elicit any response from the muscles. A nation does not die when so smitten, but the whole mechanism of its society must be reconstituted, and that quickly, if the men and women who survive its impoverishment are not to forget the habits and lose the aptitudes on which their civilisation depends. History shows no remedy but force upon which to found a fresh nucleus of discipline in such circumstances; but the organiser who rests upon force tends inevitably to treat the recovery of mere efficiency as his end. Idealism does not flourish under his rule. ... The great organiser is the great realist.'
(Mackinder, 1962 (1919), p.13)
Halford J. Mackinder was the father of modern British geopolitics, and a leading British strategist before and during the First World War, as well as a leading British strategist before and during the Second World War.
Mackinder was a Reader in geography at Oxford 1887-1905, Director of London School of Economics 1903-1908, Member of Parliament 1910-1922, Britain's High Commissioner for South Russia 1919-1920, member of Royal Commissions on income tax and awards to inventors in 1919 and food prices in 1924, chairman of Imperial Shipping Company 1920-1945, chairman of Imperial Economic Committee 1925-1931, knighted in 1920, received Charles P. Daly Medal of the American Geographical Society in 1943 and the Patrons medal of the Royal Geographical Society, its highest honour, in 1945. He was sworn to the Privy Council (the Royal council) in 1926 and died in 1947.
Civilisation and the need to industrialise
We might ask first of all, why be so occupied with establishing industry? Friedrich List gave one answer. He never stopped arguing that industrialisation was a prerequisite for a moral society since industrialisation demanded advances in technology, science, knowledge, welfare and morality. List in 1841 suggests,
Let us compare Poland with England: both nations at one time were in the same stage of culture; and now what a difference. Manufactories and manufactures are the mothers and children of municipal liberty, of intelligence, of the arts and sciences, of internal and external commerce, of navigation and improvements in transport, of civilisation and of political power. They are the chief way of liberating agriculture from its chains.... The popular school (i.e. Adam Smith and J.B.Say, AMD) has attributed this civilising effect to foreign trade, but in that it has confounded the mere exchanger with the originator. Foreign manufactures furnish the goods for the foreign trade ... (List, 1841, p.142)
Russia for certain has vast amounts of natural resources from which it could live by selling these to the outside world. Export of raw materials may, however, become an excuse to be lazy or to develop a "Dutch disease" (stagflation; when rents from natural resources spill over into the economy in general). The experiences of several South East Asian countries show, however, that it is possible to develop without exporting natural resources.
Raw materials are a very insecure basis for welfare both in the short and long run, as commodity prices generally are very unstable and have been falling for a long period of time. This fall is today reinforced by the IMF's (International Monetary Fund) SAPs (structural adjustment programs). Their "advice" to non-industrial countries is to further specialise in their "natural" "comparative advantages" of commodity-production, and not to engage in "artificial" promotion of industry through interventionism. The increased production of these goods lead to reduced prices. Besides, extractions of raw materials do not require nor promote the level of technology, science, knowledge and culture which industry does. Therefore, as List argued in 1841 industry should be promoted. This is basically also a question of the chosen picture of man and the correspondingly correct policy.
The Russian moderniser Sergei Witte, who had translated List into Russian, was of the same opinion. Of Baltic-Dutch origin and from Odessa, he had advanced rapidly within the Russian State Railways into becoming minister of finance, and later Prime Minister. In 1900, he addressed a far-sighted memorandum to the young Nicholas II (1894-1917), who had succeeded his father Alexander II in 1894,
The experience of all peoples shows that only the economic independent countries are fully able to assert their political power. ... Russia more than any other country needs a proper economic foundation for its policy and culture ... International competition does not wait. If we do not take energetic and decisive measures so that in the course of the next decade our industry will be able to satisfy the needs of Russia and of the Asiatic countries which are - or should be - under our influence, then the rapidly growing foreign industries will break through our tariff barriers and establish themselves in our fatherland and in the Asiatic countries mentioned above and drive their roots into the depth of our economy. Our economic backwardness may lead to political and cultural backwardness as well. (von Laue, 1963, p.3)
As opposed to the ideas of Mackinder quoted above, Witte suggested to Kaiser Wilhelm II that,
Imagine Your Majesty, the European countries united in one entity, ... If that were done, Europe would be much richer, much stronger, more civilised, ... The first step toward attaining this goal would be the formation of an alliance of Russia, Germany, and France. Once this were done, the other countries of the European continent would join the alliance (Witte, 1990).
Being a "pupil" of Friedrich List (Mosse, 1992, p.192; von Laue, 1963, p.188), Witte was a railroad man (Witte, 1990, p. 192). He saw the construction of infrastructure, and in particular railroads, as the locomotive of the Russian economy. We will look into this below, but let us now shortly comment upon the past and present status of infrastructure in Russia.
The infrastructural situation in Russia
Concerning infrastructural software the Soviet-Union (and most of the Eastern block) had one of the world's best education systems and partly an extremely well educated intelligentsia. This is particularly remarkable concerning the more remote parts of the "empire" as compared with the immediate neighbouring regions. The health system equally so, although it technically was not up to the standards of Western Europe. Motivation within the elite was mainly related to promotion and material privileges connected to this administrated through bureaucratic rules, i.e. a bureaucratic incentive structure. Motivation among people in general was lower since it did not matter how much effort they put into their work and since they could not buy much for the money they earned anyway.
Concerning infrastructure hardware the countries were fairly well developed in the west but deteriorating and only faintly developed elsewhere. Roads were few and private cars were scarce. Railroads were therefore the main vehicle of transportation. A quick glance at a railway-map will confirm that most of the established infrastructure is situated west of the Ural Mountains and that a vast majority is built before the 1917 revolution. (Hoffman, 1990, p.690)
Intensive reorganisation- and construction works took place under the leadership of Peter I - the Great, Catherine II - the Great, Alexander II and then, in particular, under Sergei Witte, until the 1905 revolution. (Massive amounts of literature are available on this development.) These periods were also marked by closer co-operation with the West and general Westernisation, but always with a return to more inward-looking and autarchic politics. The constructive work on infrastructure continued under Stalin although often under much cruder methods than under the tsars, and with even less use of decentralising instruments like markets, thereby also depriving Russia of the development of an innovative middle class.
"Primitive Socialist accumulation"
In 1900, when Nicholas II fell ill of typhoid fever, his heir, the Grand Duke was in need of preparation and so,
Witte not only instructed the Grand Duke on the benefits of protection and of foreign capital; he covered the full range of Russian economic life. ... the crucial ideas - only a few of which can be related here - were his own (as derived from Friedrich List). ...
But lest the Grand Duke put too much emphasis upon state initiative, Witte warned that the state may inspire but does not create: "The true creators are the citizens."
'The more society progresses, the more complex become all the functions of the productive process and the more difficult will be the role of the people involved in it. In order to fulfil their role they must have not only capital but also the necessary qualifications, the spirit of enterprise, and energy. These grow only on the soil of self-reliance. Not to stifle independent action, but to develop its strength by creating favourable conditions for its application, that is the true obligation which in our time the state must discharge toward our over more complex national economy.' (von Laue, 1963, pp.188,190)
These words by Witte strongly bring to mind the earlier parallel ideas of the leading economist of public finance, Adolph Wagner. As we shall see, Witte's efforts were marvellously successful. After the Bolshevik Coup d'Etat in 1917, however, Russia proceeded in the opposite direction, in particular after Stalin came into power in 1927. After the revolution in 1917, the following wellsprings of independent and innovative initiatives were put aside, in spite of explicit notions in Russian leading circles of the crucial importance of this phenomenon. First, the traditional bourgeoisie was repressed, as well as all independent initiatives by local worker-collectives, during the civil war in the years up to approximately 1921. (Berkmann, 1976; Maximoff, 1979; Voline, 1975). After Stalin took over, the new NEP-bourgeoisie was beaten, then in the early 1930s the independent farmer, the "Kulaks", were severely (!) repressed. Monopoly capitalism could then reign in order to create monopoly rents - taken from agriculture and given to industry - establishing a method of taxation. The system lacked an efficient allocation instrument, as the market price mechanism. The totality of this combination produced an non-innovative economy with large waste of resources of any kind, put short: a most uneconomic system. This is what Yevgeny Preobazhensky already in the 1920s called 'primitive socialist accumulation' (Dobb, 1972, pp.184-185).
In general, the economic growth became based, not on self-initiated technological progress as in the West, but in general, on import of Western technology and massive investments of "more of the same", more raw materials and more crude manpower. This was the logical development of the ideas of Adam Smith; economic growth is a result of market size (permitting division of labour and specialisation) and material accumulation: of labour and capital. Karl Marx focused on the accumulation aspect of Smith's theories. Although, science and technology was supported, in the COMECON, in spite of this theoretical background, it did not produce the scientific progress necessary for a self-sustained development. Science-policy is a question, not only of quantities like massive inputs of resources into pure R&D, it is also a question of quality, of motivation within research strata and of general social circumstances like market conditions concerning for instance relations between consumers and producers (Amann, Cooper et al., 1982).
The Perestroika and particularly the deregulation policy have an historical parallel in Russia: the Bukharinism of the 1920s. Bukharin, promoted the view that merchants should be given the opportunity to high profits,
Bukharin's contention that the NEPmen played an important role in the restoration of state industry, and hence in the development of socialism in the Soviet Union, resembled Lenin's view after 1921 that communism would have to be built in Russia with non-communist hands. Pushing this point further, Bukharin noted on a number of occasions that private entrepreneurs were also a source of tax-revenue, funds that helped nourish the industrial sector. Viewed from this perspective, the NEPmen, in spite of themselves, seemed to occupy a position in the front ranks of the movement to build the world's first socialist state.
In 1925 Bukharin was, in effect, directing his famous "enrich yourself" exhortation at the NEPmen as well as the peasantry, because his analysis had concluded that prosperity in the private sector benefited the state. But the NEPmen could hardly be expected to increase the volume of domestic trade if they were repeatedly harassed by state officials and gouged by rapidly increasing taxes.' (Ball, 1987, p.46)
The Russian economy was opened up, and Western interests were allowed to extract raw materials from Russia at favourable prices. Russia then, in the late 1920s, got caught in the classic "scissors" dilemma of less developed countries: Imported manufactured goods- and food prices rose and the prices of Russia's exports, raw materials, sank. The same problem was to re-emerge in the 1980s. With the coming of Stalin as the new strongman or tsar, however, this policy ended and autarchy was introduced, with methods reminding us of what the British strategist, Halford Mackinder, wrote in 1919 (entered as an opening quote in this article).
The policy of "enrich yourselves" provided the foundation on which parts of the old and new nomenclature could acquire a new basis of power - as during Perestroika. The establishment of such a "new" social stratum may historically be seen as a dubious advantage. It has often proven to be more a disadvantage than an advantage to the development and progress of a nation, as can be witnessed for example in the case of Argentina. These "raw-export" strata traditionally function as an extension of foreign capital. By pursuing their own interests, they tend to jeopardise the industrialisation of their national country and its long-term prosperity. The characteristics of a landed- or raw materials-based class like this have strong parallels to another social stratum which live not from natural rents but from capital rents; interests. The history of the Italian city-states, the Netherlands or England give clear indications of the destructive consequences of an influential rentier (exploitative) class as opposed to an industrial (productive) class.
To counter the interests of strata like these, one has to resort to a policy that first of all, takes the long-term total interests of the country into consideration. This may require "authority" if these new strata have established themselves and secure their positions and influence. Whatever we may think of Stalin's methods, he provided something like this, but he failed to recognise and utilise the principles that could have generated a long-term recovery in Russia. In the "cure" he killed the goose that laid the eggs in the long term: the wellsprings of innovation.
Planning-instruments of the bureaucracy
The central planning system was more based on commando than on plan. The system was slow and inefficient - not because the bureaucracy was large but because it according to Marxist value-theory was unproductive and accordingly was held to a minimum (Udgaard, 1977). Additionally, there are more generally known reasons for the deficiencies of a commando system. As a matter of fact, the bureaucracy has grown tremendously after the downfall of communism - in Ukraine double fold and in Russia triple fold. The lack of a price-mechanism and thereby a decentralised market system made the whole system inefficient, as it accordingly had to rely on the inadequate bureaucracy - which was unable to produce efficient and flexible rules for the economy to work well.
The Soviet leadership, as for example within GOSPLAN, realised for decades that the bureaucracy had no good planning instruments. Several reform projects were therefore carried out both concerning studies and practical changes. For instance, the ideas emerging from the group under the leadership of Liberman in the 1960s (Udgaard, 1977), promoted market oriented reforms and introduction of a price mechanism as a way to a more efficient information system but without much success. Another group (and more secretive for ideological/political reasons) under the leadership of the famous space-science economist Pobisk Kusnetsov conducted research based on a more natural science related approach. This group asked more fundamental questions as to the physical structure and energy-requirements of an industrial economy.
Western subsidies and the scissors dilemma: food as a weapon
The long-practised strategy of giving priority to the military sector could work as long as the West "subsidised" the military construction of the East through 1) high prices on crude oil, gas and minerals which the USSR exported, and 2) low prices on grain which the USSR imported. In 1986, however, the oil price fell abruptly, and grain prices started to rise. It may be a matter a speculation of whether any of this was a part of US President Reagan's indirect warfare against the communist regime of the USSR. Certainly one reason for the rising grain prices was the cutback on cultivated land within the USA and the EC (now: EU) during these years. To some extent this was the result of the policy of the great American grain cartels that saw their interests served with a tighter grain market and rising prices.
As a result the USSR leadership began to fear that food supplies might be shut down, i.e. the West might use food as a strategic weapon. Accordingly the USSR-leadership began to make preparations for larger self-sufficiency of food, as Stalin had done in the 1920s. Gorbachev’s leading economic advisor, Abel Abelgajan outlined the problem in 1988 (Abelgajan, 1989, p.18ff). Gorbachev accordingly implemented a crash program of agricultural reforms in 1987, outlined in 1982 under Brezhnev. According to Gorbachev in 1987 and Ligachov in 1988 special priority was to be given to the crucial logistic facilities of agriculture; storage, transport and food processing. Grain loss, for example, was estimated to be around 25-30 %.
Private land-lease programs, increased production of durable food products, increased self-sufficiency of the Muslim regions as well as major increase of food import from Eastern-Europe were other parts of the strategy, financed by price-hikes on Soviet exports to these countries. The latter strategy proved fatal to the whole system, however, and eventually seems to have been the straw that broke the camel's back and brought the system down; The East-European states were placed in a "double-scissors"-position, as they were not only pressed by "unfair" trade-agreements with the Soviet Union, but also faced a classic scissors-dilemma with the West. Eastern European economy failed to perform, first in Poland and Romania, and political eruption followed, first in Poland. After some time, these eruptions eventually spilled over the borders along with the economic troubles.
The KGB-people who took over in the 1980s, saw no other solution to the emerging breakdown-crisis than to make a grand reform under the name of Perestroika, which was to buy the Soviet elite time to clean up corruption and inefficiency. This reform was intended to have an economic character, primarily, under a facade of political reforms; Perestroika was not, of course, intended to bring down the ruling elite. Nevertheless, through the logic of events, being in particular the inability of the elite to reform itself, the process of Perestroika happened to bring down the communist party as an organisation, if not as a ruling class (the nomenclature).
The reforms introduced before Perestroika partly tried to reorient resources toward science-intensive sectors of the industry. This "acceleration", as it was called, largely failed in front of the resistance from the production sector systems that refused to accept any weakening of their powers. The later reforms, under Perestroika, included an organisational reform that strengthened the former failure to reform. These organisational reforms were to a large measure based on ideology and therefore resorted to a kind of market socialism of the workers self-management type. The results were somewhat similar to what had happened in Yugoslavia in the 1960s when the commando-system was decentralised and gave larger responsibility to individual enterprises. Because of the particular way it was done, the economy changed, broadly speaking, from a success story into a failure. (Lutz and Lux, 1979, p.258ff)
In the USSR, this policy was shaped in a way that led to a stronger role for the industrial sector ministries. Thereby the crucial role of the state as a planning agency which could reorient resources into more productive activities was diluted and instead a struggle between different industrial bureaucracies emerged. The failure of the reforms was therefore not that they did not decentralise economic decision-making, but on the contrary that it was done in a way that resulted in a weakening of the necessary overall perspective to such a degree that co-ordination was strongly damaged. Instead of giving more freedom to the individual agents (the firms) while retaining a considerable co-ordinating function for the central government, the intermediate organisations were strengthened resulting in a coagulating industrial structure and inevitably inefficiency. Instead of promoting co-ordinated investments in infrastructure, as a locomotive of growth, Western consumerism was idealised. A kind of "Keynesian" financial expansion under Gorbachev produced no productive expansion and export boom, (Hewett, 1992, p.56) it mainly produced suppressed inflation due to the structure of prices-and of motivation.
A prevalent opinion is that the final blow to the USSR was dealt by US president Reagan's project SDI (the Strategic Defence Initiative) - the 1983 "star wars" program. Moscow opposed it as they realised that they had no chance to follow this without draining the civil sector even more, which it at first did. So the SDI-argument is probably correct. But this was probably not an inevitable outcome. By investing in this joint (sic) USA-USSR effort, the USSR might have revived its scientific and technological impetus and made itself able to crawl up from the grave it had dug itself into. This was the explicit suggestion by US President R.Reagan. This would, however, have necessitated major reforms of a character that the Soviet leadership was not prepared to accept, and therefore they instead propagandised against the SDI. As noticed, Moscow's efforts to redirect resources toward more science-intensive activities, at the beginning of the 1980s when the SDI-plans were launched, failed precisely because of the inability to change the organisational structure of the USSR in a constructive direction.
Privatisation has only been partly successful, if we believe that the idea behind was to establish an economic system promoting high productivity and welfare. But, if the idea behind it was to secure some strata of people in the West and their helpers in the East riches as well as power, then the policy has been highly successful. The deregulation of the Russian economy can be seen as an extreme form of rent-seeking where strategically positioned persons and groups within Russia and on the outside has pushed through reforms to their own advantage, a more extreme version of what happened in Britain (Sampson, 1992, p.146-147).
In order to privatise, we typically would need first to establish a legal system which would be able to handle the new situation - a market system, and unlike believers in spontaneity, we would claim that we would need a carefully drafted plan concerning for example the legal system. A formal and written legal system of responsibilities would have to be established. Most probably this could be achieved by modelling the system of a country not too different from the one in question.
More significantly, any Russian Perestroika in any spheres whatever was dependent on Western Models. When Aleksandr II decided to modernise the archaic judicial system, experts were sent abroad to study the legal practices of more advanced countries. Witte's economic philosophy was borrowed from Friedrich List. ... The Duma, in its procedures, tried to model itself on the parliament of Westminster. (Mosse, 1992, p.275).
Japan had successfully followed the same strategy; modelling German economics, the British navy, the French and then the German army. However difficult this process of imitation may be, in the Russian case, the most likely model would not be from a libertarian country, with an empiristic, Anglo-Saxon common-law tradition, but more likely from a culture with a "mixed" economy like France or Germany with a rationalistic, civil code tradition. This is facilitated by the fact that pre-Revolutionary law was based on these prototypes. There was, however, not established any clear and stable legal system in advance of privatisation and price-liberalisation in a orderly manner. It has only been installed ad-hoc and changed repeatedly, thereby resulting in a totally changing environment for the participants. This continues to be one of the largest problems for foreign investors and is recognised as such. The 19th century modernisers did precisely imitate Western models of the kind proposed above, in 1832, 1864, 1894, and practically completed in 1903, first the French-, then the German codes were the prototypes (Butler, 1977). The Russian establishment was perfectly aware of this crucial and institutional aspect of infrastructure. A Swedish historian of law, Erik Anners writes, concerning the reforms in the 1860s, that,
This development was beneficial for an area that was of the greatest importance for Russia's social life, namely the economic. Earlier on, the weaknesses on all areas of law had blocked the road for industrialisation and for a higher developed credit- and commercial life. Without the reforms of procedural law in the 1860s, the upturn for joint-stock companies, business-banks, insurance-companies and private railroads could not have been possible - an upturn which was the very basis for the grand industrialisation-process in Russia at the end of the 19th century.
The circles which stood behind the reform-work were fully conscious that, in order to serve the economic life, it was necessary with reforms which would lift the juridical-technical level in the life of law and, in particular, in the processes.
In 1862, the following was said during the discussions in the Russian Council of State, "The lack of financial assets which the government can dispose of, is caused by - apart from the general economic circumstances - especially the weaknesses in the central parts of the administration of justice. This is the main cause of the decline of credit and industry. Money without credit is not productive capital. And with the present miserable condition of justice, there can be no mention of credit. Therefore, an improvement of justice is not only appropriate but necessary." (Anners, 1983, pp. 328-329)
In order to privatise you need a potential professional buyer - a future owner - with competence and connections for production, and preferably with investment capital. You would need somebody who would be willing to buy and able to run the outfit thereafter within a market system. Such a manufacturing and merchant class was typically lacking in the CIS, as it has always been in Russia for four hundred years from Ivan IV and Peter I and even under Sergei Witte. To a large degree this was a result of the state's own policy which prevented this from being established, as the state often used force in order to take over activities which had proved profitable (Pipes, 1987, chapter 8: The Missing Burgoisie, pp.191-220). Establishing any such innovative social strata takes time and a stable fertile environment that depends on the traditional popular and state culture. In Russia the only slightly qualified candidates were the former party bureaucrats and their foreign allies.
The Soviet production system - including Eastern Europe - was designed to keep the empire together and utilise economics of scale. It was therefore based on a regional division of labour combined with large-scale production. This made the various regions highly dependent on each other and therefore made it impossible for one part to break away. This has nevertheless happened and the results were inevitable. Old established commercial and communicative tracks have been wiped out and new ones have yet to be established. Because of this change of the flow of transportation-demand capacities at places the former was not designed for, bottlenecks had to appear.
Deregulation has been partly successful in some areas only, to be moderate. Prices have been deregulated only to some extent but still with staggering results because of the monopolistic production- and distribution structure. As the large-scale production structure was privatised private monopolies were created with higher dividends for the shareholder as the ultimate goal instead of general welfare, however illusory. This is a parallel to what happened in Great Britain when public infrastructure was privatised with similar results (Sampson, 1993, pp.143-138); price rises of these particular services and goods and lack of investments, but dividends have also been rising ... Whereas, for instance, prices of water-supply only close to doubled in Great Britain after privatisation of water and gas, this is nothing compared to what happened in Russia. A vast inflation developed and wages, not to speak of pensions were hardly able to follow. There were leading liberalist voices in Russia, for instance Prof.Larisa Piyasheva, who argued that this would happen, and that a privatisation would have to precede liberalisation of prices. This advice was not followed.
Shock-therapy rent seeking: Mafia privatisation
The privatisation plan was formally designed as socialisation - that is, handed over to the people in the form of vouchers - but in practice rather resulted in handing parts of the industry over to the local former communist bureaucrats as well as to the Mafia related circles. An impoverished population sold their vouchers at give away prices in order to survive.
The local bureaucrats, and the Mafia which had been established, by former Gulag prisoners in the Krutchev era, often operates in combination with foreign capital, and all profit from export of some of the few attractive goods Russia has left for export: raw materials and semi-finished goods. This shadow economy gained strength in the 1980s, and under the liberalising reforms of Gorbachev, in particular. At that time it joined forces with the various industrial sectors and established what we today can observe as industrial-sector Mafiosi - as for example in oil and gas.
The present minister of finance, Anatoly Chubais, is now (fall 1996) considered being the actual leader in Russia. He and many other functionaries were recruited and educated by Anglo-American "libertarist" think-tanks (Mont Pelerin Society, Cato Institute, Heritage Foundation, IEA's CRCE) starting around 1983. They are now to be found all over in Russian power bodies, "parties" and think tanks (ICRET, Krieble Institute), quite parallel to what happened with the Kerensky government in 1917 (Pares, 1931, p.413), and with the same extremely discrediting effects for the democratic reforms. The way the process has been conducted has possibly spilt the chance the world had to overcome the old conflict between the East and the West, and for such petty reasons of power and profit.
The infiltration of the Soviet elite was of course planned (Times, 1991). In 1989, former Finance Minister Yegor Gaidar managed to oust Academician Aleksei Sergeyev from the editorial board of Kommunist, the theoretical organ of the Communist Party. Sergeyev had suggested that Russia should imitate the economic principles of German recovery after WW II, instead the party organ promoted strategies for regional sustainable economics. In Germany, director of Deutsche Bank, Alfred Herrhausen, and director of Treuhand (the German administration of privatisation), Dieter Rohwedder, promoted similar ideas for debt-forgiveness and the development of the third world (Herrhausen) and for East-Germany (Herrhausen and Rohwedder). They were shot in 1989 and 1991 respectively, and their assassins are still unidentified, though it has been claimed that there was a revived RAF (Rote Arme Fraktion) behind the deeds. Typically, those who get assassinated are politically moderate, as this will leave the ground free for clashes between the extreme wings. Thereby, future progress in the respective countries can be jammed. Similarly the brain behind the Rapallo treaty between Russia and Germany, Walter Rathenau, was assassinated in 1922, perhaps for similar reasons in order to prevent a rise of Central- and Eastern Europe.
Some elements within the mentioned think tanks, have for considerable time promoted the idea of supporting the spontaneously created, informal, and unregulated sectors of the economy outside the control of "tyrannical governments" and nation-states. J.Sachs managed to promote this activity in his reform project in Bolivia - in that case strengthening the cocaine sector (Sachs, 1988). His mentor, Soros, is also a key person in the drive to pull parts of the informal markets into the legal markets - by sponsoring activities devoted to campaigns for the legalisation of drugs through for instance Soros' Open Society Institute. The Economist has editorially been arguing for the same liberalisation-policy. Soros' Quantum Fund by accident happens to be registered in the Dutch Antilles, infamous for their unregulated money-laundering activities, as happens to be the case also with the British offshore banks. There is a parallel to the opium wars of the 19th century here. A major new industry in Russia has been precisely drug traffic.
The Yeltsin-reforms has perhaps more than anything else been an institutionalisation of the informal criminal sector: a "Great Criminal Revolution", as noted with connections to the US "Conservative Revolution" among the extremists in the Republican Party and in the Tory Party. The reforms have correctly been criticised for a lack of installing a viable property right-structure before the price liberalisation took place. The criticism correctly pointed out, before and after the "shock-therapy", that liberalisation before legal structures would lead to massive rent seeking by the industrial monopolies. It is a fact that the leading Anglo-American think-tanks, who educated many of the present people in power in Russia today, happen to include the world experts on precisely property rights and rent-seeking, for instance James Buchanan. It is not necessary to imply or even suggest that shock therapy was intended by the Anglo-American think-tanks, to lead to the results we see today. Nevertheless, it is most likely that the Russians who profited from the insights of the think tanks, were themselves a part of the new establishment, or that they were hired by this establishment. In addition, there is some evidence that vested foreign interests have used their influence for reasons of profit and for great power politics. What has happened in Russia the last 5 years then, seems to be a textbook example of modern property-rights and rent-seeking theories. They just turned out to have been totally inverted, thereby promoting precisely the kind of rent-seeking that is destructive to society, instead of preventing it. Although there is every reason to regard the Russian people as a most unfortunate victim of the transformation process, there is every reason to doubt the victimisation of the Russian elite. One may regard the blame put on the IMF as being a strategy which uses the IMF as a scapegoat for a policy which influential parts of the Russian establishment would have preferred to follow anyhow, according to their own interests. Moreover, implementation of the IMF program is twisted according to the interests of this Russian establishment. Through this strategy, not only does this establishment keep and improve their commanding and privileged positions, but they also manage to put the blame for the general resulting misery on somebody else; the IMF and the Americans. Thereby the centuries-old anti-western Russian ideology is confirmed and strengthened.
Wall Street Journal Europe's regular commentator George Melloan claims under the title "Lebed vs. Chubais With Russia's Future at Stake", that in Russia,
Its 1991 revolution was bloodless, which means that most Soviet apparatchniks never lost their real source of power, control over property. They appropriated for themselves the property they had controlled in the name of the "people." Party bigwigs became capitalist owners and monopolists. (Wall Street Journal Europe, Nov.26, 1996).
We may rightly ask, how much deregulation and privatisation really has taken place in the meaning: Has there really been a development towards a democratic regime? On the political side, we can seriously doubt this. On the economic side, there is a danger that it has for the most part, been rhetoric. In reality, the old oligarchy may for the most part only have changed its jacket to fit a new fashion, imposed more or less from abroad. The old elite has been conducting the reforms, and has more or less been able to pick the reform elements that suited its own future interests. What we may have been witnessing is a transformation, most of all, of an oligarchy which changes its base of power from that of bureaucratic positions to that of property rights to natural resources and trade privileges. These activities represent different kinds of rent seeking, in the negative meaning of the concept, more than they represent rent-creation.
The present government of Prime Minister Chernomyrdin (- former director and present president of Gazprom) and Chubais, seem to be a central part in this profitable export of raw materials, including connections to Chechenya for instance. Part of this export-industry has also been taken over by Mafia-connected banks (up to 51 % in "debt for equity swaps", for example the massive Nikkel factory on the Kola Peninsula), as a result of deals where the government in return has received credit from the banks. This export resulted, in the early 1990s, in dumping on the Western markets at such low prices that re-investments have been cut dramatically, eventually causing parts of production to a standstill.
The Rotschild- and J.Goldsmith sponsored Soros, who introduced J.Sachs as the brain behind shock therapy (Soros, 1991), is one of the handful big international speculators who have made fortunes on trade with Russian commodities and semi-finished goods. President Abraham Lincoln's economic adviser, Henry C.Carey, in 1851 characterised the "free-flow" system in the following manner, reminding of George Soros' role today,
Rotschild may be taken as the type of the whole system and ... furnishes a picture of the speculators of every kind, in England, who live at the cost of the labourers of the world ... He employed brokers to depress or raise the market for his benefit ... Minor capitalists, like parasitical plants, clung to him and were always ready to advance their money in speculation at his bidding. He became the high-priest of the temple of Janus, and the coupon raised by the capitalist for a despotic state were more than a match for the cannon of the revolutionist., (Carey, 1967, pp.63-64).
155 years after this was written, it is astonishing how these representatives of "hit and run capitalism", are still tolerated. A clue to this may be the background of his main backers, Rotschild and Goldsmith. They are not only financial speculators but also tightly connected to the intelligence world (Dorill and Ramsay, 1992). Soros was therefore perhaps not without reason a main actor behind the destruction of the ERM mechanism in 1992. Continental politicians (Jaques Delors, Willy Claes, Philipe Maystadt) did most likely not act out of ignorance when they, in 1993, accused "politically motivated Anglo-Saxon speculators" for plotting against the ERM in 1992.
There may be reasons to pay some attention to the character of the IMF (International Monetary Fund), since it has not only been central in setting up destructive policies in the developing world, but has also been instrumental in securing Russia a new position in this club. In order to arrive at a deeper insight of the character of this policy it may be of interest to start with a small historical introduction. Credit has historically been a most important instrument in state building, warfare and a crucial tool in the international power-game (Wallerstein, 1978, p.44; Marx, 1972, I,4,1050; Braudel, 1985, p.241; Kennedy, 1989, p.89). Anderson explains how Britain has used this advantage of credit,
In the 1730s the philosopher George Berkeley described it as 'the chief advantage England has over France; and three decades later an expert on commercial questions spoke of the strength of England's public credit as 'the permanent miracle of her policy, which has inspired both astonishment and fear in the States of Europe'. ... These comments had much justification: of the costs of the four great wars fought by Britain in 1702-83 three-quarters were raised by borrowing. It was borrowing moreover at relatively low rates of interest: the ability to raise money cheaply was a major British advantage in the country's struggle with France. (Anderson, 1987, p.108)
Writes historian Carroll Quigley,
Credit had been known to the Italians and the Netherlanders long before it became one of the instruments of English world supremacy. ... This new stage of financial capitalism, which continued to dominate England, France, and the United States as late as 1930, was made necessary by the great mobilisations of capital needed for railroad building after 1830. ... The third stage of capitalism is of such overwhelming significance in the history of twentieth century, and its ramifications and influences have been so subterranean and even occult, ... This system had its centre in London for four chief reasons. ... great volume of savings ... oligarchical social structure ... aristocratic but not noble ... skill in financial manipulation, especially on the international scene. (Quigley, 1966, pp. 48-50).
Zara Steiner notices that,
It is the present view of some historians that it was Britain's financial and commercial role and not it’s manufacturing base that was, and remained, the real source of her wealth. The City of London played the dynamic role in overseas expansion and stood at the centre of Britain's global prestige. World trade was invoiced in pounds and financed by London. (Steiner, 1994, p.48)
There are reasons to regard the years since the fall of Bretton Woods as a reversal of the historical process from monopoly capitalism back to pre-1931 financial capitalism. From Pax Americana and almost back to Pax Britannica. Anthony Sampson calls the domestic British phenomenon in the 1980s a,
return to the freedom and internationalism of the Edwardian times before it broke apart seventy years ago. (Sampson, 1993, p.115, in the section called; 'The City Transformed').
The IMF has used this instrument forcefully in Russia, and has been able to direct the development with small means actually being paid out, as the IMF-loans have been used as a carrot and a whip to pressure debtor nations into compliance. IMF has attached certain conditions to its loans - the SAPs (structural adjustment programs) - which for any involved nation, in general, concerns deregulation of internal and external economic affairs: prices are to be deregulated, tariffs and subsidies are to be reduced and companies are to be privatised. The flip coin of this policy is that, on the other hand, the money- and credit-supplies are to be tightly regulated. That is the limit to this liberalism; do not liberalise credit and money: make credit cheap and available; to some extent a deflationary policy, which Quigley claims historically is a hall-mark of financial capitalism (Quigley, 1966, chapter on Financial Capitalism). In particularly, one should not, make it more readily available to some activities rather than to other activities. When this is being combined with liberalisation of the financial markets, one may conclude that this policy regards growth in speculation and consumption as, in practice, better than growth in investments in infrastructure. The method of attaching conditions is old and was practised with the Phoenicians and their apprentices, the Venetians. It usually concerned different kinds of foreign access to local markets and to local companies, as it does in the case of Russia. This policy generally favours foreign interests.
The IMF's power is far larger, but also more indirect than is usually noticed. Practically speaking all banks and nations of the industrialised world demand that the debtor country conform to the "advice" of the IMF. Thereby, these countries through the IMF, in practice establish an international credit-cartel which can dictate conditions and thereby the internal domestic policy of any debtor country. This is on an international scale.
On the national scale the policy implemented is again precisely limiting the availability of credit. What this amounts to therefore, is more or less a world-wide dictatorship through the resource of credit, perhaps the strongest instrument of power there is. The policy is also, since it makes this resource scarce, to the benefit of those who already have this resource; the creditors. So, to some extent this amounts to a world government run by the creditors - who are not democratically elected but representatives of banks and their investors. There has for a long time been a recognised goal of the free trade school to establish a world government, in order to secure global free trade. This was pointed out by List and Roscher (List, 1841, p. 120ff; Roscher, 1882, § LXVII ), concerning the ideas of J.B.Say and Quesnay. With the establishment of the United Nations and the closely related IMF, WTO and the World Bank, together establishing a universal credit cartel, this may have come through. What we seem to have, therefore, is a theoretical goal among free-traders of a world government, and the actual establishment of this by a "union" of creditors.
On the board of the IMF, interests are represented according to the size of investments, as contrasted with democratic principles. First, the US and secondly, Britain are the nations with most influence at the board of the organisation. Their representatives may not only be bankers, but also politicians put in at the board of the IMF. They are likely to be subject to prevalent ways of evaluating matters within the board of banking experts.
Their way of thinking have, however, changed over the years. During the years of Pax Americana, in the 1950s and the 1960s, due primarily to the revival of the American System-tradition of economics under F.D.Roosevelt, there was considerable support in these world economic organisations for construction of infrastructure in the developing countries. One of the founders of the World Bank, the American Harry Dexter White, represented this line and wanted the World Bank to become a financial supporter of public goods which private investors would not fund. There was always another tendency, at the start represented by Lord Keynes, who wanted the World Bank to perform more according to standard private bank criteria and only perform as a guarantee fund for private investments. Keynes argued against,
"the absurd notion of debtor countries being responsible for international investment." (Oliver, 1975, p.151; Gavin and Rodrik, 1995, p.329)
This tendency today prevails (Daily Telegraph, 1996). This policy may represent a more narrow-minded banking policy, paying more attention to the short-term bottom line of accounts, than too long-term growth potentials.
This tendency gained ground, in particular from the end of the 1960s. It started with the devaluation of the pound; followed with the establishment of British off-shore banks; the end of the Bretton Woods system; and the rigged oil crisis in 1973 and Paul Volcker's US interest-rate hike in 1979, which both turned oil rents into third-world debts, and into interests for the Anglo-American banks. The general liberalising policy during the 1980s put the candle on the cake. The change in "development" policy from promotion of technology and grand infrastructure projects, to local projects and "attitude" development (for instance education in family planning), within the world economic policy institutions is one part of what might be termed the "banker's counter-revolution" of the 1970s and 1980s. What we have arrived at today, and increasingly so, is probably a kind of financial capitalism where national governments are at the mercy of the whims of the financial markets, whose whims again are at the mercy of cynical large scale speculators whatever nationality they may be.
It was not likely that the shock-therapy would work: There was limited experience with local independence and decision-making. There was not an established infrastructure - in any sense of the term - which could accommodate the decentralised and flexible interflow of goods required. Only gradually could this be established. Putting an old person used to warm surroundings into a cold shower is more likely to give him a heart attack rather than to fresh him up. A more moderate approach might be to make the old bureaucracy use French or Japanese dirigiste methods, in order first of all to make the former military-industrial complex turn out goods for infrastructural development.
Shortcutting facts, most of what could go wrong during the transition after 1983 (Andropov) and 1991 (Yeltsin) did. (IMF, 1990; IBRD, 1992; Aaslund, 1993; IMF, 1994) Practically speaking, all efforts to reform the production- and administrative systems failed, and what more, concerning the post-1991 reforms, it had to be known in advance: The recipe had been tested in Bolivia, Yugoslavia and Poland, countries with far more decentralised social structures than the USSR, and with disastrous results: hyperinflation, austerity, de-industrialisation and pauperisation. (Sachs, 1988; IAEA, 1991; Mohr, 1993; ECE, 1994; Czarny, 1992; Heinz, 1990; Jurana, 1992; Gabrisch et. al., 1992). The economic collapse of Yugoslavia - as a result of this Sachs-IMF (International Monetary Fund) strategy - provided a classic background for the civil war. The potential of the socio-economic development in the even more multi-ethnic Russia, is terrifying. The economic effects on the USSR could be expected to beat the record, and it has so far. We will not look thoroughly into specific matters here, but concern ourselves with the matter of economic policy and transportation. The results of the transition can elsewhere be seen as a near breakdown in agricultural production, industrial production, health care, science and the armed forces. Most financial papers in the West tend to paint the sky blue, concerning the development in Russia, but some articles in usually rather free-market friendly journals, do more recently seem to approach a more realistic picture. Newsweek's headline speaks for itself: "Cash Hungry. With few companies earning rubles, Russia has become a barter economy." (Newsweek, 1996). Financial Times editorial titled "Carving up Russia" (Financial Times, Nov.29, 1996), states that "nineteenth century robber barons" have taken over the Russian economy. US President Clinton, Vice-President Al Gore, and spokesman Strobe Talbott, did already in December 1994, criticise the IMF for its policy in Russia. Whitewatergate was launched soon after. Chancellor Kohl, at the annual congress arranged by the military magazine Wehrkunde (Febr.`94), likewise criticised schoolboys from Harvard and Heidelberg, whose actions risk disrupting the military stability of Europe. He claimed that "the question of war and peace in the 21st Century has not been answered yet."
Monopolies and inflation: SAP-monetarism
Within the general policy of the SAPs (structural adjustment programs) of the IMF, monetary stability has been central. Financial austerity has been demanded by the Western monetary organisations with the IMF in the lead in order to build up "trust" in Russian markets for (institutional) financial investments, and has been of an extremely crude character. The Russian central bank was simply told to stall the printing press and the state simply stopped paying its bills to companies and salaries to its employees. Inflation has therefore lately been curbed. But partly due to the lacking payment of salaries for workers, and therefore to the companies production has been paralysed - again somewhat parallel to the budget-cutting policy and halt to salary payments within the US administration. Major parts not only of industry but of the whole social system including the armed forces have been shut down, or run at snail-speed, due to this central halt in the flow of credit due to the anti-inflation policy of Yeltsin - as in a chain reaction. The economy has turned into a barter-based system, with all its efficiencies. These inefficiencies are now much larger than the former centrally planned system. It is likely that the standard of living will continue to slide if this goes on since the non-investment and lack of maintenance this causes is likely to wear down the very material structure of the economy.
The continued chain-reaction in the credit system and the enormous built-up social reaction of fury, does threaten to blow up the entire social system of the former USSR. The large strikes and protests during fall 1996 point to this possibility. It thereby threatens the stability of the whole Eurasian continent with potentially grave consequences. This had to be known in advance of the halt in credit and the whole manner of dealing with the transition, since it had been tried before in even less centralised systems. The only reason, it seems, that Russia should not blow up, is the resigned mentality of the Russian people. Nevertheless, the responsibility and the intentions of the organisations and persons in charge of this policy most certainly should be questioned.
Removal of a protectionist curtain
The Soviet production system, was more or less based on the autarchy of Eastern Europe and the USSR. It was a protected system, in the bad sense of the word, since it never developed the means to promote progress in know-how, competence and technology for consumer goods, which traditionally has been the object of protection according to the infant industry argument. The Soviet system was never able to achieve an industrial standard that was competitive with the Western (or Asian) goods thereby making it able to compete on the world market. It is, however, doubtful that this was the intention before Gorbachev. His strong belief and efforts to change the competitive position of the USSR stranded primarily on the inability to motivate the actors in the system to change their behaviour accordingly (Hewett, 1992, p.56). The military production-sector was, however, in a different position and was partly highly competitive technologically if not economically (due to cheap supplies of labour, energy and other natural resources).
When the iron curtain was removed the Eastern market was therefore up for grabs. The domestic industry had no chance in competing with Western prices and quality standards. Domestic companies could not sell their goods and went bankrupt. Citizens could not buy the imported goods since they had lost their income. Only the "new" elite profiting from speculation, and trade in semi-finished goods and raw materials could afford the imported goods which now dominates most markets. A new social differentiation was thereby being established. Only this time the majority was not living at a low and slightly increasing living standard, as under communism. This time they were pauperised.
As a result of the break-up of old supply lines all regions and nations have been affected as new trade barriers arose parallel to what happened after the Austro-Hungarian Empire fell apart. As a result of the established and extreme geographical division of labour within the Soviet system, in order to promote economic of scale and the dependency of regions, the destructive results were far worse in the 1990s.
A breakdown in infrastructure, industry, and the armed forces
The fall in population and expected life-time are only the concrete signs of something more serious going on beneath the surface. More serious, because of its role as a driving power in development and therefore the long term productive implications; the fall in general morality, motivation as well as the brain drain. Brain drain concerns the poor funding (!) of former intellectual and scientific activities, giving rise to increased academic unemployment as well as the growing emigration of skilled people; Large scale emigration of skilled workers and scientists move to the West and to Asia. These intellectual reserves are precious pearls in a society, and take a long time to cultivate, but such a short time to destroy. The second introductory quote by Halford Mackinder should here be remembered.
Production has dropped in every sector of the economy. Typically industrial production is lower the more refined it is - or rather was. Raw materials production as oil, gas and aluminium has not been much reduced but are now being exported rather than used for productive purposes domestically. Finished goods production much more so and high-tech production has been almost wiped out of existence. This applies especially to the strategically important machine tool production that has been severely reduced. According to the Russian bureau of statistics as of June 1995, general industrial production has been reduced some 68 % in the 1987-1994 period, and is still dropping dramatically. In all finished goods sectors imports have taken the place of domestically produced goods. In Moscow, even food is 70 % imported from the West. This is all clearly indicative of Russia being transformed into the status of a third world country.
As noticed above especially high-tech industry has been
badly hurt by the development. The so-called military industrial complex has, however, to some large degree been able to continue its production for several reasons. First of all the military institution is relatively intact. The dwindling demand for Russian arms in Russia and Eastern Europe has to some degree been compensated for by the increased sales to Asian countries - as well as with the sale of nuclear reactors to Iran.
The breakdown in industrial production has of course spill-over effects into other parts of the economy, and the other way around. Investments and maintenance in agriculture and transportation has therefore been seriously damaged.
In Moscow in 1922, Jonas Lied wrote that,
The organisation of trade routes in Russia has always been the weakest point in its economic life and upon it will depend the restoration of Russia's industries to its pre-war productivity. The factories and mills were standing idle in the Central Industrial districts because of lack of food, fuel and raw material, which could not be brought up from original sources because of the unsatisfactory condition of transportation. (Lied, 1922)
The statement serves to give us an impression of a prime and long-standing practical worry of the Russian society, which the tsarist rulers repeatedly had tried to solve, some through massive construction works. After 1922 and the civil war, under Stalin, infrastructure was to some degree rebuilt and expanded, but it failed to be maintained under Brezhnev. The severe fall in industrial and agricultural production during the early reforms, and especially under deregulation, has led to a fall in infrastructure capacity with the energy-, water-, and railroad system breaking down. This comes on top of the already far gone process of non-investment under Brezhnev's regime until the change around 1987. Already in February 1994, Mikhail Malei, a member of the Russian Security Council and the leader of the reorganisation of the Russian military industry told Le Figaro that all signs point to a catastrophe and that
Russia is exceptionally vulnerable to a disruption of its railways, and this could stop all life in the country.(Le Figaro, Febr.18 1994).
General Lebed's economic advisor, Sergei Glazyev's, and Mikhail Malei's strategy, is to engage the military sector in the purpose of rebuilding the infrastructural sector of Russia, as it is the only sector still somewhat organised. This is one reason why the destabilising policy against the military sector is of such crucial importance. Some political factions in the West may wish this to happen, but for the Russian people it may prove disastrous - and equally so, indirectly, for the Western peoples. The military sector has been suffering not only from a severe lack of investments but also from lack of funds to pay salaries. Discontent within the armed forces is therefore very marked and the general mood and motivation very strained. The war in Chechenya has severely enlarged this strained situation.
The story behind the Russian fiasco in Chechenya, is not only that of simply a national insurrection. Influential factions within the inner elite in Moscow have reaped large benefits from arms sales to the Chechenyans and others see large potentials in the nearby oil-production, 'the world's next crucial energy supply', and pipe-line transportation through Chechenya. The leading international press has been well aware of this and the Central European Economic Review writes that,
Efforts to commandeer the pipeline routes for Central Asia oil and gas have set off an international dogfight that makes the Great Game of the 19th century look like a croquet match. (Central European Economic Review, 1996).
In this perspective what goes on in Chechenya may - to a smaller extent - be a result of what goes on in Moscow, than the opposite. Obviously, major interests have been involved in attaining a "favourable" government in Moscow.
What kind of policy is preferable? A-priori utopianism and generalisation of strategies
Simply we all want to live well. This requires that the goods are delivered and therefore that the production system and society at large is functioning well. Previously it did not and currently it does even worse. How do we change this and achieve delivery in Russia? There are several ways of imagining a possible future. We can take the speculative approach and try to construct a theoretical utopia by building on a set of organising principles - like for instance the French utopians Fourier and Saint Simon or the Russian utopians Lenin and Bakunin. Yet another is the approach of the free market utopians Jeffrey Sachs and Anders Aaslund who, set up the shock-therapy deregulation model according to standard IMF procedures.
Utopianism is not a priori bound to be a bad approach but is heavily dependent upon the character of the principles and their realism, which ought to be tested by experience. Nevertheless, the approach of free-market advocates like Sachs, generally tend to overlook circumstances which are prerequisites for a functioning market. This concerns in particular historical and actual aspects of infrastructure in all types of it: the mental outlook of the people, the immaterial institutional framework, necessary organisations, and material hardware like transportation.
The shock-therapy approach proceeded in a generalising manner assuming that the policy which was adapted in Britain and Mexico, however (un)successful, would fit the former East Bloc countries. The strategy was centred on deregulation: deregulation of prices, capital flows, privatisation of industry and a tight monetary policy in order to stall potentially resulting inflation. This, it was argued, would promote efficiency and investments. This approach to a too large measure took for granted that the necessary infrastructure was there already. A quick glance at Russia's past and present should have been sufficient to invalidate this.
We may take an empirical approach and decide to study history to find out which policies worked to a certain extent and which did not work. This is the approach partly used among others by Dieter Senghaas (Senghaas, 1982). The success stories in history of economics are well known although neither of them were perfect or purely utopian in the sense that they did not relate to historical and factual realities. Although they were visionary, they were indeed also pragmatic in the sense that they flexibly adjusted the implementation of their economic principles to actual circumstances. Their practices also ran counter to current mainstream theoretical text-books.
These success-stories can roughly be mentioned chronologically as follows: France under Louis XI, XIII and XIV, Richelieu, Colbert and de Gaulle, England under Elisabeth I and George III, USA under John Quincy Adams, Lincoln, McKinley, F.D.Roosevelt and Kennedy, Germany under and after Bismarck and Adenauer, Russia under Peter I and under Witte, China under Sun Yat-sen (aborted), Japan under the Meiji, Taisha and Showa regimes, Italy under Enrico Mattei, Taiwan under Chang Kai-shek etc., South-Korea under Park Cheung etc., Malaysia under Mahathir and Indonesia under Suharto. The changes in economic policy in China in the 1990s make it likely that China will follow in the same track. Generally, this admittedly multifarious economic policy, can be called mercantilism understood as a policy which regards the nation-state, as the necessary creator and regulator of markets, with an obligation to change national production structures towards higher productivity and welfare. This, however, to some extent make liberalist economics into a short parenthesis in the history of modern western economic policy, as some have claimed (Østerud, 1979). The above examples are therefore to be seen as the clearest manifestations of main stream economics - in practice that is; as economic policy, as opposed to economic theory in particular in the Western countries approximately after the 1960s.
Experience - in Russian history
As noticed, Russia also has taken part in this history of success. It may not be today be the brightest shining star, but it certainly took part to an extent which has astonished observers ever since. The Russian experiences in particular took place under Peter I, Catherine II, Alexander II, and in particular under Sergei Witte. These were also the great Westernises in Russian history. Apart from the traditionalist party in Russia, the autocrats and Pan-Slav movement, there is as we know, also the experience with communism that in many ways was a retreat from Western modernisation into autocracy. During the initial period of communism, there was a period not of planned economy as we have learned to know it, but a period of unbridled capitalism: the 1920s when Nikolai I. Bukharin, was influential. The policy was, however, compared with Witte's policy, less centred on production and more on trade. This period seems to have been an inspiration to the strategists behind the present deregulation in Russia.
Let us have a quick look at the accomplishments of the period of market-modernisation in Russia under Sergei Witte. Lyashckenko writes in his classic History of the National Economy of Russia to the 1917 Revolution, that concerning the protectionist policy,
If we view this policy as a temporary but necessary measure of production, its favourable contribution to the development of Russian capitalist industry cannot be denied. ... The protectionist industrial policy of this period included, in addition to tariffs proper, another manifestation of this protection; namely, government contracts. ... The result was an increase in large orders to a number of domestic plants at monopolistic prices, that is, a form of outright subsidies in support of heavy industry at the expense of the treasury. (Lyashchenko, 1949, p.559).
The historian Daniel Yergin writes that,
Russia's industrial economy had gone through stupendous growth under the favourable policies of Count Sergei Witte, the powerful finance minister from 1892-1903. Trained as a mathematician, Witte had risen from a position as a lowly railroad administrator to become the master of the Russian economy by sheer ability - a most unusual means of ascent in the Czarist empire
Witte was truly an exception, a man of great talents in a government populated by people of little ability. The entire system was rotten with corruption and incompetence. (Yergin, 1991, pp.129-130)
Harvard's leading expert on Russian history, Theodore von Laue, describes in detail the policy of Witte's 1892-1903 railway policy, and its success. There was an extreme increase in traffic, in particular of non-agricultural goods, which by 1900 made up 80 % of the value of the goods traffic. The quality of passenger traffic were among the best in Europe and the traffic doubled between 1897 and 1902 and in 1902 127 million tickets were sold. von Laue comments that,
The general benefit which the new railways added to Russian economy and Russian life are of course, impossible to estimate precisely. Certainly all of Russia profited. Her widened arterial network allowed an increased mobility of people and goods. The new roads fused all of Russia into an economic unit as her far-flung borders were linked through a system of effective communications. Surely, what had been built under Witte remained forever as part of the country's working equipment.
These general benefits apart, railroad construction had been planned to make a specific contribution to economic expansion. The demand for building materials and equipment constituted, so Witte's theory ran, a powerful incentive for the creation of heavy industry. The gigantic expenditures for railroad construction were, in fact, cash payments for orders from mines, steel mills, and machine shops, and for those industries which, in turn, equipped the makers of railroad materials. ... Whatever the source of investments, the results were remarkable. ...
While the heavy industries stood in the foreground of the advance, the tempo of expansion (nicely measured by contemporary or Soviet percentagemongers) was shared by related industries. ... It is easy to trace the specific effect of railroad construction upon the growth of the heavy industries. ... the next step in Witte's theory, the stimulation of their light industries, is more difficult to evaluate. ... (but) the near doubling of the consumption of raw cotton in the country and of the production of cotton goods in the 1890s would indicate a corresponding gain and a justification of Witte's theory. The growth of production also led to modernisation of equipment. ... On the whole consumer goods were apt to lag behind capital goods.
The conclusions suggested by the foregoing figures are confirmed by a highly respectable Soviet calculation of the increases in the over-all industrial production. If total industrial production of Russia in 1913 is set at 100, it stood at about 31 in 1892. Eleven years later, after Witte's dismissal, it had risen to nearly 64. In short, it had fully doubled during these years at a pace of development unequalled in tsarist Russia or, for that matter, among other European nations except Sweden. Russia was indeed catching up. (von Laue, 1963 pp.265-269)
Witte writes that,
As finance minister I gave considerable attention to raising the productivity of our labor force. Productivity was low for several reasons: the existence of barriers to the of initiative on the part of the peasantry, the bulk of our labor force; climatic conditions which leave millions of peasants with nothing to do for several months of the year; inadequate transportation.
As finance minister I was able to do something about transportation doubling our railroad network. Many said I was going to fast, but now these objections are no longer heard, for everyone understands that the recently built railroads have been bringing us significant benefits. For that reason there has been energetic railroad construction in recent years.
Unfortunately, my work in extending the railroad system suffered from constant interference by military authorities, who generally were supported by his Majesty. ...
During my tenure as finance minister, industry grew so rapidly that it could be said that a Russian national industrial system had been established. This was made possible by the system of protectionism and by attracting foreign capital.
I was criticized by some blockheads for building up industry too rapidly. Also I was criticized for using "artificial means" in promoting industry. What does this stupid word mean? By what other means that artificial can industry develop? Everything that man does is, to a certain degree, artificial.... and the artificial means I employed were far weaker than those employed for the same means by other states. This, of course, our salon ignoramuses do not know.
There is a common complaint that I was too liberal in handling out State Bank loans to industry. This is not so. In the first place .. it is ridiculous that such a sum of money could have provided the "artificial means" for giving birth to the industry of such a country as the Russian Empire. In the second place, a good part of these loans went to nobles turned industrialists, men who either belonged to the court camarilla or who had ties with that group.
Generally speaking, the importance of industry to Russia is not appreciated or understood. Only a few men, like Mendeleev - that great scientist and scholar and my devoted associate and friend - understood its importance and tried to enlighten the Russian people about it. ...
Toward the end of the last century, as unrest began to grow among our workers, as socialist ideas, originating in the West, slowly gained support among them, a movement began among the liberal intelligentsia, as well as among workers, to introduce labor legislation similar to those found in the West, ... They were even enacted in Germany, when the unquestionably conservative Bismarck was in power.
However, in Russia efforts to enact such legislation met with strong opposition from reactionary circles. Thus, it was only with great difficulty that I was able to have a workman compensation bill approved by the State Council. (Witte, 1991, pp.320-323)
What characterised the success stories in history: How did they do it?
Governmental co-ordinated economic growth first of all characterised these success stories of modernisation and industrialisation - by force; "dirigisme"; or "indication". They focused on knowledge as the driving force of economic growth, accumulation of wealth, and of power over nature. Accumulation of knowledge and capital led to increased productivity and production, and rising profits, investments, wages, and ultimately an increased standard of living. In general this was accomplished by public regulation of private rent-seeking generating a general industrial rent: rent-creation. Although certain principles stay the same, the practical methods may vary according to local and time-connected circumstances.
This tradition, to a large part philosophically idealistic in origin, established certain political practices, found at its definitive breakthrough in the "statist" approach known as statism - also known as state mercantilism; national mercantilism; Colbertism; dirigisme; cameralism; the national system; the American system; and the German ethical-historical school. More recently the tradition is related to American institutionalism; the French regulation school; evolutionary economics and so-called Schumpeterian economics; and "the new science of law". Some of these latter developments have, however, partly been detours into the landscape of the opposed materialist tradition, and thereby overlook crucial aspects of the foundation of this strategy, relating to the interrelated phenomena of innovation (creativity) and cohesion (morality).
The tradition was tentatively and initially formulated in theory and practice not only in Europe but in many regions since times immemorial. It was developed within political-administrative empires and nation-states. Principal elements will be found in the monarchies of ancient China, India, Mesopotamia, Egypt and in Europe with Plato, Augustine and in particular the inheritors of the Frank empire; France and Germany (the Holy Roman Empire), and England in some periods. The mental (educational and moral) foundation was laid by the reform orders of the Catholic church, devoted to education of the people in language, history, music, poetry, in their own languages - as well as devoted to translation and copying of classic works and service of the poor and ill. Already the policy of Charlemagne was a result of this moral attitude and policy of the Catholic Church: general education; one common and scholarly European language (Latin), and development of infrastructure (canals) and roads.
In Northern Europe this policy probably started with Charlemagne and his followers as the later Frederick I Barbarossa, of Germany, in the 12th century, Edward III of England in the 13th century and continued successfully with Louis XI in late 15th Century. Modern elements will also be found, in particular in the US and Germany, and in the East and Southeast Asian countries.
This willed development originated from the (originally ancient Platonic and Stoic) tradition of natural law. With the emergence of the nation-state during the Renaissance, the idea was strengthened that a ruler had an obligation to perfect his country. (cf. Wolff, 1749) As a result of this, the Renaissance also created a revolution in the attitude to knowledge, and thereby the revolution in natural sciences and technology. The European economies started an industrial take-off (Reinert and Daastøl, 1997).
The emergence of markets -spontaneously or willed?
The above mentioned success stories were not at all the stories according to Adam Smith's theory of "natural development" left uninterrupted by governmental intervention. A recent statement in The Economist is representative of how this attitude is still alive today:
The most important lesson governments can learn about growth may be that, if they want to promote it, they must give up their desire to control it. (Economist, 1995, p.110)
The success stories confirmed more to Adam Smith's praise of the British "Act of Navigation" of 1651 (Smith, 1776, Book IV, ch.ii). This act was established on Venetian and Hanse models, shut out Dutch ships from British commerce, and occasioned an Anglo-Dutch war. From the very beginning of trade - already with the Phoenicians - regulation and taxation was used to promote rent-generating monopolies, and growth in productive competence and knowledge in general this led to growth in production and welfare. The mother country of the mentioned magazine was a modern pioneer in this policy starting with Edward III (Hudson, 1992; Israel, 1992; L.Harper, 1939). For one other story of "what really happened" see Paul Bairoch (Bairoch, 1983). He shows how markets did not arise as a "natural development" emerging from interaction of uncoordinated individual agents, but rather was the result of planned development.
The main instrument of (national) mercantilism was the creation of a (national) market in order to give life to increased production in the cities (Polanyi, 1944; Heckscher, 1931: vol.I: Mercantilism as a Unifying System). This necessitated several elements which generally can be subsumed under the creation of a national administration and connected to investments in infrastructure - seen as the instrumental keys to prosperity: both material- and immaterial infrastructure. Friedrich List points especially to the importance of immaterial production factors when he writes concerning the difference between this tradition and the school of Adam Smith that,
We now see what extraordinary mistakes and contradictions the popular school has fallen in making material wealth or value of exchange the sole object of its investigations, and by regarding mere bodily labour as the sole productive power. The man who breed pigs is, according to this school, a productive member of the community, but he who educates men is a mere non-productive. ... A Newton, a Watt, or a Kepler is not so productive as a donkey, a horse or a drought-ox ...
Certainly those who fatten pigs or prepare pills are productive, but the instructors of youths and adults, virtuosos, musicians, physicians, judges, and administrators, are productive in a much higher degree. The former produce values of exchange, and the latter productive powers, some by enabling the future generations to become producers, others by furthering the morality and religious character of the present generation, a third by enabling and raising the powers of the human mind, a fourth by preserving the productive powers of his patients, a fifth by rendering human rights and justice secure, a sixth by constituting and protecting public security, a seventh by his art and by the enjoyment which it occasions fitting men the better to produce values of exchange. In the doctrine of mere values, these producers of the productive powers can of course only be taken into consideration so far as their services are rewarded by values of exchange ... But whenever our consideration is given to the nation (as a whole and in its international relations) it is utterly insufficient ... The prosperity of a nation is not, as Say believes, greater in the proportion in which it has amassed more wealth (i.e. values of exchange), but in the proportion in which it has more developed its powers of production. (List, 1841, p.142-144)
Administration: Co-ordination, tax and credit systems
The ruler was to create, as the most important instrument, a "national" market by establishing national systems of administration and infrastructure concerning respectively; law, security (of life, civil rights and investments), standardised measures, taxation and credit, as well as systems for education, health, transportation and energy. Thereby the state and its ruler was to perform an act of economic integration; of the former feudal municipalities forming a nation - as opposed to the interests of the landed aristocracy and of the financial oligarchy. The former unification of USA, Germany, South Africa and the EU-process presently ongoing in Europe, are examples of such integration of former more or less sovereign states.
The politics of (national) mercantilism installed national armies in order to end robbery which was menacing trade severely. This was paralleled at sea with the erection of navies to secure national trade abroad as the mercantilist nations were eager to loot each other's trade. A national defence was also necessary to defend against pressure from foreign powers whether private or governmental. Further on, the (national) mercantilists established policies of general education, science, transportation, production and credit creating national markets. Thereby it developed the interior of the countries, in addition to the previously developed coast lines under feudalism and municipal mercantilism, first by promoting the construction of waterways and roads. The development of railroads in the 1820s for the first time made land-transportation able to compete favourably with sea-transport - also for military purposes, as pointed out by List, and later by Mackinder.
Investments in general education and health care were necessary in order to shape a high quality work force for the administration and for production as well as for reasons of morality. The construction of a national credit system was one essential part of the creation of a national market in order to have a medium of exchange and in order to finance the infrastructure needed - apart from financing wars. Taxation and customs systems were erected to extract the tax-revenue needed for defence and infrastructure. Besides, the construction of a national tax system was equally important for another reason. It would provide the foundation for the heterogeneous treatment of economic activities and thereby create and expand the basis for tax-revenue. Preferred activities were to be subsidised and the converse taxed. This made use of heterogeneous taxation of the citizens and their activities as well as taxation of imports and exports.
Import of finished goods was taxed whenever this endangered the establishment of wanted domestic competence - and on the other hand subsidising wanted infant industry with long term cheap credit and low taxation as compared to other activities. Raw materials export was taxed in order to discourage it. Imported know-how was promoted by giving advantages and privileges to skilled immigrants and companies under various conditions. The "power-mercantilist" regimes placed severe punishment onto emigration of those skilled in any trade, as opposed to the "humanist-mercantilists" who, like Leibniz, argued for the distribution of knowledge and against debt-creating loans to other countries.
Advances in productive competence and know-how were carefully protected from take-overs and destruction by foreign intruders (competition of cheaper products) by regulation, customs and taxation as well as by the installation of patent systems. The preliminary outlays of such subsidy and protection - as compared to the possibility of buying cheaper foreign products - were seen as investments in future prosperity. Even Smith, Bentham and Senior acknowledged to some degree the infancy industry argument. Their reasons, however, were noticed - and criticised by List (List, 1841). One early example of principally motivated mercantilist tax-policy in Northern Europe, is that of Louis XI. The tax-income of France more than tripled between 1462 and 1482 whereas salaries doubled. His taxes were to some extent regressive - inverse with the productivity of the taxpayer - and were supposed to subsidise general education and the creation of cities as cultural centres and production centres.
Possible strategies: Basic necessities- or high-tech. production
It is important to underline that although there are certain economic principles which have to be respected if success in growth is to be reached, still there are many ways of implementing these principles - depending on factual or historical circumstances of various natures; natural and geographical as well as social and mental.
The desired industries in early periods of industrialisation, were usually basic necessities of the people - typically simple clothing or bicycles. By protecting this market and supporting home-made goods of this type, one instantly established a domestic market, requiring as little know-how as was practically feasible with the cultural level of the people.
However, another strategy for the creation of a domestic market was also chosen although more demanding; High-tech production of finished goods in a kind of domestic high-tech "islands" within the relatively backward economy, a dual economy which can be used constructively if co-ordinated. It gave the advantage of establishing domestic supply lines within the company as in Korea and outside the company as in Taiwan. The production of jet-planes and helicopters in Indonesia is a conscious effort in this direction. The co-operation of the American company Douglas with Chinese companies is a way for the Chinese of acquiring know-how and of the Americans of getting good-will and access to an emerging massive market. - Both Indonesia and China would otherwise become major importers of aeroplanes if this strategy was not chosen due to the geography and size of the populations. As in early mercantilism, in Japan and Taiwan the governments started companies and later handed them over to private individuals or companies who were capable, under various constraints.
Demystification of "The Asian Miracle"
One religiously oriented myth has been aired the last decade, which may have significance, but may also be overestimated. The experience of the South-South-East Asian nations is due to their Confucian cultural background, which promotes education, order and industriousness. This would then only apply to Malaysia and Thailand, and only to a very limited extent - corresponding with the importance of their Chinese minorities, and not at all to Indonesia, which all are on the way to become NICs - newly industrialised countries. So not only Catholic and Protestant Christians as in Europe and the US, Shintos as in Japan, and Confucians in Southeast Asia can do it but Muslims and Buddhists as well. So why not Muslims in Asia and Africa, Christians in Africa, Orthodox Christians in Russia and Latin-America and the ancient culture of Hindus in India?
The strategies and experiences of East and Southeast Asia generally, except for the cases of Hong-Kong and Singapore, defy the myth of export-led growth. Instead a main strategy has been to establish a domestic market and to supply this market. After all that is what national economics is all about; satisfying the needs of the local population - not the needs of tradesmen. This perspective of the so-called protectionist, dirigiste or national tradition thereby refutes the convenient myth of the non-intervention faction; The argument that the experiences of the Southeast Asian nations cannot be repeated since they based their strategy on export. Accordingly, major countries like China, India, Brazil, Nigeria, and eventually Russia cannot use this strategy because "there will not be sufficiently large markets available for them".
Rather the opposite; this strategy "of Southeast Asia" is actually better suited for these large nations than for the small ones given their immense domestic markets. This necessitates, however, investments in infrastructure and transportation to a larger measure than what was the case in coastal areas like Japan, Taiwan and Korea. The latter could, to a larger extent, rely on sea-transport like the European nations could, as they industrialised. Russia is by far the most extreme case of a large nation which cannot rely on a coastal development strategy, since there hardly are any ice-free shores which can be used for this strategy. Accordingly, Russia must apply the infrastructural strategy for internal development.
The general mystification concerning economic policy in Southeast Asia, however, is that this is a free-trade experience. There are numerous writings available which counter the myth that the Southeast Asian policy-experience should have been anything else than mercantilist, as were the earlier success of the West.
Some people see state-regulations as a bad policy, in general and in favour of special interests only. The Economist wrote of the business guru and leading advocate of deregulation in Japan that,
"As a managing consultant, Mr. Ohmae grew rich by criticising the way that firms were run, and by suggesting improvements. He approached politics in similar style, denouncing the regulations that cosset special interests in Japan - and less centralised - government." (Economist, 1995, p.76)
During fall 1996, a Taiwanese official was interviewed on Norwegian TV saying that,
The West speaks about the Asian miracle but there is no miracle. It is all a matter of governments directing matters so as to suit the industry, concerning infrastructure in particular. (NRK-1 TV, Aug. 1996)
Concerning the peculiar way of Japanese planning Wassilij Leontieff writes the following in his review of Prof. Shigeto Tsuru's book Japan's capitalism, creative defeat and beyond:
"In this connection one can quote the answer given by a young Japanese corporate executive when he was asked why the powerful, private, business organisations seem to have accepted the voluntary "indicative" suggestions - received from MITI and other governmental agencies long after such advice ceased to be mandatory: "We have placed in our government" (he really meant, government bureaucracy) "our wisest, best educated, and best informed people. No wonder we are prepared to follow their advice."
Co-ordinating planning was successfully used in making what the author describes as "anticipatory" public investment that involved the creation of factory sites, by reclamation along with providing such infrastructure as ports and feeder roads." (Leontieff, 1994)
The forgotten role of public goods
Public goods have certain characteristics which make them less attractive to individual agents or private investors. Their costs are concentrated to the investor but their benefits are distributed to a far larger community. The cost of investment, the fixed investment is often very high and result in strong economics of scale, beneficial for the establishment of a natural monopoly. Their benefits concerns two distributional aspects: so-called external effects; externalities, and time. External effects concerns for example the productivity improving effects of new technology, or efficiency-synergy from organisational co-operation. Time-distribution concerns the fact that pay-back time for many investments in public goods is long. For these reasons there is likely to be an under-investment in public goods if markets are not regulated, directly or indirectly, so as to correct this imperfection. This is the basis for governmental intervention into the development of many kinds of infrastructure like for instance; human (education, science); institutional (legal system); organisational (law enforcement and defence); and material (transportation). The infant industry argument is one argument of this type which regards learning and new know how in production as a public good.
Sergei Witte writes in his Memoirs that,
The new policy was and is based on the belief that railroads have a major importance for the state and that private enterprise, which is basically concerned with private interests, cannot adequately serve the interest of the state in this field. (Witte, 1990, p.192)
This problem of potential under-investment has been recognised by practically oriented people from the beginning of civilisation. The marvels of the ancient world would never have been built otherwise. Economic theoreticians have not always been so practically minded and have often disregarded the necessity of such investments. Historically, there is a tendency to disregard the problem among coastal states who can utilise the natural waterways as infrastructure. There is also a marked tendency of economically mature nations to disregard the problem as they too can take the infrastructure for granted; it does no longer constitute a major problem.
Although, even Adam Smith and Jeremy Bentham pointed to the necessity of intervention in several instances, it was to a larger extent left to the economists of the emerging industrial powers to focus more closely on this problem of potential under-investment in public goods like infrastructure. German economists like List and Schmoller and American economists like Carey and Taussig are some examples of this (List, 1841; Schmoller, 1923; Carey, 1837; Taussig, 1939). This more or less German-American tradition which focused on the establishment and maintenance of infrastructure could still be found to dominate development economics in the period of de-colonisation in the 1950s and the 1960s. Some examples can be mentioned (Nurkse, 1953; Gerschenkrohn, 1962; Rostow, 1960; Hirschmann, 1967; Senghaas, 1982).
Railroads and space-programs: Expanding the frontiers of knowledge
The railroad approach was especially important when this technology was relatively new. There are today new technologies in this field which may again establish railroads as an interesting field of investments; "conventional" tilting high-speed trains, magnetic levitation trains (maglev) and under development, technologies based on super-leading materials. In areas which have not yet been developed - as major parts of Russia, Central-Asia and China - even the old railroad-technologies would be interesting investments. But, as opposed to the normally accepted claim that only these relatively low-cost technologies are applicable, in the vast low-population-density-areas of the East, precisely the opposite may be the case. Precisely these new costly technologies may give these areas not only the infrastructure to overcome their natural handicap and ("artificially") establish close market conditions, but it may also provide these countries with a science-engine and a potential for technology export, if this technology is developed in these areas; i.e. an economic motor based on scientific progress.
The 19th century experience with railroads as an expansion of the technological frontier, has been shown to be a parallel to 20th century space-projects like Apollo (Hughes, 1965). The technological spin-offs to the rest of industry and society concerning knowledge of materials and in productivity have been immense, and for the Apollo-project calculated at around 14 times the investment-input. President Kennedy in 1962 pointed to the core of the problem. Donald Gibson, in his Battling Wall Street. The Kennedy Presidency, quotes President Kennedy as saying that,
We choose to go to the moon. We choose to go to the moon in this decade, and do the other things, not because they are easy but because they are hard; because that goal will serve to organise and measure the best of our energies and skills; because that challenge is one that we are willing to accept, one that we are unwilling to postpone, and one which we intend to win - and the others too. (Gibson, 1994, p.150).
Although the ultimate frontiers are no longer in railroads, but rather in micro-physics, microbiology and astrophysics: in each end of material reality, the lesson still is the same: Investments, also in infrastructure, should focus on the frontiers of knowledge. Maglev trains is one such example - and already a fairly mature technology in theory, as it was developed theoretically in the early 1930s. Combined with modern technology as new knowledge in materials like super-leaders and ceramics, the results can be even more impressive than so far achieved.
International development of infrastructure and the Delors-plan
The problem of transition in the East has to be seen in connection with the ongoing discussions in neighbouring regions like Europe (the EU), Central-Asia and China. First, transportation is often international and has to be interconnected. Secondly, the parallel projects in other regions may render these regions capable of supporting an upswing in the East. Thirdly, technological developments elsewhere may be put into use in the East. Fourthly, the struggle for this strategy in the East is politically dependent on a success of such a struggle elsewhere, and therefore the strategy has to be seen in a global perspective on trade and power; geopolitically. If this development strategy is not accepted in the West then such a strategy for the East will receive no support in the West and will be less likely to succeed in the East.
Nevertheless, a nationalist government (in the bad or the good sense of the word) in the CIS may decide to go ahead on their own anyway. This is probably what is happening at an increasing rate, seen particularly with the growing protectionism, not only with the F.List oriented presidential candidate Pat Buchanan in the US, during the spring of 1996, but also with the introduction of protectionist measures in Russia in February 1996, however blunt. The tendency of Germany to work more closely with Russia, China and Iran on development policy without waiting for permission from its Western allies, is a sign that Bonn understands some of the conflicting interests between the Central- and the Western European elites, and is willing to act according to its own interests.
The infrastructure plan for Eastern Europe and the CIS therefore has to be seen also in connection with the silk-road co-operation between the East- and Central-Asian countries and with the ongoing discussion of the Delors plan - the so-called white paper on employment from the EU commission. This Delors-plan has crystallised into the TEN-project (Trans-European Network) under the leadership of H.Christoffersen. This proposal eventually ended up as a shaved down project of 14 specific project of which most were already on the table of the national governments and within the budgets. So, it has ended up as an aborted effort to solve the problem of Europe concerning competitiveness against the US and Japan.
A major obstacle: crowding out?
A major obstacle to the infrastructural approach, proposed by Jaques Delors as well by Edmond Malinvaud and his 12 colleagues in Paris, has been opposition from financial circles, monetarist and many main stream economists, and like-minded politicians. The same arguments are found in the US. The main international political spokesmen for this strategy has been the Tory Margaret Thatcher and later John Major, and the more extreme Republicans in the US. This camp has suggested to finance the projects through loans on the financial markets. But as they do know, this would not be accepted by their politicians. The reason is that this would have the effect of crowding out other private investments directly, and indirectly by driving u