Illiberal Stagnation

April 9, 2017

Illiberal Stagnation

by Joseph E. Stiglitz

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Today (April 2), a quarter-century after the Cold War’s end, the West and Russia are again at odds. This time, though, at least on one side, the dispute is more transparently about geopolitical power, not ideology. The West has supported in a variety of ways democratic movements in the post-Soviet region, hardly hiding its enthusiasm for the various “color” revolutions that have replaced long-standing dictators with more responsive leaders – though not all have turned out to be the committed democrats they pretended to be.

Too many countries of the former Soviet bloc remain under the control of authoritarian leaders, including some, like Russian President Vladimir Putin, who have learned how to maintain a more convincing façade of elections than their communist predecessors. They sell their system of “illiberal democracy” on the basis of pragmatism, not some universal theory of history. These leaders claim that they are simply more effective at getting things done.

Russia is now enabling the Taliban’s disingenuous diplomacy by pretending that ISIS is the more worrisome threat. It’s a game the Russians have been playing for more than a year.–Russia’s New Favorite Jihadis: The Taliban

That is certainly true when it comes to stirring nationalist sentiment and stifling dissent. They have been less effective, however, in nurturing long-term economic growth. Once one of the world’s two superpowers, Russia’s GDP is now about 40% of Germany’s and just over 50% of France’s. Life expectancy at birth ranks 153rd in the world, just behind Honduras and Kazakhstan.

In terms of per capita income, Russia now ranks 73rd (in terms of purchasing power parity) – well below the Soviet Union’s former satellites in Central and Eastern Europe. The country has deindustrialized: the vast majority of its exports now come from natural resources. It has not evolved into a “normal” market economy, but rather into a peculiar form of crony-state capitalism.

Yes, Russia still punches above its weight in some areas, like nuclear weapons. And it retains veto power at the United Nations. As the recent hacking of the Democratic Party in the United States shows, it has cyber capacities that enable it to be enormously meddlesome in Western elections.

Image result for Trump and Putin

There is every reason to believe that such intrusions will continue. Given US President Donald Trump’s deep ties with unsavory Russian characters (themselves closely linked to Putin), Americans are deeply concerned about potential Russian influences in the US – matters that may be clarified by ongoing investigations.

Many had much higher hopes for Russia, and the former Soviet Union more broadly, when the Iron Curtain fell. After seven decades of Communism, the transition to a democratic market economy would not be easy. But, given the obvious advantages of democratic market capitalism to the system that had just fallen apart, it was assumed that the economy would flourish and citizens would demand a greater voice.

What went wrong? Who, if anyone, is to blame? Could Russia’s post-communist transition have been managed better?

We can never answer such questions definitively: history cannot be re-run. But I believe what we are confronting is partly the legacy of the flawed Washington Consensus that shaped Russia’s transition. This framework’s influences was reflected in the tremendous emphasis reformers placed on privatization, no matter how it was done, with speed taking precedence over everything else, including creating the institutional infrastructure needed to make a market economy work.

Fifteen years ago, when I wrote Globalization and its Discontents, I argued that this “shock therapy” approach to economic reform was a dismal failure. But defenders of that doctrine cautioned patience: one could make such judgments only with a longer-run perspective.

Image result for Stiglitz--Globalisation and Its Discontents

Today, more than a quarter-century since the onset of transition, those earlier results have been confirmed, and those who argued that private property rights, once created, would give rise to broader demands for the rule of law have been proven wrong. Russia and many of the other transition countries are lagging further behind the advanced economies than ever. GDP in some transition countries is below its level at the beginning of the transition.

Many in Russia believe that the US Treasury pushed Washington Consensus policies to weaken their country. The deep corruption of the Harvard University team chosen to “help” Russia in its transition, described in a detailed account published in 2006 by Institutional Investor, reinforced these beliefs.

I believe the explanation was less sinister: flawed ideas, even with the best of intentions, can have serious consequences. And the opportunities for self-interested greed offered by Russia were simply too great for some to resist. Clearly, democratization in Russia required efforts aimed at ensuring shared prosperity, not policies that led to the creation of an oligarchy.

The West’s failures then should not undermine its resolve now to work to create democratic states respecting human rights and international law. The US is struggling to prevent the Trump administration’s extremism – whether it’s a travel ban aimed at Muslims, science-denying environmental policies, or threats to ignore international trade commitments – from being normalized. But other countries’ violations of international law, such as Russia’s actions in Ukraine, cannot be “normalized” either.


One thought on “Illiberal Stagnation

  1. “I argued that this ‘shock therapy’ approach to economic reform was a dismal failure.” — Joseph E. Stiglitz

    After the fall of the Soviet Union, the US had two choices: (1) to reach out to Russia, to ensure that a cold war scenario never again happens, by helping them to get back on their feet in a spirit of support and commitment to a more free and open Russia, good for Russia, good for humanity; (2) Act like every empire before them and see this as a chance to further enrich themselves and spread their hegemony. Well, the US chose the latter. US administration are on record as saying “We have ten years to do what the hell we like, before the Russians are back on their feet.” Not helping Russia was a deliberate act. By help, I mean in the sense that it was in the planet’s interest to do so. The fact they did not choose this path was not down to some miscalculation, that on hindsight they would have done differently, it was done deliberately as the US saw it as a chance to further their ambitions. History will see it as an opportunity missed.

    If the West had helped Russia (e.g. a Marshall plan of some sort), many of the deprivations the Russians experienced could have been avoided. Instead for ideological reasons, they thought the best thing to do was to sell off state assets (assets in theory everyone owned) and issued people with share vouchers. Instead of a share owning utopia, people ended up selling their vouchers for food as the rouble collapsed and out of this mess emerged the oligarchs. In some sense, to deal with this mess, the only solution was to fall back onto a strong man – but perhaps this could have been avoided had finance and a structure been in place. In that sense, the West helped to create Putin. In fact, it was American insistence, along with IMF & World Bank policies, that forced Yeltsin to privatize everything in a rush that ended up in the gangsters (oligarchs) hands. It was the plan Stiglitz himself objected. The Americans wanted chaos in Russia but anyone with tiny bit of historical foresight knew it would turn out badly for everyone.

    I think Stiglitz is more on the side of the cock-up theory of history, rather than saying it was a strategic act. But The US did appear to let Russia fail rather than create a potential economic rival. Likewise, it didn’t take the ‘zero option’ on nuclear weapons offered by Gorbachev, mainly because of Margaret Thatcher’s objections to reducing missiles from thousands to a few hundred sets up the possibility of strategic nuclear strikes, whereas MAD (mutually assured destruction) makes this less likely. Perhaps the failure to embrace new thinking and a new vision will be seen every bit as big as the failure of Athens and Sparta to forge a common partnership and identity – one that we and perhaps our grandchildren will pay for. Whatever the case, that historic moment passed. One of those great what-ifs of history.

    Stiglitz suffers some short-sightedness that his visions of the future for Russia is only one which copies the US/European model. But other options are available. China is pointing the way forward for a modernized, planned economy by borrowing extensively from the Singapore model adding to it many of its own characteristics. Japan and South Korea with their intertwined political and business regimes are another. When Deng Xiaoping chose to unleash capitalist forces he made sure the state kept tight control (such as steel, coal etc which the West to this day criticizes as “inefficient” completely forgetting that they employ countless tens of millions who otherwise would be unemployed and restive). Singapore, too, keeps tight control of critical companies and sectors. It was unleashing gangster-capitalism and its oligarchs that ruined Russians chances. At the very least they should have retained capital controls. All if this was clearly the Americans imposing a wild-west capitalism. It was the shock therapy that killed the patient and any chance of a smooth transition.

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