Wild West Goes East

When communism collapsed, the World Bank marched into the
Former Soviet Union with privatization agenda in hand.

by Peter Griffiths

New Internationalist magazine, March 2004

In the 1980s the World Bank developed an extreme free market solution to be applied everywhere, regardless of the problem. Privatize everything, remove government controls, remove all subsidies, let the markets set prices, have free-market exchange rates: all to be done chop chop. The disastrous effects of this were becoming evident in Africa by the end of the decade. When Eastern Europe opened up, the same policies were applied there. I watched helpless, as countries moved inexorably to disaster.

I am not talking here of the official policy of the World Bank as stated in a headquarters press release, but of the defacto policies of the Bank, its related aid organizations and consultants - a tight-knit group who share a common ethos with whom I have worked over 40 years.

When the World Bank moved into the Eastern Bloc, key jobs were deliberately given to people with no Third World experience. The World Bank staff in Washington and the Europe office considered themselves a cut above those working in Africa, and so were the only people to handle the task of reconstructing the Former Soviet Union (FSU). As a result, those who were at last learning the lessons of their experiments on Africa were sidelined, and the experiments on the FSU began.

Most of the consultants coming from the West to reform the FSU had no experience of working outside their own countries. This did not stop them from giving advice as they stepped off the plane - anathema to experienced international consultants, who have learned: 'Keep your mouth shut and your eyes and ears open. Save your conclusions for your final report.'

I have a vivid recollection of a World Bank staffer in l992 hectoring the Minister of Agriculture of Albania, waggling her finger in his face. She was on her first trip abroad, six months after leaving university - a university, moreover, which is not known for its agricultural economics.

Most of the consultants in the early 1990s were in fact business people, unemployed because of the recession. They were not brilliant at business, they had no consultancy skills, they knew nothing about policy or the establishment of markets that worked. They had three advantages, though. First, they were cheap. Second, the Eastern Europeans liked the thought of being advised by real capitalist business people. Third, and most important, the Eastern Europeans hated the thought that their problems were in any way similar to those of the Africans they despised, and they did not want advice from people who had worked in Africa. Those of us with a lot of experience were able to get work there only by cutting the African jobs out of our CVs and emphasizing our record in Europe.

This recruitment policy meant that the people running the show were naïve about policy and practice. For example, I found that the Governor of a Russian province with a grain surplus was banning exports from the province, so as to keep the price down, then buying on his own behalf and exporting at a large profit. I had to explain this to the World Bank expert in charge of the economics of the sector, though it is a common practice in Africa and Asia, and even the communist Governor had been able to work it out for himself.

Again, we know from common sense, and from disastrous experiences in Africa, that it is foolish to privatize firms in a distorted market - and the FSU markets were far more distorted than those in any of the 30 countries I have worked in, except Vietnam. Before privatization, there are subsidies, taxes, regulations and controls. When these are abolished, prices of inputs and outputs can double or halve in a matter of months, bankrupting firms. It makes much more sense to remove the subsidies, taxes and quotas first, thereby achieving an approximation to a free market, then to privatize gently, so the firms continue to operate.

Savage controls But the policy imposed on Russia was wholesale privatization into a distorted market - and privatizing loss-making firms in the hope that somehow, magically, they would suddenly make a profit. Was there a fear, perhaps, that the process of reforming policy before privatization might lead to a thriving public-sector economy?

I was shocked when a Thatcherite from the British Conservative Party's Central Office visited Eastern Europe and made it clear that he was far less enthusiastic about privatization than me, or any other consultants I knew. I started to realize that we had all been imbued with the Washington Consensus.

The policy-makers imposed savage price control. They ignored the general experience that price control must cause major distortions - and was bound, therefore, to worsen the distortions of the command system which had already caused the collapse of the Soviet Union. They ignored the experience of Africa that price control of locally produced goods ends up as a tax on production.

And they ignored the general experience that price control leads to a black market. The distortions were so great in Russia that huge profits could be made. Within a few years the mafia controlled most of the economy.

Inevitably price control meant that state-owned companies lost money and, in the absence of state subsidies, a large chunk of the economy was bankrupted. Firms run by competent professionals, using machinery that had been written off, could have done very well if they had been allowed to charge reasonable prices; they could even have exported. Instead they had to close down.

Bizarre assertions The lack of international experience of many consultants had odd results. It was stated authoritatively, and it became agency policy, that it was impossible to lend money to farmers unless they owned their land - a startling proposition to those who have worked in England, Africa or Asia. It was stated that it was impossible to have land ownership without accurate mapping, preferably by satellite - startling to the English who know of farms with no title deeds because they have been in the same family for a thousand years. It was stated that banks could only lend to farms that could be sold in an agricultural depression - startling to those who know that. farms are unsaleable in an agricultural depression.

It is not just that the policy lessons have not been learned.

Despite an abundance of experience around the world about what kind of projects do not work, I see a lot of new projects that are bound to fail. Sometimes they have no discernible objective. Sometimes they aim to produce a small benefit at a large cost, which is when I start asking whether it 'would be cheaper simply to give the money away. All too often they are replicating a project which has been a failure elsewhere in the world, for technical and economic reasons that are well known.

I saw for myself the difference between delivering aid for the World Bank in Africa and looking for ways of making commercial loans for them in Russia - loans repayable in dollars, in a chaotic market afflicted by hyperinflation.

Russian people say to me: 'More people have died in Russia in the last 10 years than in Stalin's Terror.' Was it, as they suspect, an American plot to destroy the rival superpower? Was it incompetence? Was it the wilful, arrogant refusal to examine evidence or theory that might show they were wrong? Or was it the willful refusal to examine evidence or theory that might conflict with the views of their paymasters?

Is one more evil than the other?

Peter Griffiths is an international consultant who has worked extensively for the World Bank and other agencies in 30 countries. peter@griffithsspeaker.com

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