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,
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
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
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. email@example.com