CHAPTER 10
UNFAIR FAIR TRADE LAWS AND OTHER MISCHIEF
THE IMF IS a political institution. The 1998 bailout was dictated by a concern to maintain Boris Yeltsin in power, though on the basis of all the principles which should have guided lending, it made little sense. The quiet acquiescence, if not outright support, to the corrupt loans-for-share privatization was partially based on the fact that the corruption too was for good purpose—to get Yeltsin reelected.1 IMF policies in these areas were inextricably linked to the political judgments of the Clinton administration’s Treasury.
Within the administration as a whole, there were, in fact, misgivings about Treasury’s strategy. After the defeat of the reformers in December 1993, Strobe Talbott, at the time in charge of Russia policy (later to become deputy secretary of state), expressed the widespread apprehensive view of the shock therapy strategy: Had there been too much shock and too little therapy? We at the Council of Economic Advisers felt strongly that the United States was giving bad advice to Russia and using taxpayers’ money to induce them to accept it. But Treasury claimed Russian economic policy as its own turf; turned aside any attempts to have an open dialogue, either within government or outside; and stood stubbornly by its commitment to shock therapy and rapid privatization.
Political judgments as much as economics lay behind the stances of the people at the Treasury. They worried about the imminent danger of backsliding into communism. The gradualists worried that the real danger was the failure of shock therapy: increasing poverty and falling incomes would undermine support for market reforms. Again, the gradualists proved right. The Moldova elections in February 2000, in which the old Communists got 70 percent of the seats in the Duma, were perhaps the most extreme case, but disillusionment with radical reform and shock therapy is now common among the economies in transition.2 Seeing the transition as the last round in the battle between good and evil, between markets and communism, led to one further problem: the IMF and U.S. Treasury treated most of the ex-Communists with disdain and distrust, except for a few chosen ones who became their allies. There were, of course, some die-hard Communists, but some, perhaps many of those who had served in the Communist governments, were far from true believers. Instead, they were pragmatists who wanted to get ahead in the system. If the system required that they join the Communist Party, that did not seem an overly excessive price to pay. Many were as happy as anyone else to see the end of the Communist domination and the restoration of democratic processes. If these people carried over anything from their Communist days, it was a belief that the state bore a responsibility for taking care of those in need, and a belief in a more egalitarian society.
In fact, many of these ex-Communists became what, in European terms, are called Social Democrats of various persuasions. In American political terms they might range anywhere from the old New Deal Democrats to the more recent New Democrats, though most would have been closer to the former than the latter. It was ironic that the Democratic Clinton administration, seemingly embracing views highly consonant with these Social Democrats, would so often ally itself in the economies in transition with reformers who leaned to the right, the disciples of Milton Friedman and of radical market reforms, who paid too little attention to the social and distributional consequences of policy.
In Russia, there was no one but ex-Communists to be dealt with. Yeltsin himself was an ex-Communist—a candidate member of the Politburo. In Russia, the Communists were never really ousted from power. Almost all of Russia’s reformers were well-connected ex-Communists. At one time, it seemed the fault line would lie between those who were closely connected to the KGB and Gosplan—the centers of political and economic control under the old regime—and everyone else. The “good guys” were the apparatchiks who had run businesses, like Viktor Chernomyrdin, the head of Gazprom, who succeeded Gaidar as prime minister, practical men with whom we could deal. While some of these “practical men” were ready to steal as much of the state’s wealth for themselves and their friends as they could get away with, they were clearly no left-wing ideologues. While (mistaken or not) judgments about who would likely lead Russia into the promised land of free markets may have guided decisions about whom the United States (and the IMF) should ally itself with in the early days of the transition, by 2000 a hard pragmatism had set in. If there had been idealism in the beginning, the failings of Yeltsin and many of those around him had led to cynicism. Putin was embraced with seeming warmth by the Bush administration as someone we could work with, his KGB credentials of little moment. It had taken a long time for us to finally stop judging people by whether they were or were not Communists during the old regime—or even by what they did under the old regime. If mistaken ideology may have blinded us in dealing with emerging leaders and parties in the countries in transition, as well as the design of economic policies, mistaken political judgments played no less a role. Many of those with whom we allied ourselves were less interested in creating the kind of market economy that has worked so well in the West than in enriching themselves.
As time went on, and the problems with the reform strategy and the Yeltsin government became clearer, the reactions of people in both the IMF and the U.S. Treasury proved not unlike those of officials earlier inside the U.S. government as the failures of the Vietnam War became clearer: to ignore the facts, to deny the reality, to suppress the discussion, to throw more and more good money after bad. Russia was about to “turn a corner”; growth was about to occur; the next loan would enable Russia finally to get going; Russia had now shown that it would live up to the conditions of the loan agreements; and so on and so forth. As the prospects of success looked increasingly bleak, as the end to the crisis looked increasingly around still another corner, the rhetoric changed: the emphasis switched from confidence in Yeltsin to fearing the threat of the alternative.
The sense of anxiety was palpable. I received a call one day from the office of a very senior adviser to the Russian government. He wanted to organize a brainstorming session in Russia on what the country might do to get itself going. The best that the IMF had been able to provide in years of advice was stabilization; it had nothing to offer in the way of growth. And it was clear that stabilization—at least as presented by the IMF—did not lead to growth. When the IMF and the U.S. Treasury got wind of this, they leaped into action. Treasury (reportedly at the most senior level) called the president of the Bank and I was ordered not to go. But, while Treasury would like to think of the World Bank as its own property, other countries can, when carefully orchestrated, outflank even the U.S. Treasury secretary. And so it happened here: with the appropriate calls and letters from Russia, I proceeded to Russia to do what the Russians had asked—to open a discussion unfettered by either IMF ideology or U.S. Treasury’s special interests.
My visit was fascinating. The breadth of the discussions was impressive. There were a number of bright people struggling to craft a strategy for economic growth. They knew the numbers—but to them the decline in Russia was not just a matter of statistics. Many people I talked to recognized the importance of what had been left out of, or given insufficient attention in, the IMF programs. They knew that growth requires more than stabilization, privatization, and liberalization. They worried that the pressure from the IMF for rapid privatization, which they were still feeling, would lead to still more problems. Some recognized the importance of creating strong competition policies, and bemoaned the lack of support that they were receiving. But what struck me most was the incongruity between the spirit in Washington and in Moscow. In Moscow, there was (at the time) a healthy policy debate. Many were concerned, for instance, that the high exchange rate was suppressing growth—and they were right. Others worried that a devaluation would set off inflation—and they too were right. These are complicated matters, and in democracies, they need to be debated and discussed. Russia was trying to do that, trying to open up the discussion to different voices. It was Washington—or more accurately, the IMF and the
U. S. Treasury—that was afraid of democracy, that wanted to suppress debate. I could not but note, and feel sad about, the irony.
As the evidence of the failures mounted, and as it became increasingly clear that the United States had been backing a weak horse, the U.S. administration tried even harder to clamp down on criticisms and public discussion. Treasury tried to eliminate discussions from within the Bank with the press, to be sure that only their interpretations of what was going on would be heard. Yet it was remarkable how, even as evidence on possible corruption unfolded in U.S. newspapers, the Treasury Department hardly wavered in its strategy.
For many, the loans-for-share privatization scheme discussed in chapter 9 (in which a few oligarchs got control of a vast portion of the country’s rich natural resources) became the critical point at which the United States should have spoken out. Within Russia, the United States was not unjustly perceived as having allied itself with corruption. In what would have been perceived as a public display of support, Deputy Treasury Secretary Lawrence Summers invited to his house Anatoly Chubais, who had been in charge of privatization, who organized the loans-for-share scam, and who not surprisingly has become one of the least popular public officials in all Russia. The U.S. Treasury and the IMF entered into the political life of Russia. By siding so firmly for so long with those at the helm when the huge inequality was created through this corrupt privatization process, the United States, the IMF, and the international community have indelibly associated themselves with policies that, at best, promoted the interests of the wealthy at the expense of the average Russian.
When U.S. and European newspapers finally exposed the corruption publicly, Treasury’s condemnation had a hollow and disingenuous ring. The reality is that the Duma’s inspector general brought these charges to Washington long before the news stories broke. Within the World Bank, I was urged not to meet with him, lest we give credence to his charges. If the extent of corruption was not known, it was because ears and eyes were covered.
WHAT SHOULD HAVE BEEN DONE
The West’s long-term interests would have been far better served had we stayed out of close involvement with particular leaders, and provided broad-based support to democratic processes. This could have been done by supporting young and emerging leaders in Moscow and in the provinces who were against corruption and who were trying to create a true democracy.
I wish there had been an open debate about America’s Russian strategy at the beginning of the Clinton administration, a debate more reflective of the discussion going on in the outside world. I believe that if Clinton had been confronted with the arguments, he would have adopted a more balanced approach. He would have been more sensitive to the concerns of the poor, and more aware of the importance of political processes than the people at Treasury. But as is so often the case, the president was never given a chance to hear the full range of issues and views. Treasury viewed the issue as too important to let the president have an important role in making the decisions. Perhaps because of the lack of interest from the American people, Clinton himself did not feel that this issue was important enough for him to demand an accounting in greater detail.
U.S. INTERESTS AND RUSSIAN REFORM
There are many in Russia (and elsewhere) who believe the failed policies were not just accidental: the failures were deliberate, intended to eviscerate Russia, to remove it as a threat for the indefinite future. This rather conspiratorial view credits those at the IMF and the U.S. Treasury with both greater malevolence and greater wisdom than I think they had. I believe that they actually thought the policies they were advocating would succeed. They believed that a strong Russian economy and a stable Russian reform-oriented government were in the interests of both the United States and global peace.
But the policies were not totally altruistic. U.S. economic interests—or more accurately, U.S. financial and commercial market interests—were reflected in the policies. For instance, the July 1998 bailout was just as much a bailout of Western banks that stood to lose billions of dollars (and eventually did lose billions) as it was a bailout of Russia. But it was not just Wall Street’s direct interests that influenced policy; it was the ideology that prevailed in the financial community. For instance, Wall Street regards inflation as the worst thing in the world: it erodes the real value of what is owed to creditors, which leads to increases in interest rates, which in turn lead to declines in bond prices. To financiers, unemployment is far less of a concern. For Wall Street, nothing could be more sacrosanct than private property; no wonder then the emphasis on privatization. Their commitment to competition is far less passionate—after all, it was the U.S. secretary of the Treasury, Paul O’Neill, who in his previous position as head of Alcoa engineered the global aluminum cartel and worked to suppress competition in the global aluminum market. And notions of social capital and political participation may not even appear on their radar screen; they feel far more comfortable with an independent central bank than one whose actions are more directly under the control of political processes. (In the case of Russia, there was a certain irony in this stance; in the aftermath of the 1998 crisis, it was Russia’s independent central banker that threatened to push a more inflationary policy than the IMF—and some members of the government—wanted, and it was the independence of the Central Bank that partly accounted for its ability to ignore charges of corruption.)
Broader special economic interests in the United States affected policies in ways that conflicted with broader national interests and made the country look more than a little hypocritical. The United States supports free trade, but all too often, when a poor country does manage to find a commodity it can export to the United States, domestic American protectionist interests are galvanized. This mix of labor and business interests uses the many trade laws—officially referred to as “fair trade laws,” but known outside the United States as “unfair fair trade laws”—to construct barbed-wire barriers to imports. These laws allow a company that believes a foreign rival is selling a product below cost to request that the government impose special tariffs to protect it. Selling products below cost is called dumping, and the duties are called dumping duties. Often, however, the U.S. government determines costs on the basis of little evidence, and in ways which make little sense. To most economists, the dumping duties are simply naked protectionism. Why, they ask, would a rational firm sell goods below cost?
The Aluminum Case
During my term in government, perhaps the most grievous instance of U.S. special interests interfering in trade—and the reform process—occurred in early 1994, just after the price of aluminum plummeted. In response to the fall in price, U.S. aluminum producers accused Russia of dumping aluminum. Any economic analysis of the situation showed clearly that Russia was not dumping. Russia was simply selling aluminum at the international price, which was lowered both because of a global slowdown in demand occasioned by slower global growth and because of the cutback in Russian aluminum use for military planes. Moreover, new soda can designs used substantially less aluminum than before, and this also led to a decline in the demand. As I saw the price of aluminum plummet, I knew the industry would soon be appealing to the government for some form of relief, either new subsidies or new protection from foreign competition. But even I was surprised at the proposal made by the head of Alcoa, Paul O’Neill: a global aluminum cartel. Cartels work by restricting output, thereby raising prices. O’Neill’s interest was no surprise to me; what did surprise me was the idea that the U.S. government would not only condone a cartel but actually play a pivotal role in setting one up. He also raised the specter of using the antidumping laws if the cartel was not created. These laws allow the United States to impose special duties on goods that are sold at below a “fair market value,” and particularly when they are sold below the cost of production. The issue, of course, was not whether Russia was or was not dumping. Russia was selling its aluminum at international prices. Given the excess capacity in its industry and the low p
rice of Russian electricity, much if not all of what it was selling on international markets was being sold above its costs of production. However, the way the dumping laws are typically implemented, countries can be charged with dumping even when they were—from an economic point of view—not dumping. The U.S. estimates costs of production using a peculiar methodology, which, if applied to American firms, would probably conclude that most American firms were dumping as well; but worse, the Department of Commerce, which acts simultaneously as judge, jury, and prosecutor, estimates costs based on what it calls BIA, best information available, which is typically that provided by the American firms trying to keep out the foreign competition. In the case of Russia and the other former Communist countries, it often estimates costs by looking at costs in a comparable country. In one case, Poland was charged with dumping golf carts: the supposedly “comparable” country was Canada. In the case of aluminum, had dumping charges been brought, there was a reasonable chance that sufficiently high duties would be imposed so that Russia would not be able to sell its aluminum in the United States. It might be able to sell its aluminum elsewhere (unless other countries followed the U.S. lead), in which case international aluminum prices would have continued to have been depressed. For Alcoa, a global cartel was thus preferable: it offered a better chance of getting the high prices that Alcoa wanted.
Globalization and Its Discontents Revisited Page 36