The End of Poverty - II

Oh wow, it has been a month since I blogged. How do people find the time to blog regularly???

Anyways, I did a bit of travel over the last month (first to Cochin to attend a friend's wedding) and another to Delhi and Dharamshala and the good thing about traveling, especially on train is the amount of time you have to just sit & read. So, as it turned out, I finished reading The End of Poverty towards the end of my Delhi/Dharmshala trip. BTW, Dharamshala is a beautiful place, situated at the foothills of the Dhauladhar Himalayas. McLeoydgunj, about 10 kms up north from Dharamshala is the official residence of the current Dalai Lama. Although I wasnt lucky enough to get a glimpse of him, I did manage to visit a few monastries and the Chinmoy Tapovan. I ran out of luck with heavy rains & had to cut short my plans of a trek to Triund and Indrahar Pass, and just head back to Delhi.

So, The End of Poverty was a brilliant read, for me at least. It got very interesting from the point where Sachs starts describing his experiences with helping different economies of the world. Starting with Bolivia, where he helps solve their problems with hyperinflation and more importantly, how understanding a nation's history of economics helps with solving the longer term problems. There is this interesting anecdote, where Sachs reveals how the IMF is driven, and controlled by large conglomerates like Citibank. Sach's scorn for how IMF's debt strategy is sometimes determined by international banks was quite evident.

During the course of his campaign for nullyfying the international debt that some of the developing countries are heavily burdened with (so heavy that there is really no use of any amount of economic liberalization within the country), Sachs seems to have made a good bit of enemies in the US government.

Onto Poland, Russia, China & India. The story of Poland's return to modern Europe was quite fascinating. Poland was considered the most liberal of the communist countries, but it went under martial law between 1981 & 1989, during which it was a freewheeling, chaotic country & economy, with black marketing, smuggling. In 1989, in one of the biggest demonstrations of voux populi in recent history, Poland held its first free elections, resulting in a political earthquake with the public screaming in unison "we want the communists out". On invitation from the Polish Solidarity Party, Sachs worked out a comprehensive plan, the first in history, for transforming a socialist economy to a market economy. The plan covered questions of trade, exchange rates, stabilization, industrial policy, debt cancellation and slow privatization. The rest of the chapter describes how the plan actually worked, and how Poland's proximity to mainland Europe went a long way in getting Poland out of trouble.

Russia, on the other hand, is a much sadder story. Russia's economic crisis started in the mid 80s. Russia depended heavily on oil and and gas exports to earn foreign exchange, and on its own use of oil & gas in an energy-intensive heavy industry. World oil prices plummeted in the mid 80s when Soviet oil production peaked and then sharly fell due to depletion of old oil fields and a lack of investment in new harder-to-reach fields in the tundra. This lead to increased international debt, the economy was caught in a crises, without a hope of salvage. Around the same time, Gorbachev's efforts with perestroika failed miserably. Coupled with this were the complications around USSR's recent split into multiple countries - currency convertibility was an issue with so many currencies, hardly any foreign assistance, growing international debt, etc.

The industrial and agricultural output declined during 1990-91 leading to a drastic fall in gross national product and national income. By 1991 the Soviet economy had stopped declining and gone into complete collapse. How did perestroika fail so miserably? First of all Gorbachev never planned to remake the Soviet system, he merely wanted to modernise it. He attempted to curb the production and sale of alcohol. While alcoholism was a major problem in the USSR he inadvertently forced production underground. Like America during prohibition the Mafia took control and has plagued Russia ever since. Other measures introduced under perestroika were leasing land to farmers (all land was owned by the state), allowing loss making factories to go bankrupt and limited numbers of private enterprises to open. McDonalds even opened a branch in Moscow although its prices were out of reach for the average person. The most promising measure of all was a cut in state spending especially in military expenditure. The reforms while on the right track were not comprehensive enough to overcome the sluggishness in the Soviet economy. When more radical changes were made they were mostly too late to prevent the slide in the economy and often had adverse effects. This was the case with the long overdue 1991 price rises which caused panic buying of any and all goods. Perestroika was to little too late to revive the Soviet economy.

The failure of perestroika was exacerbated by Gorbachev's continual boasting about the results that the reforms would have. In the last years of perestroika erratic policy shifts were common with wide ranging reforms soon clamped down on. Gorbachev's failure to approve Grigory Yavlinsky's 500 day economic plan (Rajeev's note: this by the way, was the plan Jeffrey Sachs came up with working with Yavlinsky) in September 1990 after much earlier enthusiasm lost him any remaining support he still had from the Soviet people. By steering a course between the conservatives and the reformers Gorbachev alienated almost everybody leaving himself with few allies. The Soviet economy was in decline as Mikhail Gorbachev took office and after much early hope he could not prevent economic collapse. His insistence on slow gradual economic reforms annulled any positive effects that the reforms might have had. This reluctance to introduce meaningful free market reforms to the Soviet economy lost Gorbachev the support of the people.

Sachs also reveals how US foreign policy, especially towards Russia was another big reason why Russia failed to look up again. In his own words,

I had supposed in 1991 and 1992 that the United States would be rooting for Russia's success much like it was rooting for Poland's. With hindsight, I doubt if this was ever the case. Poland was viewed by US strategists as the eastern flank of the Western alliance. Poland was a candidate for the European Union and for the NATO. Bolstering Poland was, therefore, umambiguously bolstering Western interests as well. I had believed the same was true for Russia as well, but I now doubt that (Dick) Cheney and (Paul) Wolfowitz ever shared that perception. Russia was not destined to become a member of the European Union, and was certainly not a candidate for NATO. It was still a country with more than 20,000 nuclear weapons. It now seems plausible to me that bolstering Russia's quick recovery was viewed as inimical to US interests by the Bush and the defense establishment.

Russia did become a market economy, although lopsided towards oil and gas. Economy has grown since 1998 on the basis of high international energy prices. But will Russia become a democracy is a big question no one dares to try to answer I guess. Though Vladimir Putin rules with constitutionalism and multi party democracy, he has also successfully centralized power, tamed the media and muzzled the independent opposition. Its efforts of privatization has led to highly acute imbalance of a lot of power with a few oil magnates, leading to a lot of corruption and ill gotten wealth.

Whew! I guess India's story is more well known (at least to us Indians). So I will leave that for now.

The next half of the book is about Africa and parts of Asia that are in extreme poverty, and Sach's detailed plans on how much aid is required to help African nations out of their misery. According to Sach's 0.7% of the GNP of developed countries, if targeted correctly towards the extreme poor, can help bring them out of poverty and onto a path whereby they can try and get onto the next rung of economic development.

I would highly recommend this book.