No More Shock Therapy, Please
Memo To: SSU students on summer break
From: Jude Wanniski
Re: Letters to the WSJ and NYT
In the last several days, a lot of ink has been spilled on the International Monetary Fund, better known to SSU students as the Evil Empire. The Wall Street Journal ran a marvelous lead editorial on May 19, "The IMF in Action," which correctly bashed the IMF for having contributed to the Asian financial crisis, particularly in Indonesia. The Journal drew blood, and the IMF was forced to respond with a letter to the editor, which ran May 29. The IMF spokesman dismissed the Journal arguments by saying "everyone knows" that the crisis is due to the political situation in Jakarta, and that "there is nobody here but us chickens," at the IMF henhouse. I wrote a letter to the editor defending the WSJ's position, which I e-mailed May 30. See it below.
On Thursday, June 4, The New York Times published an op-ed, "Rule of the Ruble," by Jeffrey Sachs, director of the Harvard Institute for International Development, a "non-profit group" that has been making a fortune in salary and perks for the incompetent economists, who are living off U.S. taxpayer grants from the Clinton administration. You can read about this scandal in the June 1 issue of the Nation, which the NYT does not mention. Sachs from December 1991 to January 1994 was an "economic advisor to the Russian Government," according to the NYT. It was in fact Sachs who authored the "shock therapy" plan that was sold to the Yeltsin government, which sent the ruble into its inflationary spiral, from four to the dollar to more than 6000 to the dollar — wiping out the ruble savings and pensions of the ordinary people of Russia. The "shock therapy" scheme was backed to the hilt by The New York Times editorial page, which gets its economic orders from the Harvard boys. These include Larry Summers, who is now the deputy Treasury Secretary and was the chief economist of the World Bank when Sachs was poisoning Russia with his economic nostrums. At the time, I called Summers "Mr. Inside," and Sachs "Mr. Outside."
Their main contribution to the people of Russia was to persuade the government to devalue the ruble against oil, which under the command economy system of the USSR was the keystone to the entire economy. The IMF offered big bags of dollars in exchange, and as their advice was taken, the economy fell apart, and as it fell apart and revenues fell, the IMF returned to say it would not give the promised big bags of money until the government raised taxes to balance the budget. Countless thousands of Russians have died of malnutrition, alcoholism and disease as a result of Jeffrey Sachs and his Ph.D. henchmen from the Ivy League (and Stanford). Yet the NYTimes Thursday has the nerve to bring him back for a reprise. New advice to Moscow. And what does Sachs argue? That the IMF is to BLAME for the collapse of the Russian economy, because it has lately been trying to stabilize the ruble!!! The same ruble that was worth 25 cents in U.S. money in 1989 is now worth a tiny fraction of a penny and Sachs takes half the op-ed page to tell the readers of the newspaper that it is overvalued and the bad guys at the IMF are responsible. (If you check the currency tables and find the ruble at 6.1 to the dollar today, please realize the government on January 1 knocked three zeroes off the NEW ruble for cosmetic purposes.)
Those of you who have been in our TalkShop recently may have noted several entries from SSU students who wonder if the CIA is using the IMF to destroy Russia. I answered that I did not believe there was a grand conspiracy, that these events can be easily explained by the sheer incompetence of the people involved. The NYT and the dominant political establishment in the United States has a religious belief in the nonsensical dogma of the neo-Keynesians. There always will be excuses as to why one country after another falls apart after it is touched by the IMF. Here, we have an example of Jeffrey Sachs setting himself up as the NEW neo-Keynesian, who can be trusted because he is publicly criticizing the IMF. The editors of the Times congratulate themselves on being even-handed, allowing support for the IMF and criticism of the IMF on its editorial pages. Meanwhile, all around the world, people in misery slip into deeper misery, poverty and death. Nobody here but us chickens.
May 30, 1998
The Wall Street Journal
200 Liberty Street
New York, N.Y. 10281
The spokesman for the International Monetary Fund who took issue (May 29) with the Journal's editorial blaming the IMF for throwing gasoline on the financial flames of South Asia reflects the intellectual bankruptcy at the top of that institution.
To argue that Thailand had to devalue the baht last July because it was running out of foreign reserves is incorrect in that Thailand could have continued its defense with domestic reserves. Leave aside the fact that the IMF had been on the sidelines for a year, sniping at Thailand for pegging the baht to the dollar, criticism that encouraged currency speculation against the baht.
Bangkok's real problem began after it devalued by 16% and the IMF rushed in with promises to help defend the currency if Thailand raised taxes to balance its budget. There is nothing that weakens demand for a currency more than higher taxes, which is why the IMF's presence sent the Thai currency reeling further, weakening the financial structure of its trading partners.
The IMF spokesman also insisted that Indonesia's attempt to save its currency with a currency board could not possibly have worked, because it would have meant higher interest rates. While I am not a fan of currency boards in all circumstances, the Journal clearly is correct in noting that the Indonesian rupiah was showing signs of robust health when the markets believed a currency board would replace the IMF nostrums, and collapsed when the IMF and U.S. Treasury Department together sank that approach.
When President Suharto raised energy prices by 70% to meet IMF demands for budget balance, some 500 Indonesians died in the ensuing riots. Of course, the IMF spokesman prefers to note that most conventional reports blame the riots on "politics," not the IMF. History, though, will place the blame and the blood where it belongs.
June 4, 1998
The New York Times
New York, N.Y.
For the first time in several years, I find myself defending the International Monetary Fund in its objective of keeping its currency stable, even as I continue to criticize the policies it urges upon Moscow to reach that objective. Harvard's Jeffrey Sachs, who authored the "shock therapy" program that ruined the Russian economy, now takes space again on your op-ed page, June 4, to offer more destructive advice; this time criticizing the IMF and arguing for a devalued ruble, "Rule of the Ruble."
What? A devalued ruble? When Sachs began his shock therapy campaign in 1989, with the support of the Times, the ruble traded on the black market in Moscow at four to the dollar. It is now the equivalent to 6000 to the dollar and Sachs wants it even cheaper? He sold his program to Boris Yeltsin's finance minister, Yegor Gaidar, soon after Mikhail Gorbachev fled from the scene. Its essence was to throw the economy into the free market all at once, with the key being a lifting of price controls on oil.
At the time, opponents of Sachs in the Finance Ministry invited me to Moscow to make my case against this move to Gaidar in person. I argued that it was necessary to first fix the ruble price of gold, at a rate at least no worse than the four-to-one black market rate, or the sharp rise in the oil price would destroy the ruble's value, bring on runaway inflation, and knock the props out of the economy which depended on the controls.
In his office, I warned Gaidar that if he followed Sachs's advice, his government would fall and he would be removed from office. Alas, Gaidar was elevated to the post of prime minister, carried out the shock therapy, and was driven from office in subsequent elections. The cost in human misery of that economic policy is immense and incalculable. China, getting the same advice, rejected it every step of the way. "You do not burn down your old house until you've built a new one," is how one official of the PRC government told me in Beijing a year later.
The IMF is now right to try to stabilize the ruble, but it can only do so by increasing the demand for it. This does not mean raising interest rates on ruble bills and bonds or by cracking down on tax evaders who are dodging the oppressive rates. It should lower these counter-productive rates, making it easier and more attractive for capital and labor to acquire and hold rubles, and fix its value to gold at its current ruble price. No more shock therapy, please.