Jeffrey Sachs and Shock Therapy in Eastern Europe

TYLER COWEN: To pick a success from the past, let me mention Poland. In my opinion, Poland has gone very well. It’s a great country. It’s been a success. If I made the following claim, would you agree with it? That you, Jeffrey Sachs, have done more for economic liberty through the medium and history of Poland than almost any other economist alive today? True or false?

[laughter]

JEFFREY SACHS: I’d say that things I recommended were — that was good advice I gave back then. I’m proud of it. It worked out. It was a very remarkable period of my life and a very remarkable moment and it was exactly one of these periods when you’re just struck at the complexity and the mess and one needed to find a way out of that.

Just to tie that strategy in with how I’m explaining my general approach, actually, I made recommendations for a significant, rapid change of economic institutions, structure, and politics that had a very big effect in the internal dynamics of what was happening and the international dynamics.

But the basic idea of course was not mine at all. The basic idea was in the historical moment, and the basic idea was also Solidarity movement’s idea, and here’s what I mean. I was asked at one point, “Write a plan.” It was for me an unbelievable moment which I remember as vividly as anything I remember. Because I said, “I’ll send this to you in a couple weeks.” It was one of Lech Wałęsa’s top advisors who said, “I need it tomorrow morning.”

    One of the great life experiences is the lessons of four years of Harvard all-nighters. So I pulled an all-nighter, and I wrote a plan for transforming Poland from a communist, central-planned economy to a market economy. If anyone’s interested, I’ll send you the document, which I recovered from a box sometime a few years ago.

What he told me was, he said, “I don’t care what you put. You have to explain it, but this has to be about Poland’s return to Europe.” The message was like giving a term paper or a one-nighter. Write your essay on how Poland can return to Europe.

For me, that defined everything. First it was the right idea. It was why it was there. It was why it was wanting to help Solidarity. At the time it was what I believed in. But it also defined . . . They had a clear vision. We want to be a normal country in Europe.

TYLER COWEN: And they are, right?

JEFFREY SACHS: And they are now, completely. It’s totally normal. As one of the greatest leaders of our time in human rights, Adam Michnik, said, “We’re boring.” They went from the great drama of revolution to being a boring country in Europe.

But the point I want to make, Tyler, is that the endpoint was clear for them. Everything else fits, once you have an idea of that compelling focal point. Then I said, “OK.” Like the guy carving an elephant out of ice. Take away everything that doesn’t look like an elephant. Take away everything that doesn’t look like a European normal economy.

TYLER COWEN: Then Russia, which I blame only on the Russians, by the way. But they never had a comparable endpoint in mind. Is that fair to say?

JEFFREY SACHS: I think there are two things. I blame a lot of it on Dick Cheney, so not just on Russia. Russia itself, by virtue of Russia, 11 time zones of the Eurasian land mass, does not have a fixed focal point, and half of Russian history is how we’re a unique civilization, the Third Rome, and half of Russian history is being part of Europe and being part of European civilization. They’ve never settled that question until now.

But the other difference which I found — (I didn’t understand it then, almost at all, by the way. It took me 20 years to understand it, actually.) — was how weird it was that in 1989, and this is geopolitics, which I didn’t understand as it was happening.

In 1989, I made recommendations for Poland. I said several unusual things, like “Don’t pay your debts, get debt cancellation. You need emergency, a billion dollars on this date,” and so forth. Everything I recommended actually ended up happening with US government support.

Then in Russia two years later I was asked by Gorbachev and then by Yeltsin to help them, because they saw what was happening in Poland. They liked that. They wanted something similar. So I said exactly the same things, and the US government kept saying, “No, no way, no way.” I kept saying, “But that kept working there.”

I didn’t understand it in some deep sense for a long, long time, how weird this was. I knew it wasn’t the difference of economic advice. I understand what a financial crisis is.

TYLER COWEN: Culturally weird, you mean.

JEFFREY SACHS: No, how weird it was in the historical moment that things that had worked extremely well, had shown themselves, where I had had Brent Scowcroft and Bob Dole and others strongly supporting it, all of a sudden just no support from Washington. The IMF saying, “We’re not going to do this.” I said, “But, Richard Urban, you did that two years ago in Poland.” “We’re not going to do it.” “Why?” Flat.

OK. What’s the lesson of this? Quite important, actually. It’s a little bit off-topic, but very important. We didn’t want to help Russia in 1991. We wanted our unipolar world. I didn’t know that at the time. For me, I wanted to help Russia. This is a chance for freedom, democracy, market economy, normalcy. Yeltsin defined, he said December 11, when I met him the first time, 1991, “We want to be a normal country.” I said, “I will help you, Mr. President.”

We didn’t want that in this country. What I didn’t understand was everything I said about Poland was immediately accepted because it was good advice and because Poland was going to be a bulwark of NATO. Everything I said about Russia didn’t matter whether it was good advice or not. Russia was on the other side.

TYLER COWEN: But China did it without us, without American help for the most part. What is it about Russia that meant Russia couldn’t do it? The problem was not like a Khrushchev-Kennedy dialog. But Russia must have failed in some other way where China more or less did not. What is that element?

JEFFREY SACHS: Many things. First of all, Russia faced in 1991 an extremely acute financial crisis. If you haven’t lived through a deep, deep, deep financial crisis, it’s hard to understand what it is.

Now we’ve lived through something mild like that in 2008, which was frightening enough. But I’ve now seen them many times and studied them for my whole career. They’re very fulminant. They’re like that meningitis epidemic. They absolutely can rip a society apart before you turn around.

Russia had that. It had that for all sorts of reasons, but one was that the price of oil had declined at $10 a barrel, and Gorbachev had borrowed tens of billions of dollars from 1985 to 1991 and run out of money. They ran out of reserves at the end of 1991. This was a macro, macro crisis, and it was a very bad one.

The same thing had happened in Poland in a different time dimension, but by 1989, so that’s why it called for debt cancellation, a standstill on debt payments, an emergency stabilization fund.

The first point is financial crisis is in and of itself a distinct category of pathology. Russia had it, China, thank goodness for them, didn’t have it. Russia needed help on a financial crisis. That’s number one.

By the time they got out of the financial crisis, which was several years later, because we completely stuck it to them in amazing ways and allowed the crisis to be fulminant for a number of years. The reformers were gone, the corruption was completely out of control.

I don’t want to exonerate the Russians for the irresponsibility and so on and the lack of good strategy. But often in a historical context, to solve a problem you need both sides operating. There are other serious differences, very major differences that are worth just mentioning. We could go into length. But there’s a big difference of being a urban industrial, broken, Soviet economy.

TYLER COWEN: Which was deindustrializing eventually anyway.

JEFFREY SACHS: Which had so overgrown the investor heavy industry, and it was in a lot of collapse, versus being an agrarian, impoverished country, as China was in 1978. The pathways were bound to be very, very different. The geography is different, by the way, because China’s just filled with people who could do low-cost labor right at the ports on the east coast of China.

Whereas for Russia, it’s almost basically a landlocked landmass that was running off of petroleum which had collapsed in global price, which had collapsed in the physical facilities in the countryside, with collapsing steel mills, collapsing everything.

It just looked like a waste dump in 1991 when you went around Russia, absolutely cannibalized airplanes at every airport just rusting away, ton after ton of steel rusting away wherever you turned. Cement melting away wherever you turned. The place had just been a heavy industrial machine for the military-industrial complex for decades.