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Taming the Speculators: What Should Countries
Do With Their Central Bank Reserves?
Yevgeny Primakov explains where Russia’s Neoliberal Model
Went Wrong
By
Michael Hudson
Global Research, May 14, 2009
Posted by CenPEG
Last
week Izvestiya published an interview with former Premier Yevgeny
Primakov, now president of the Chamber of Commerce and Industry.
(Johnson’s Russia List published a translation on May 8).
The discussion centered on a universal problem – what China
and other Asian countries, as well as OPEC and Europe should do
with the export surpluses and proceeds mounting up in their central
banks from mortgaging or selling off their real estate and industry.
Or to put matters in retrospect, what should they have done to avoid
the neoliberal monetarist ideology that governments should do nothing
at all with these surpluses, not even use them to fuel economic
growth.
If
U.S. diplomats had their way, countries would simply let their foreign
exchange reserves accumulate in the form of loans to the United
States, in the form of Treasury bonds and other securities. Mr.
Primakov has long opposed what his interviewer called “the
fetishization of the Stabilization Fund – our beloved ‘piggy
bank.’” Urging that it be spent on “primary needs,”
to buy tangible capital goods, undertake infrastructure investment
and finance imports to rebuild Russia’s dismantled manufacturing
sector, he explained, “I was always opposed to having the
Stabilization Fund considered something saved for an emergency.
Money needs to be spent inside the country. Naturally not all of
it. Some part should certainly be kept as a reserve.” But
it was Vladimir Putin’s own “initiative to divide the
Stabilization Fund into the Reserve Fund and the Fund for Well-Being.
The latter was to be used to develop the economy and for social
needs. It is too bad that they did not get to it in time.”
Ever
since the Asian financial crisis of 1997, countries that have built
up foreign exchange reserves have found themselves targets of global
raiders. The tactic has been to sell a currency short, that is,
to promise to deliver a few hundred million (or nowadays a few billion
dollars) of it to a buyer (usually the central bank) near the current
price, and then drive down the exchange rate by selling. The central
bank tries in vain to absorb the selling wave, until finally its
reserves are exhausted and the currency depreciates.
Under Prime Minister Tun Mahathir Mohamad, Malaysia protected itself
by not making its currency available for foreign speculators to
buy and cover their short-sale position. But most other countries
have passively built up reserves in an attempt to outspend potential
raiders. Today, however, underlying trends are using up these reserves.
The global financial crisis has ended the real estate bubble that
enabled many countries to cover their trade deficits by selling
off their real estate or simply taking out foreign-currency mortgages
against it. The Baltics and other post-Soviet countries in particular
have been financing their trade deficits by fostering a property
bubble that has led real estate owners to borrow mortgage credit
from Western banks. In the absence of putting in place a viable
domestic banking system, Scandinavian, Austrian and other Western
banks are the only institutions able to create credit. Now that
the global real estate bubble has burst, this foreign exchange credit
is no longer forthcoming. The financial End Time has arrived. Rather
than facing the new state of affairs – chronic trade deficits
are now over-layered with heavy foreign-debt service. Countries
that have built up foreign reserves are running them down.
Many countries are trying to delay the Day of Judgment by borrowing
from the IMF, dissipating the proceeds by subsidizing capital flight
by investors and speculators who can see that exchange rates for
chronic trade-deficit countries are about to plunge steeply. Russia
has joined in expending its foreign-exchange reserves to stabilize
the ruble in the face of capital flight and foreign speculative
selling.
In retrospect this appears to have been inevitable, and indeed was
widely foreseen by critics of the neoliberal Washington Consensus.
The reserves built up during the oil-price run-up last year and
the recent boom in minerals prices are being spent without having
used the proceeds to develop its industry so as to replace imports
and develop export markets for what used to be a high-technology
economy prior to the Yeltsin “reforms” (that is, dismantling
of industry). Russia continued to rely almost exclusively on raw
materials and oil exports. “In our country,” explained
Mr. Primakov, “40% of GDP was created and is created through
raw material exports. The share of industrial enterprises engaged
in development and introduction of new technologies barely comes
to 10%.” The problem is that having given away its mineral
resources and other public enterprises to insiders and their cronies,
Russia has relied on what they choose to leave in the country from
their exports and sale of shares in their companies. “The
prolonged refusal to inject the capital being built up into the
real economy and its direct investment in American treasury securities
instead of its use inside the country to diversify the economy.
… As a result, Russia will most likely come out of the recession
in the second echelon – after the developed countries.”
The alternative, Mr. Primakov said, would have been to use the Stabilization
Fund “to switch the economy to the innovation track and for
its restructuring. ‘Patching the holes does not help for long.’”
But the then-minister of economics, German Gref, fought off attempts
“to cannibalize the Stabilization Fund.” Under the kleptocracy
the money was left to be stolen.
The problem is where to go from here. Neoliberal “monetarist”
ideology conjures up the threat of inflation to deter public spending.
This IMF and World Bank propaganda blocked Russia from investing
in industry during the Yeltsin disaster of the mid-1990s. “Fear
of inflation,” Mr. Primakov explained, “was named as
the main reason that huge amounts of money lay idle. They said that
inflation would soar if what had been built up began to be spent.
At one of the representative conferences, I asked: ‘What kind
of inflation can there be in building roads? The work would just
spur on production of concrete, cement, and metal ...’ But
our financial experts have a monetarist view of inflation. They
are afraid of releasing an additional money supply into circulation.
But in reality inflation rises much more strongly from that fact
that we have colossal monopolization.” Trade dependency leads
the ruble’s exchange rate to weaken, raising the price of
imports and thus aggravating the inflation – precisely the
opposite of what Washington Consensus orthodoxy insists.
I myself have heard Scandinavian and other European officials make
this argument in almost the same words, and it has persuaded many
Third World governments to do nothing with their raw-materials export
proceeds but “save for a rainy day,” not promote domestic
self-sufficiency in food and consumer goods. The argument seems
maddeningly stupid, because it pretends that all government spending
is inherently inflationary, adding to the spending stream without
producing any production to absorb it. The practical effect is to
block countries from growing in the way that the United States and
other developed nations have done – by investing in infrastructure
and other capital formation, with the government providing basic
infrastructure at cost or even freely (as in the case of roads)
so as to minimize the cost of living and doing business. Instead
of having investment in place to show for the foreign exchange earned
by exporting raw materials (and selling off ownership of national
assets), countries that follow this policy are now seeing their
reserves drained rapidly. And as far as government spending is concerned,
the economic collapse is increasing public budget deficits after
all!
Contrast this behavior with Pres. Obama’s February 17 economic
stimulus plan for the United States. When the Izvestiya interviewer
asked Mr. Primakov what he thought about it, he noted that: “In
America investments in ‘intellect’ have been increased
– in science, progressive technologies, and education, and
expenditures for medicine are rising. ... Doesn’t it seem
to you that our package of anti-crisis measures is less ambitious?
… This law should be considered a plan of investment related
to the American economy and society entering the 21st century and
a new technological platform of competitiveness. That is why expenditures
for science have been increased. The same thing, undoubtedly, with
human capital.”
But that is not the Russian strategy today, Mr. Primakov complained.
Russia has been living in the short run. “The TPP (Chamber
of Commerce and Industry) conducted a poll in 720 firms. Only a
third of the managers said that they associate getting out of the
crisis with producing new output. The rest are counting on staff
cutbacks. If the ministries are given the assignment of reducing
expenditures at their discretion, the first thing they sacrifice
is scientific research and experimental design development. However,
research and development should be classified as protected articles
of any budget.”
So much for the free-market policy of automatic stabilizers and
do-nothing government policy, leaving choice in the hands of the
nation’s financial oligarchs. The situation calls for structural
change, coordinated by the government. “If a plane is having
trouble, the autopilot cannot handle an unusual situation. Only
the personal skills of the pilot can save the ship. It is similar
with the economy. Autopilot does not work in extreme conditions.
… Self-regulation of the economy disappears as a factor.”
When asked about the oligarchs keeping their funds abroad rather
than investing them in domestic industry, Mr. Primakov replied that
Russian officials did not “take into account that banks’
interests do not coincide with the interests of the real sector
of the economy. … It should have been explained that after
receiving state support, in using it banks no longer [should] act
as commercial structures but as agents of the state. It should have
been watched to make sure that the state capital was not commingled
with the banks’ other assets in common accounts but was marked
off with a red line. But that was not done. Probably some people
were lobbying for the banks’ interests at that point. And
the bankers hurriedly began to convert the rubles into hard currency
and export it abroad and build up their capitalization” instead
of “extend[ing] credit to the real sector of the economy.”
Oversight was done poorly, and Russia did not even use its public
funds to finance capital investment. But when it comes to what to
do at this late point, Mr. Primakov acknowledged, “Punishing
the banks for what happened means destroying them.”
The problem is how to restructure the financial system to make it
serve the objectives of industrial growth rather than merely facilitating
capital flight. Throughout the world financial interests have taken
control of government and used neoliberal policies to promote their
own gain-seeking – financial gains without industrialization
or agricultural self-sufficiency. Betting against one’s own
currency is more remunerative than making the effort to invest in
capital equipment and develop markets for new output. So unemployment
and domestic budget deficits are soaring. The neoliberal failure
to distinguish between productive and merely extractive or speculative
forms of gain seeking has created a travesty of the kind of wealth
creation that Adam Smith described in The Wealth of Nations. The
financialization of economies has been decoupled from tangible capital
investment to expand employment and productive powers.
Central to any discussion of financialization is the fact that credit
creation has been monopolized in the United States and Britain for
their own national gain. What makes this interview so relevant is
that Mr. Primakov is speaking as head of Russia’s shrunken
manufacturing sector. Russia “practically pushes big business
outside our borders,” Mr. Primakov noted, “to borrow
money from banks there in places where the interest rates are incomparably
lower.” Just as the nation was becoming underdeveloped industrially,
so it and other post-Soviet economies have failed to create domestic
financial institutions to provide the credit that is needed to finance
circulation between producers and consumers. As a result, these
countries are simply fooling themselves to imagine “that credit
can continue to be borrowed abroad ‘for the crisis.’
It is not out of the question that for the first time in 10 years,
the state itself will even go begging for a loan again.” So
a byproduct of today’s crisis will be to put the world outside
of the creditor nations on rations, as it were.
Mr. Primakov was asked what he thought of Moscow Mayor Yuri Luzhkov’s
tracing “the sources of the present Russian crisis [to] the
1990s, when the liberal government permitted the ‘stealing,
squandering, and distribution of natural resources and the largest
sectors of industry to those who could not support their development.’”
He replied that there were many smart managers among the oligarchy’s
ranks, but acknowledged that “It is a different question that
in buying up enterprises (mainly raw material ones) for a song and
obtaining mega-profits, many from the beginning preferred not to
raise the efficiency of production, but to skim off the cream. …
Why think about some processing of raw materials if they bring in
big money anyway in natural form? The state should have entered
that niche long ago. To have done everything to make certain that
some of the petrodollars were pumped into science-intensive industry.”
Contrasting Russia’s failure to industrialize with that of
China and its anticipated 8% economic growth in 2009, Mr. Primakov
noted: “China exports ready-made products, while in our country
a strong raw material flow was traditional.” Now that Western
economies are shrinking, China is “moving a large part of
the ready-made goods to the domestic market. At the same time, they
are trying to raise the population's solvent demand. On this basis
the plants and factories will continue to operate and the economy
will work. We cannot do that. If raw materials are moved to the
domestic market, consumers of such vast volumes will not be found.”
Increasing domestic purchasing power will “merely step up
imports.” That is the price that Russia is now paying for
having failed to sponsor “structural changes in the economy.”
I have cited these long quotations because they have been made by
a man who once had a chance to steer Russia along different lines
than the economically suicidal death trap promoted by the Harvard
Boys and their Washington Consensus. It is the trap into which the
Baltics and other countries have fallen. A decade ago Mr. Primakov
proposed an alternative, based on a resource-rent tax to finance
Russia’s re-industrialization. The government would have collected
the “free lunch” of its raw materials sales proceeds
in excess of their low costs of production. Instead of retaining
the revenue in the public domain from the decades of capital investment
that the Soviet government had made to develop its mineral, oil
and gas resources, instead of using it to finance economic modernization,
Russia simply gave it away to political insiders and let them sell
off shares in these resources to foreign buyers on the cheap. Anatoly
Chubais and his Western “free-market” backers promised
that giving property to individuals in this way would transform
them into forward-looking Western-style industrialists. Instead,
it turned them into Westernized finance capitalists.
Michael
Hudson is a frequent contributor to Global Research.
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