Streetwise Professor

There are myriad reasons to criticize Pakistan’s President Pervez Musharraf. His numerous attempts to make deals with the Taliban in Waziristan and other Northwest Frontier regions have been unmitigated failures. No one will mistake him for a democrat or supporter of civil liberties. Nonetheless, the hyperventilating criticism of Musharraf by US presidential hopefuls, most notably Hillary Clinton and Bill Richardson, in the aftermath of the Bhutto assassination is just plain stupid. Clinton has called for an international investigation of the Bhutto killing,; this would undermine Musharraf’s already precarious position. Richardson advocated “forcing” Musharraf from power.

So, let’s say Clinton and Richardson get their way, and Musharraf is ejected from power. Who will rule instead? The choice is not between the authoritarian Musharraf and some democratic alternative. Not even Bhutto was a credible democratic alternative. The choice is between Musharraf and Islamic radicals allied with Al Qaeda.

This reminds me of events of 30 years ago–namely, the overthrow of the Shah. The Shah was no prize, an autocrat, a serial violater of human rights. He was unpopular. His campaign to modernize Iran alienated many traditional elements of Iranian society. (See Paul Johnson’s Modern Times for a good overview of this.) Unwilling to continue American support of such an unsavory character, Jimmy Carter et al threw him overboard. And as bad as the Shah was, his successors–Khomeni and the ayatollahs was infinitely worse for America, the world, and even for the supposed beneficiaries of the regime change, the Iranian people. We are still grappling with the consequences of that choice decades later.

Clinton and Richardson are old enough to remember this, not that they give any evidence of having absorbed the lesson. It is so much easier to preen morally like St. Jimmy, and to pretend that the choice is between a imperfect Musharraf and some ideal alternative–that doesn’t exist. The real choice is between an imperfect Musharraf and a demonic Islamist regime.

Given the immense strategic stakes, and Pakistan’s status as a nuclear power, the consequences of choosing badly are likely to be even more catastrophic than those that followed the fall of the Shah. It would be bad enough if Clinton’s and Richardson’s statements are political throwaways intended to appeal to the Democrat primary electorate. The situation in Pakistan is extremely delicate, and anything that undermines Musharraf redounds to the benefit of the Islamists–and to the detriment of the US. Statements by prominent US politicians can have this undermining effect. It would be immeasurably worse if these utterances reflect how a President (gag) Clinton or a President Richardson would govern.

All the alternatives in Pakistan are bad, but some are much worse than others. It is easy to slam Musharraf. It is far harder to identify a credible alternative that would be better for the US–and for Pakistan. Before shooting their big yaps, the Clintons and Richardsons and other candidates and elected officials in the US should consider the real alternatives. As the Carter Iran fiasco demonstrates, sanctimony may be self-satisfying, but self-defeating (in the extreme). For better or worse, for now Musharraf is all that stands between a bad situation and absolute disaster. Under these circumstances Clinton’s and Richardson’s remarks are irresponsible in the extreme.

Aaron Lucchetti reports that J. P. Morgan Chase, Deutsche Bank, Citadel and others are planning to launch a futures exchange in competition with the CME. The article is sketchy on details. For instance, it makes no mention of the clearing arrangements for the proposed exchange. (My guess–The Clearinghouse Formerly Known As BOTCC, the Board of Trade Clearing Corporation. There is a large overlap between the identity of the firms that just acquired all the shares of The Clearing Corporation and the firms mentioned in the Lucchetti article.)

Aaron argues that this initiative arises from bank dissatisfaction with high CME fees. That’s possibly part of it, but there is another angle as well. The big Wall Street dealers also want to protect their position in the OTC swaps market. The CME is aiming to offer clearing services in that market, which represents a direct competitive threat to the swap dealers.

The prospects for the upstart exchange’s success are bleak. It is always difficult for an entrant exchange to challenge an incumbent. (Just ask Eurex or Euronext.LIFFE.) As I’ve written before (both on this blog and in some working papers) due to its liquidity advantage, the incumbent is likely to prevail unless it makes an egregious error (as LIFFE did in 1997-1998.) My prediction: a short-lived price war between the upstart and the CME (and perhaps preemptive CME price cutting) followed shortly thereafter by the upstart’s demise, followed shortly thereafter by an increase in CME fees.

One last observation. The Wall Street firms lobbied the DOJ rather intensively to oppose the CME-CBT merger, arguing (among other things) that entry was not feasible. This announcement kinda refutes that argument, eh?

So Putin is Time’s Person of the Year. Time is one of those publications for people who think they are egg-heads but are more likely to be pinheads. It consists primarily of massive dollops of leftish-conventional wisdom (“LCW”) served up as Deep Insight.

The most annoying part of the article is its regurgitation of the LCW that Putin has restored Russia economically. Here’s the antidote: the Stoner Weiss-McFaul article in Foreign Affairs that argues quite effectively that the Russian economic rebound and Putin’s ascendancy have been merely coincidental, and if anything, Putinism has retarded Russian economic growth. Putin is the beneficiary of the effects of an oil boom combined with the 1998 devaluation combined with a more efficient allocation of resources attributable almost completely to the privatizations and liberalizations of the much denigrated 1990s. A comparison of Russian economic performance with that of other CIS and Eastern European countries does not flatter Putin and Putinism.

The touting of the (chimerical) stability of Russia under Putin is another example of the superficiality that passes for incisive journalism. Umm, Adi, are you deaf? Can’t you hear the growls emanating from underneath the Kremlin carpet? And we are talking about Russia here. Ever heard of a dude named Potemkin? Maybe a little less credulity and a little more digging and pushing might be warranted. Ya think?

The article also highlights Russia’s restored international “respect.” Really. Sourcing on that? Gerhard Schroeder? Putin and too many Russians crave–and get–the kind of respect that thugs and ganstas get. It is fair to say that Russia matters in ways that it did not in the 1990s, but what really seems to matter to Putin et al is that people pay deference; he and his ilk care very little as to the means by which that deference is induced or compelled. Remember that respect and deference are two very different things; respect and resentment never travel together, but deference and resentment very often do. Under Putin, Russia has repeatedly played the spoiler and supported dark forces (the cult of stability doesn’t extend to Lebanon, for instance), and often it appears that there is no larger purpose behind this than to show that it can and it will. Good attention, bad attention–who cares? Attention is all that matters, and bad attention seems to come so much more easily.

As for Putin himself? Well, he was just being himself. The by now familiar tu quoque retorts to any criticism. The aggressiveness. The cockiness. The touchiness about gettin’ respect (which betrays a deep insecurity, if you ask me, and which again seems to mean the “respect”–i.e., deference–that a gansta craves.) It amazes me that anybody who lives west of, say, Minsk, finds this anything but repellent (and that anywhere east thereof finds anything but embarrassing.) But, there’s no accounting for taste. (Or, as I am sure they say in the Time editorial offices, “De gustibus non est disputandum.”)

For other views on the Putin-POTY thing, I strongly recommend Bob Amsterdam, Micheal Weiss, and Jules Crittenden. Each is very different–Bob’s is thoughtful and gentle, Jules’s is thoughtful and scathingly cutting, and Michael’s thoughtful and somewhat in-between in tone–but each effectively skewers Time’s annoying pretensions and Adi Ignatius’s credulous and fawning puff-piece.

Dr. Roger Pielke has resumed his excellent Climate Science blog. It is particularly refreshing in the aftermath of all the Bali-hooey to read succinct commentary from someone who recognizes that the science is almost never settled, and hence keeps his mind open to all the evidence. His recent posts on the lack of evidence that water vapor in the atmosphere is increasing (as the climate models predict it should) are particularly illuminating. The positive feedback from water vapor is where the real temperature increasing action in the climate models comes from; the absence of parallel increases in water vapor and temperature is inconsistent with the predictions of these models. In real science, this is called “rejecting the hypothesis.” In global warming “science” this is called an inconvenient truth that shall not be spoken of.

Anyways, it is good to see that Dr. Pielke recognized the importance of his voice and his viewpoint, and is using the forum of his blog to continue to disseminate his science-grounded approach to a broad audience.

Things are still in flux regarding how the Putin-Medevedev condominium is going to work. From RFE/RL Newsline:

Presidential-administration chief Sergei Sobyanin has ordered the presidential domestic policy and state-legal departments to develop “variants for correcting federal legislation and law-enforcement practice in favor of strengthening the power of the chairman of the government,” “Argumenty nedeli,” No. 51, reported on December 20. President Putin said on December 17 that he would not seek to change the balance of power between the president and the prime minister (see “RFE/RL Newsline,” December 18, 2007). The measures under consideration include amending federal constitutional law so that a president can dismiss a prime minister only if the move is backed by four-fifths of the State Duma and two-thirds of the Federation Council; “reestablishing the practically abolished mechanism for removing a president from office”; and giving the prime minister control over the “power departments,” state corporations, and natural monopolies. According to “Argumenty nedeli,” the federal constitutional law on the government is sufficiently contradictory that it would not need to be amended in order to give the prime minister control over the Federal Security Service, Interior Ministry, Prosecutor-General’s Office, Investigative Committee and Justice and Emergency Situations ministries. “The premier can create and head a deliberative body,” the weekly wrote. “For example, the State Committee for Defense, such as Stalin had. The defense minister, chief of the [armed forces’] General Staff and first deputy prime minister overseeing the [military-industrial complex] could be included in it.” The prime minister can also be put in charge of bodies like the National Antiterrorism Committee and the State Antinarcotics Committee, wrote “Argumenty nedeli,” adding that the only bodies over which the prime minister will have difficulty establishing direct authority are the Federal Protection Service (FSO), the president’s Main Department for Special Programs (GUSP), and the presidential security service. The weekly cited unnamed Kremlin sources as noting signs of “latent competition” among the three contenders for the post of Kremlin administration chief under the next president, identifying them as Sobyanin, deputy Kremlin administration chief and presidential aide Vladislav Surkov, and presidential aide Igor Shuvalov.

Russia Profile has some decent commentary on this issue. Stephen Blank’s seems closest to the mark:

Putin has stated that he would not try to usurp power from the President as Prime Minister, but this isn’t something that can be trusted. In fact, at this stage it is impossible to know who will ultimately prevail, Medvedev or Putin. But the powers of the presidency are such (and I suspect that Medvedev is no lightweight or liberal, just another talented civilian bureaucrat) that over time he is likely to become the more powerful of the two men, and the most powerful person in Russia. Of course, all this speculation reveals the absence of a rule of law in Russia, and the fact that the regime is one of men and not of laws. Moreover, all the speculation of Putin trying to engineer a constitutional reform to achieve a parliamentary system based on a ruling party, that would result in a facsimile of European democratic models, omit the fact that Putin has done everything he could to demolish democracy and constitutionalism in Russia. Why would he turn around and undo his own handiwork, especially since he is so proud of his achievements?

We would all thus be more informed and understanding of Russian developments if we resist the inevitable and ubiquitous efforts by political scientists to find analogues for Russia in the lexicon of Western political science, which is imbued with European and American models. In fact, Putin’s system is a Tsarist system, and the structure of Russian rule resembles nothing as much as the one depicted in the great institutional studies of late and mature Tsarism (Leroy-Beaulieu, Korkunov, and the more recent Zaionchkovskii and Yaney). Understanding the repetitive nature of Russian political history, with its Tsarist court and intriguing boyars, whose main motives are power and greed as they all serve the state, as the only way of achieving these objectives, would be more productive than the endless and essentially misinformed speculation about Western models in Russia.

I agree with Blank that Putin’s pronouncements about no reshuffling of authority are not credible, and the Argumenty nedeli piece reinforces that. I also think that all the conjectures about Medevedev’s docility and loyalty to Putin are over the top. Maybe that’s true now, but once he sits in the chair, his whole perspective could change.

What is certain is that the transition period will be beset by uncertainty. That is incredibly dangerous in a system like Russia’s. I continue to think that the mental model of the Russian government as a cartel of violence specialists cooperating to split rents is illuminating. And cartels are vulnerable to breakdown in conditions of increased uncertainty. Divisions of authority are especially destabilizing to a cartel. If Medvedev becomes President and Putin prime ministerde jure authority will be more divided than at present, and more importantly in a rule-of-man system (as Blank characterizes it), de facto powers will certainly be more divided. In this more unstable and divided environment, the likelihood of a cartel breakdown is much more likely. And in Russia, a breakdown of the cartel of violence specialists means violence. Potentially lots of it.

Thus, as Robert Amsterdam has often noted, Putin’s vaunted stability is chimerical. It could disappear quickly and violently. I am convinced that Putin and other cartel members also understand the tenuous nature of the current equilibrium. How else to explain their extreme responses to even the most pathetically weak demonstrations of opposition and their efforts to control tightly every aspect of the political system? That is why I continue to believe that things are still in great flux, and the anointment of Medvedev is only another scene, and not the finale.

This article from Bloomberg recapitulates many of the points I’ve made regarding the mirage of Russian military resurgence. This Paul Goble post lays out the details of the Russian military’s pressing manpower problem. Demography may not be destiny, but it can sure create daunting problems in maintaining force levels.

It’s not like this demographic problem is news; the Soviet military began feeling the pinch in the late-80s (see William Odom’s The Collapse of the Soviet Military.) Draft dodging has been rife since late-Soviet times. Yet, facing this crunch, Russia has reduced the term of service from two years to one, which essentially doubles the difficulty of maintaining force levels. The decision to cut the term of draftee service despite the dwindling numbers of eligible conscripts and the difficulty in getting them to report almost certainly reflects the pernicious direct and indirect effects of dedovshchina. This cancer, which began growing with changes in the Soviet conscription system in 1967 quickly became so deeply rooted that it survived the concerted efforts of Marshall Yazov, Soviet MOD under Gorbachev, to eliminate it.

It is increasingly clear that there is a yawning disconnect between Russian rhetoric and reality. Putin suspends Russian participation in the CFE treaty with great fanfare, but it is evident that as a practical matter this is irrelevant because Russia has neither the resources (most notably human) nor the inclination to expand its conventional forces beyond the limits imposed by the treaty. Ivanov makes bold statements (which his underlings tried to walk away from) about the necessity of Russia maintaining nuclear parity with the US–at a time when, as the Bloomberg article and other sources make clear, Russia’s strategic forces are continuing to erode.

Is this rhetoric for internal consumption? Is it a bluff directed at foreigners (not just the West, but China)? Hard to say. What is clear, however, is that the bold words bear little relationship to the actual situation.

The reality does help to make sense of recent statements by high ranking Russian military officers. These statements are bursting with paranoid rantings. The paranoia likely reflects (a) a keen awareness of Russia’s true military weakness, and (b) an intent to get the government to pony up more money to actually buy, you know, weapons and stuff.

In any event, it is always bizarre to see such a gap between public pronouncements and verifiable reality. The Emperor has no clothes, as it were. Or, perhaps more accurately, the Tsar has no uniform.

Boy, does this sound familiar. A description of Muscovite politics from Dominic Lieven’s Nicholas II:

Moscow politics had something of the Al Capone air. To outwit rival princely gangs in northeastern Russia, not to mention the Tartars, it was vital for Moscow’s rulers to stick together and for the prince’s absolute authority to be recognized. Life was unpleasant for any lieutenant who aroused the boss’s ire. On the other hand the princely boss could not rule without his lieutenants. The rewards of unity and ruthlessness were enormous. . . . On the brilliantly successful example of gangster politics the Orthodox Church put a religious and patriotic stamp of approval and nineteenth century nationalist historians scattered phrases abut Russia’s unity, power, and world-historic destiny.

I have not commented about Putin’s anointing of Dmitri Medvedev because I don’t do Kabuki theater or puppet show reviews.

Suffice it to say that any beliefs that this is necessarily final are painfully premature. Putin is extemporizing to maintain a precarious balance. What might work today can be–what was the phrase?–ah, no longer operative tomorrow. Putin is attempting to simultaneously (a) maintain power, because he likes it, because his life and fortune depend on it, and because things will go to hell in a handbasket if he doesn’t; and (b) do so while maintaining a simulacrum of constitutional legitimacy to give a fig leaf to the Steinmeirs and Schroeders and various bankers and investors that do his bidding. This is a delicate task; (b) is apparently more of a constraint than I had anticipated. The difficulty of balancing the internal factions while dealing with external realities means that the situation is very fluid, and as a result, Medvedev shouldn’t be measuring for Kremlin curtains just yet. He is eminently disposable, and may well be disposed sooner rather than later if exigencies dictate.

If Putin fails in his balancing act, things will go all Chicago a la Capone v. Moran. I would stay in on St. Valentine’s Day if I were even remotely involved in Kremlin infighting.

Cassandra was the Trojan woman whom Apollo gave the gift of prophesy–and the curse of never being believed. Yegor Gaidar sees that Russia’s future depends crucially on coming to grips with its past, but present events make it clear that his prophesies, like Cassandra’s, fall on deaf ears.

In his new book, Collapse of an Empire, Gaidar has a pressing purpose: to alert Russians–and the world–to the dangers denying the real reasons behind the collapse of the USSR. Gaidar has a strong historical sense (which is often absent among economists, alas), and from his understanding of history (most notably, of Weimar Germany and post-Hapsburg Austria-Hungary), he knows that imperial collapse can be disorienting and dispiriting to the empire’s subjects, even if the empire brutally repressed them. He also knows that demagogues and revanchists can exploit this disorientation and depression to achieve power. Those suffering from post-empire depression are very susceptible to demagogic myths that imperial glory was destroyed by “stabs in the back” from enemies foreign and domestic, and that restoration of this glory requires the people to unite behind an authoritarian leader who will ruthlessly pursue traitors at home and take revenge on foreign foes.

But he foresees that this is ultimately the road to disaster:

The legend of a flourishing and mighty country destroyed by foreign enemies is a myth dangerous to the country’s future. . . . This is the picture that dominates Russian public opinion: (1) twenty years ago there existed a stable, developing and powerful country, the Soviet Union; (2) strange people (perhaps agents of foreign intelligence services) started political and economic reforms within it; (3) the results of these reforms were catastrophic; (4) in 1999-2000 people came to power who were concerned with the country’s state interests; (5) life became better after that. This myth is as far from the truth as the one of an unconquerable and loyal Germany that was popular among the Germany that was popular among the Germans in the late 1920s and 1930s.

The goal of this book is to show that picture does not correspond to reality. Believing that myth is dangerous for the country and the world.

As an aside, I can speak to the ubiquity and power of this myth. I have had a couple of Russian students in the United States. Both were intelligent and worldly. One had lived in the United States for 10 years. Both were going to business schools. And each believed that Gorbachev and Yeltsin were American agents, and that the collapse of the USSR was a CIA plot. The first time I heard this I was surprised, but thought it was an aberration. The second time I heard it I was stunned.

But back to Collapse of an Empire. Gaidar’s basic thesis is that the economic–and hence political–collapse of the USSR was inevitable:

[The collapse of the USSR] was preordained by the fundamental characteristics of the Soviet economy and political system: the institutions formed in the late 1920s and early 1930s were too rigid and did not permit the country to adapt to the challenges of world development in the late 20th century. The legacy of socialist industrialization, the anomalous defense load, the extreme crisis in agriculture, and the noncompetitive manufacturing sector made the fall of the regime inevitable. In the 1970s and early 1980s these problems could have been managed if oil prices had been high. But that was not a dependable foundation for preserving the last empire.

Gaidar recounts the chronology of collapse in excruciating detail; too much detail at times for my taste, but a choice that Gaidar defends as necessary to overcome the power of the myth.

Gaidar shows that agriculture was the Achilles heel of the Soviet system. Stalin ruthlessly exploited agriculture to fund industrial development. This worked for awhile, but only served to demonstrate that supply curves are much more elastic in the long run than the short run. In the short run, peasants could be forced to turn over the bulk of their harvest in exchange for a pittance. In the long run, however, the attempt to extract surplus from the countryside and the necessity of attracting labor to manufacturing and megaprojects led to a flow of the best and most productive labor out of agriculture and into industry. Soviet agriculture became progressively less efficient as a result. Combine this with assorted insanities, like the virgin lands program, and what was once the world’s breadbasket became a farming basketcase.

Forced to import larger and larger quantities of food, but non-competitive in the production of machinery or other manufactured goods, the USSR relied on the export of oil to pay for it. With increasing oil output from rich western Siberian fields, and spiraling prices (courtesy of OPEC and declining US production), for a time the USSR was able to overcome the creeping weakness of its agriculture sector, and even go on an aggressive military and political offensive that spanned the globe. But soon declining oil production (attributable to extremely inefficient Soviet practices) and plummeting prices (courtesy of growing non-OPEC output, burgeoning Saudi production, and more efficient consumption of energy in the West) conspired to create an acute fiscal crisis in the USSR.

Gaidar chronicles the results of this crisis, and the government’s (and Party’s) incompetence in dealing with it. The rigidity of a centrally planned system, the rudimentary nature of the financial system, the acute political constraints facing the country’s leadership, and the geronocratic nature of that leadership, made it impossible to respond. Things spiraled out of control. Price controls prevented smooth adjustment to external shocks. Fear of political unrest prevented the leadership from lifting the controls. Faced with incredible strains on the budget, the government ran the printing press overtime. Partial “reform” measures, and improvident policy choices (such as the anti-alcohol campaign that deprived the government of a large share of its domestic revenues), only made things worse. In the end, everything came tumbling down.

Gaidar’s narrative is compelling. To a Chicago-trained economist, it is almost axiomatic that socialist system that suppresses and distorts almost every market signal; deprives individuals of the ability to make coherent economic choices; and resorts to force in an attempt to make its irrational system work; will fail in the end.

To the Russians who grew up in the system, or who grew up in the aftermath of its collapse, alas, it is not so obvious. As Gaidar notes, the fall of an empire seems anything but common sense to those that lived it. Putin and the siloviki are exploiting this to the hilt, and are perpetrating the myth that the collapse of the Soviet Union, and the economic and social chaos that followed this collapse was not due to the inherent defects of the Soviet economic system, but instead resulted from malign external forces. The recent “elections” indicate that large swaths of the Russian populace have fallen for this myth hook, line, and sinker.

So for the present, anyways, Gaidar is doomed to play the role of Cassandra, prophesying that disaster will follow Putin’s Plan, but cursed to be disbelieved and ignored. Putin and the siloviki, like the Bourbons, have learned nothing and forgotten nothing. They have not learned from what destroyed the Soviet Union, but have not forgotten that the Soviet Union was once a colossus before which the world trembled. They want to restore this colossus (admittedly, and happily, without all the totalitarian baggage), and are pursuing this goal relentlessly.

I believe that Gaidar is right that down this path lies ruin. I fear, however, that Russia will have to find this out the hard way. So Yegor Gaidar is a prophet without honor in his own country, among his own kin, and in his own house. But I believe he is a prophet nonetheless. And I heartily recommend that you read his excellent book.

Here’s an excerpt from an interview with Yevgeny Yasin of the Supreme School of Economics (H/T JRL):

Yevgeny Yasin: When the authorities start meddling in economics just to promote their own selfish interests, they are begging for trouble. Payback inevitably comes, sooner or later. Finance Minister Aleksei Kudrin stashed oil and gas export revenues in the Stabilization Trust and kept refusing all suggestions to use these finances. In any event, he was forced to give in earlier this year. The soaring inflation is one of the results of his weakness. As for what will happen after the presidential election, yes, another price-rise is a distinct possibility. New programs are charted and adopted, finances are invested in institutes of development. The state in the meantime never invests in development. Is it too busy? Perhaps it is. We see vicious infighting in Putin’s administration. Cherkesov’s men get picked up, then the deputy finance minister. The Union of Right Forces was actively smeared and compromised in the course of the parliamentary campaign. If you ask me, it is Sechin’s siloviki mounting a campaign against liberals.

Mark my words, it all will cost us dearly one fine day.

Question: How will all these games in the Kremlin affect the lives of average Russians?

Yevgeny Yasin: My calculations tell me that the fall of business activeness in Russia has cost the country 2% of the GDP every year for several years already. Businessmen fear for their assets and their property. As things stand, state corporations serve as a formal smoke-screen for the so called distributive coalitions within the corridors of power. This process should be put an end to or Russia will find itself in the periphery of global economy. A lot is at stake.

Instead of dealing with the oligarchs who have never had anything to do with him, Putin should focus attention on the ones from the inner circle, from his own entourage. He never does, though.[Emphasis added.]

Yasin echoes two common SWP themes. First, the erosion of property rights in Russia, and the concomitant effect of this on the Russian economy. (I’d like to know the basis for his 2 percent of GDP number.) Second, as I noted most recently in an post from earlier today, the use of the state to direct resources to individuals in power, i.e., the return of patrimonialism.