Faculty & Research
Taking Account of Accountability: Academics, Transition Economics, and Russia
by
Bruce Kogut
and
Andrew Spicer
2005/62/ST
Working Paper Series
Taking Account of Accountability:
Academics, Transition Economics, and Russia
Bruce Kogut* and Andrew Spicer**
September 2005
This paper, long in the making, owes debts to many people and institutions, foremost, to the reflective policymakers at the World Bank. We would like to thank participants at seminars held at the Center for European Studies at Harvard University, World Bank, University of California at Irvine, Strasbourg University, INSEAD, University of Pennsylvania, Santa Fe Institute, and the Society for the Advancement of Socio-Economics; for the comments on variations of drafts by Alice Galenson, Ira Lieberman, Gerry McDermott, Brian Uzzi, and Marc Ventresca; and the research assistance of Gokhan Ertug, Kedar Phadke and especially Mark Riddle and Anu Seth.
*INSEAD, [email protected] **University of South Carolina, [email protected] ABSTRACT
The performativity of ideas implies accountability: to what extent are academics who create ideas responsible for the consequences? We assess academic accountability by analyzing three domains (academics, international financial institutions, and Russian policy makers) in the case of transition economics and Russian mass privatization. Through a citation analysis, we observe a cohesive economics community and an established international policy channel by which ideas are enacted. However, the chronology of events indicates that the academic ideas surrounding Russian mass privatization were strongly shaped by political considerations. A content analysis of World Bank field documents show that pragmatic policies gave away to an endorsement of mass privatization promoted by one set of reformers in Russia. Events legitimatized economics and economists, as much as economics legitimized policy. At the end, legal and political institutions enacted accountability, whereas academic accountability was lacking. We ask why.
2
“Not ideas, but material and ideal interests directly govern men’s conduct. Yet very frequently ‘world images’ that have been created by ideas have, like switchmen, determined the tracks along which action has been pushed by the dynamic of interest”. Max Weber (1946a: 280)
“Knowledge can be true or false, while action can only be successful or unsuccessful, right or wrong. It follows that an observing which prepares a contriving must seek knowledge that is not merely true, but also useful as a guide to a practical performance. It must strive for applicable knowledge”. Michael Polanyi (1962: 175)
Ideas etch deep traces in the history of human events, and yet their agency remains a controversial province of debate. Weber’s seizure of both horns of the idealist and materialist traditions relied upon the conjunctive argument that ideas can be causal at critical historical breaks. Yet, if ideas are switchmen, is there accountability in the case of a train wreck?
Accountability of ideas is highly pertinent to the growing literature that details the many gaps between a policy theory and its failures, such as poverty social science, development economics, privatization, and tax policy.1 Surely, an important origin of this gap is that academic communities evolve by their own logics and incentives, where abstraction is valued over application (Abbott, 2001: 136ff.). There is a difference after all in the codified knowledge to which science aspires, the experiential and tacit knowledge that an academic learns in the practice of his or her craft, and the local and practical knowledge of how things are done “here”, that is, the beliefs situated in the field of practice. It is a distinction that presages a conclusion why good academic knowledge is often not good practice.
1 See O’Connor (2001), Hood (1994), Flyvberg (2001), and especially the incisive study by Scott (1998). For an earlier treatment, see the sagacious book by Lindblom and Cohen (1979: 44) and their distinction of “knowledge and ordinary knowledge”.
3 This putative disjoint reflects a belief in the value of institutional insulation – often called the ‘ivory tower’— and in interest-free intelligentsia whereby academics are academic and by construction, apart from the world of application. The notion of
‘performativity’ proposed by Callon (1998) and developed by MacKenzie and Millo (2003) challenges provocatively this appealing presumption of a disjoint between idea and practice.
In paraphrasing Callon, MacKenzie and Millo (2003: 108) write that economics as a body of ideas ‘performs the economy’. As evidence, they demonstrate how Black-Scholes option theory changed trading behaviors. Economics, and economists, are endogenous to the subsequent worldly behaviors under study.
The idea of performativity entails logically a corresponding notion of accountability.
Whereas economics (and surely science more broadly) enact the economy and society in powerful ways, the question of accountability is nevertheless largely ignored.
Accountability can be measured by the impact on clients: the public who consume the reports, the patrons who finance it, the users who apply it. Yet, the primary clients for academic research are other academics; after all, Black and Scholes did not patent their result as a trading algorithm but quickly put their paper into the public domain by publishing it.2 Yet, there is no board of accountability for false results, or malpractice legal suits in social science. It is this accountability gap between what academics praise as good work and what is good for the world that is the topic of the following analysis.
The historical events that led to the transformation of dozens of countries from autocratic socialism towards varying degrees of democratic capitalism represent a quasi- natural social science laboratory for the understanding of ideas, their performativity, and their accountability. The constitution of society and polity in the most fundamental sense
2 See Black’s account (1989). Even in financial economics –which arguably is one of the economic sciences closest to markets willing to pay for innovation, Lerner (2002) found that only 4 patents were issued to universities between 1971 – 2000 out of 445 patents in finance; compared to the university share in biotechnology or life sciences, this is a relatively smaller ratio.
4 had been shaken and uncertainty over which tracks to choose following communism was expressed through debate, politics, and events. Elster, Offe, and Preuss (1998) emphasize rightly that the infrequent engagement of military units in this revolution points to the diffusion and dominance of a common ideological belief that change was required. Ideas trumped force. The supply of ideas to those actors implicated in this history did not exist as an abstract schedule of choices, but as instantiated in the fluid context of colliding and overlapping fields and arenas. These fields consisted of the community of academics, of international financial institutions, and of the plurality of emergent interests that contended for power and influence in post-soviet conditions.
In this article, we analyze the overlapping jurisdiction of these fields in which academics pursue knowledge and career and in which policy makers formulate ideas and politics. The analyses of these three domains (academics, international financial institutions, and Russian policy makers) permit an individual and collective assessment of the role of a particular class of actors and their ideas, namely academic economists, as “switchmen” and as performative agents. This focus on economics itself requires justification. Why should we not say other social sciences perform the economy? The justification lies, as we show below in the domain of privatization policies, in the competitive expansion of economics within what Abbott (1988) would call a system of academic professions, particularly in the realm of policy.
This analysis has an ulterior conclusion that we explore at the end of the paper: given the complex and multi-faceted nature of transition, why did economics and economists dominate the policy discussion? Where were the other social sciences, such as sociology?
As a type of counterfactual exploration, we analyze briefly sociology’s positioning in these three domains of academics, financial institutions, and policy makers. If one accepts the importance of feedback on ideas and careers, this consideration raises the speculative
5 question of what the ‘no-show’ of non-economic disciplines meant for the development of ideas in other social sciences and their ‘performativity’. We consider the possibility of a lock-in of the policy void in the social sciences other than economics, as well as to whether there are self-governing mechanisms that correct for bad policy advice.
The paper is organized as follows. We first describe the principal ideas in the public debate following the collapse of the Communist system. A subsequent examination of citation patterns in transition economics establishes a principal thesis: there is a prestige structure in economics, hence indicating an internal dynamic that generates hierarchy. We then show that many of the economic elite interacted with local Russian elites. Yet, their impact was to convince international organizations to support an already established mass privatization program that contradicted the pragmatic knowledge of the field officers responsible for the Russian program. Errors and legal violations provoked systems of institutionalized accountability within the World Bank and the American Congress and judiciary. However, accountability within academics for the effects of ideas acted upon the world was negligible. We speculate as to why.
Background: Mass Privatization and the History of the Idea
The policy we study is privatization and the particular context is Russia.
Privatization consists of two steps: first, changing the legal form of state-owned enterprises to permit private ownership (called incorporation) and, second, the transfer of ownership to private owners (actual privatization). This transfer can be done by auction or private placement, by an initial public offering in stock markets, or by vouchers distributed to the public. The particular peculiarity of the privatization decision in many transition countries, including Russia, was the decision to privatize in mass. Mass privatization consists of the distribution of vouchers to the population (sometimes free, sometimes by a fee) that can then later be redeemed against shares. This redemption can happen in many ways. The Czech
6 Republic used a sophisticated electronic trading system; the Russians used a fairly elementary system by which individuals either traded their shares to investment funds, or physically traveled to the site of the company to exchange vouchers for shares. There are operational details (such as should vouchers be given away or sold, should investment funds be allowed, how should shares be registered, etc.) that required technical assistance and trial-and-error learning. The value of the codified advice to privatize by mass distribution depended critically upon the extent and content of this experiential learning.
More than 8,000 acts of privatization were completed around the world between
1985 and 1999, not including the mass privatization programs (Brune 2003). These sales were valued at more than $1.1 trillion (in constant 1985 US dollars). In this accounting of economic reforms, Bockman and Eyal (2002) point to the prior exposure of socialist countries to economic theories of decentralized market socialism prior to the collapse of communism.
Despite common cultural diffusion, the responses across central and eastern
European countries have been very heterogeneous. Part of the explanation for this heterogeneity is that these countries differ in their domestic conditions, as would be suggested by the criticisms of world society theory.3 There is though an observation more relevant to our thesis concerning the distance between the academic theory and the workable practice. As one looked West across the European landscape from the socialist countries, reformers asked why should the market reforms take the form of privatizations given the examples of many western countries with state-owned enterprises? Did not the theory of market socialism appeal to the “third way” in socialist countries because it permitted what seemed to be the best of both worlds: state ownership with market prices?
3 On world society, see Meyer et al. (1997); on heterogeneity, see Buttell (2000); for broader criticisms, see Campbell (1998).
7 The missing account in these narratives is the politics of discourse, the not-so- hapless academic entrepreneur, and the uncertainty over the best policy. In the conditions of great uncertainty over causality, the academic entrepreneur plays a substantive role in providing the legitimation and world image to support policies. The science is imperfect, the knowledge is not fully developed, but entrepreneurs provide the articulation; the application of these ideas to economic reform policy, to recall Polanyi’s (1962) distinction, appears to meet the criteria of “performance” in their implementation in the 1990s. In fact, the evidence regarding the welfare consequences of privatization was largely unknown in
1990. The empirical results regarding privatization were quite mixed, with studies indicating positive and negative results. For example, the well-known study by Vickers and Yarrow
(1988) on the UK experience pointed to success and failure. In theory, Sappington and
Stiglitz (1987) and Laffont and Tirole (1991) provided arguments that supported state ownership in some cases.
In contradistinction to a homogeneous society, Dezalay and Garth (2002) consider
American academic economists as competing in “palace wars” that provided different world views. The economist wars echoed in many countries, such as in Chile (Valdes, 1995) and
Mexico (Babb, 2001), and reflected more broadly the dissemination of American trained economists throughout the world (Fourcade-Gourinchas, forthcoming). These palace wars were very much in place regarding privatization, in which there was no clear consensus and few empirical studies in the academic community.4 The palace wars were also present in the debates in situ in central Europe. In Poland, an active debate occurred in western publications, partly because of the participation of academics, including several western
4 This point is best summarized by the title of an article in the Economic Journal: “Privatization: A Policy in Search of a Rationale” (Kay and Thompson, 1986).
8 ones, and also because Polish academics had unusually close ties to the West.5 The Polish discussion drew in Jeffrey Sachs, an economist from Harvard, Bulent Gultekin, a finance professor at the Wharton School and previously responsible for the first Turkish privatizations, Roman Frydman, an economist at NYU, and Andrej Rapacyznski, a polymath law professor at the Yale Law School; the latter two provide one of the best summaries of the debate at that time (Frydman and Rapacyznski, 1994; see also Gultekin and Wilson, 1990; Lipton and Sachs, 1990). The economist Leszek Balcerowicz –later
Minister of Finance and Deputy Prime Minister—referred to the era of this debate as the
“period of unusual politics”, stating an urgency to act before events could reverse the opportunity for change (Balcerowicz, 1994). This sense of urgency infused the Polish discussion, as well as that of other countries.
This debate focused on two issues. The first consisted of how to distribute shares in
Poland in the absence of stock markets and large domestic savings. The sale of the largest enterprises in any country causes an imbalance between the valuation of the companies and the available domestic savings; selling the companies to foreign investors (as Hungary did more than others) was politically not possible in Poland. The more subtle problem of distribution concerned the high transaction of sales: buyers would be subject to “asymmetric information” and hence trading spreads would be large, fees for small sales would be high, and the provision of information would be costly.
The second issue was corporate governance. If the purpose of privatization is to increase efficiency, then ultimately better corporate governance is required. One could argue that market competition for products (and for labor and managers) would be sufficient to force companies to improve. However, if this is true, competition would force all companies –regardless whether state or private – to improve; competition, not privatization,
5 Many became leading politicians: Balcerowicz became minister of finance, and Belka, prime minister. The idea of vouchers is also attributed to one of the participants in the Polish discussion: see Nellis (2002).
9 would then be the policy focus. To achieve better corporate governance, it was recognized that some form of concentrated ownership would be necessary; yet, mass privatization posed the problem of dispersed owners and entrenched managers, often referred to as the Berle and
Means dilemma in reference to the classic 1930s study of US large firms. Most solutions – the best articulated being that of Frydman and Rapacynzski (1994) – entailed the creation of mutual funds which would hold the shares of firms and provide monitoring; the Polish citizenry would invest in these funds. By and large, these proposals were enacted in law but not implemented. Poland was criticized for its backwardness, until it emerged as one of the brighter stars of the transition countries by the late 1990s.6 Later efforts to understand how
Poland was able to grow despite the poor privatization record led to speculations that worker councils played a monitoring role to prevent management from theft (Nellis, 2002).
The Geography and Academic Hierarchy of Transition Economics
Thus, the western debate over transition and privatization in reference to Russia grew out of the plethora of discussions that were taking place throughout the former socialist bloc countries. Since the key actors in these discussions were economists, we turn first to an analysis of their interactions independent of wider events, and then broaden the inquiry to look at the linkages to international financial institutions and to policy makers in Russia.
The economics community provides an unconventional, but appropriate field for the study of ideas and policy. Marked by a formative socialization, there is considerable evidence that economics training is a transformative experience for doctoral students that creates strong professional identities. Colander and Klamer (1987) found that economic graduate students arrived largely liberal in their politics and interested in policy, but their concerns subsequently shifted toward mathematics and problem solving abilities. They
6 Meanwhile the Czech Republic moved ahead with their mass privatization program, unassisted by international financial institutions. It won the admiration of the World Bank before dissolving into a miasma of corruption (see Kogut and Spicer, 2002).
10 ranked as unimportant knowing the economic literature, history, or the economy. Carter and
Irons (1991) argue that economists are made, not born. They cite a battery of experimental studies in which economists choose to maximize their interests over a more ‘equitable’ division. Experiments show that the observed division reflects strong concerns over equity; economists are more likely to appropriate more of the money. While this result holds true for first-year economists too, Carter and Irons note that these and correlated beliefs are enforced during the course of study. 7 While too much can easily be inferred from experiments, the triangulation of these studies indicate an inculcation of cognitive structures that are identity forming.
In addition, economics has currency in policy and industry circles. For the year 2000, less than 50% of the graduating doctoral students in economics (948 in total) took jobs or post-graduate positions in universities or colleges; 18.6% entered industry and 12.6% entered government. For the years of our study (1990-1994), less than 60% entered academics. 8 A study of membership of the professional association, the American
Economic Association, indicates that 55% of the current 7704 economic faculty (including
Deans) belonged to the AEA (Siegfried, 1998); assuming that similar percentages exist for doctoral students, it is highly plausible that about 50% of AEA members are not current economic academics. Consequently, economics has the desirable feature for this study of being a well-defined community, with identifying beliefs, and yet membership that extends to policy and industry.
Policy Linkages between Economics and the World Bank
7 These debates are published in the Journal of Economic Perspective, which, as Laband and Piette (1994) note, grew at an extraordinary rate in subscriptions, suggesting a stratification in technique regarding mathematics. 8 Data from Scott and Siegfried (2002: 530.) Note that the demand by the American government for economists dates back to the 1930s (Stryker, 1989).
11 A second desirable feature of studying transition economics is the prior existence of ties between the academic community and international financial institutions, as Fourcade-
Gourinchas (forthcoming) has noted. These linkages between economic academics and major international organizations date back to the League of Nations. Except for the
International Labor Organization, the League did not have specialized agencies. With small staff, it borrowed economists from around the world, and temporary directors included
Gottfried Haberler, Jan Tinbergen, and James Meade. In reviewing this history, Jacques
Polak, a prominent economist at the International Monetary Fund, concluded that “this range of activities made the League an important contributor to the spread of economics among participants in many countries” (Polak, 1997: 214).
This historical legacy became the foundations of the post-war international financial organizations. Because of its centrality to the privatization history we explain below, the
World Bank is of particular interest. It emulated the creation of an in-house research department when the Bank president, Robert McNamara, created a research economics department that increased the demand for economists, and the primacy of economics; it also led to strong ties to the economic development community through consultancy contracts.
Its Young Professional Program, started in 1963, by 1991-1995 was dominated by those with educational backgrounds in economics and finance. Of the 164 young professionals,
58% were in economics, 21% in finance, and 21% in other fields. Over 62% had degrees from US institutions, 15% from the UK and 23% from other countries (Kapur et. al., 1997).
The dominance of certain schools of economics in the World Bank is especially striking in survey of the educational training by policy, research, and external affairs staff as of 1991 (Stern and Ferreira, 1997: 586-587). Stern and Ferraira surveyed 532 individuals and received information from 465. Of those surveyed, 83% held degrees in social sciences, with 65% of these holding degrees in economics and finance, 7% in management, law, and
12 accounting, 3% in politics, and 1% in public administration; a residual category of ‘other’ made up 24%. The economic composition of the International Monetary Fund was even greater, numbering 1227 in 2001 (Fourcade-Gourinchas, forthcoming). We will show below that these ties are reflected in co-author and citation patterns within economics.
The Dynamics of an Academic Community
In our analysis of the community of transition economists, we wish to establish two simple points: transition economics reveals in its citation pattern the classic skewed distributions suggesting conventions of prestige and the network decomposition of citations indicates a strong geographic (i.e. Cambridge) dimension. The research community of academics, though heterogeneous across disciplines and fields, is marked by a hierarchy legitimated by visible signs of prestige. In many fields, and in many countries, an important criterion is the production of research and its appreciation by colleagues. A common way to measure this appreciation, one validated in research studies but also standard in professional evaluations regarding promotion, is the attribution by citation.9
To analyze the bibliometric data on transition economics, we used a key word search in the list of economic journals listed in the electronic database JSTOR to identify articles on privatization published between January 1990 and January 1996. These journals are largely American and all use the English language. Since global economics is primarily
American economics (Fourcade-Gourinchas, forthcoming) and since, as we will show, the dominant western economists in Russia were from U.S. schools, this domain corresponds to our field of inquiry. The search identified economic articles published during the specified time period that included: a) the word “privatization” and b) variations of the following words: Russia, Eastern Europe or Soviet Union. This process resulted in a listing of 115 articles by 128 authors; of these, 18 worked for, or were affiliated, with the IMF or World
9 A discussion of the use of citations is given at length by Cole and Cole (1973).
13 Bank. We kept all articles, including those that were commentaries. We then used the ISI citation service to track all citations to these articles. 10 This process generated 1271 citations in total.
These articles include not only those that we will show to be the consensus, but articles by dissenters, such as Mathias Dewatripont, Gerard Roland, and Peter Murrell.
These authors made early arguments for the benefits of gradualism and experimentation in policy reform efforts. Murrell (1991, 1992) contrasted a “shock therapy” with “gradualist” approach to reform and argued for the latter. Dewatripont and Roland (1992a, 1992b) also noted that transition occurs in a political context and too rapid reforms might threaten the democratic support for regime change. In addition, Ronald McKinnon (1992, 1994), a
Stanford economist, similarly presented early critiques of shock therapy policies.
The comparison of the data with other known studies on scientific publications provides a useful benchmark subject to the caveat that the sample size of articles in our study is smaller. Studies of the logic of academic success point to a well-defined phenomenon across most natural and social sciences called the “Matthew Effect” which implies a “cumulative advantage” over the life history of a career. The Matthew Effect, named by Merton (1968), hypothesizes that success favors the successful. As a result, competition in academic fields is marked by strong inequalities in production and recognition. Price (1963) noted that around 6 percent of scientists that publish produce about 50 percent of published papers. Newman (2000) found that a power law (often in truncated form) fits authorship and co-authorship data well; the power coefficient was estimated over 2 (Lotka’s number). There are notable differences across fields; for example, physics authors tended to have 173 collaborators on average over a five year period, a very
10 Data collection took place in November 2002. The JSTOR database of economic journals as well as the citation count was based on information available at that time. Also, J-STOR counted nine “editor’s summary” from the journal, Brookings Paper on Economic Activity, as matching our criteria. None of the summaries had any citations. We collapsed these nine summaries to a single article for our analysis. We also removed one other because it reported a discussion with no author identified.
14 high number by social science standards. In these science collaboration networks, the giant component (i.e. the maximal graph connecting authors by collaboration) is about 80% of the total; again, this is very large by social science standards.
Since there are relatively fewer collaborations in our transitions economic database, we look only at the distribution of citations by author. We estimated in log form the power law:
P(k) = ck-α
P(k) is the probability an author will receive k citations, c is a constant, and k is the actual number of citations; we used a weighted measure of citations, dividing by the number of authors to each paper and then summing across all the articles published by an author in our data. The coefficient α is 1.0009, which is an impressive fit despite the relatively smaller sample size compared to other studies, such as Newman (2000). A few economists capture the bulk of citations, with most having few or no citations.
Citation counts reveal conventions of academic recognition. Given these conventions, it is not surprising that Allison and Stewart (1974) found that citation counts are more unequal than publication counts. This inequality does not seem to vanish with age; those at the research frontier do not have declining productivity (Oster and Hamermesh,
1998). We also know that inequality is much greater for citations than for publications.
Allison (1980) reports for example that the standard deviation over the mean for publications, is 1.58 for mathematics, 1.32, chemistry, 1.28, biology, 1.01; for citations, 8.54, mathematics, 6.90 chemistry, 6.25 physics, and 4.4 biology. For our economics data of 115 papers and 1271 citations, we found that the ratio is .87 for publications, 1.62 for raw citations, and 1.76 for citations weighted by the number of authors on a paper. In summary, while the publication count does not show a highly skewed distribution, the citation count does: there are authors who are cited far more than others. These results confirm the Allison
15 and Stewart (1974) findings for the hard sciences that there is less skewness in the number of publications than in citations.
There have been many studies that have sought to explain these skew distributions in reference to important social rules, such as prestige, that influence careers. Given the findings that cumulative advantage is a strong pattern, the early years of an academic’s career should be critical to forecasting future success. Placement in a prestigious department is especially important, since these departments have greater resources, less teaching, and more prominence. There are two distinct hypotheses concerning the first job, one being universalism by which jobs go to those who show publishing capability, and the second being particularism by which jobs go to those graduates from prestigious schools.
Allison and Long (1987) found the prestige of an academic’s first job is best explained by the prestige of the doctoral program (or postdoctoral program) rather than by prior publication productivity. Subsequent publication counts are best predicted by prior publication productivity; however, citations are influenced by the prestige of an academic’s current job prestige and, to a lesser extent, by prior publication productivity. In all, these studies point to the importance of cumulative advantage that bootstraps from the initial admittance into a doctoral program.
We applied this methodology to the data on transition economists. We collected complete data on all economists regarding their doctoral and position affiliations at the time of publishing. These data on affiliations, plus data on journals, were matched to ranking data provided by Kalaitzidakis, Mamuneas, and Stengos (2001). The dependent variable is the count of citations for each author. To account for the effects of co-author prestige, we created variables that took as a weighted average of their affiliations (both doctoral and current position). Since many authors have more than one article with many authors, we
16 took the average of the prestige scores across authors. These scores are the ranks of the economic programs as evaluated by weighted publication counts.
The results are given in Table 1. Since some articles received no citations, the distribution of citations is truncated at a lower bound. Consequently, the estimation is implemented as a Tobit regression. The four estimated models show progressively the decreasing importance of the Ph.D. prestige on the number of citations. The first model indicates a highly significant effect for journal ranking, and also for the prestige of the position and PhD of the author. In model two, we use a Cambridge dummy to catch whether the author has a Cambridge (Massachusetts) position or has a Cambridge co-author.
Its coefficient is not significant. In Model 3, we replace this dummy with another one indicating whether the author received a Ph.D. from a Cambridge university (MIT or
Harvard); its coefficient is very significant. Model 4 tests if association with an international financial institution (IFI) matters; the sign is negative and the coefficient is not significant.
It is very possible that that prestige captures unobserved effects, such as the quality of any given author. As a reminder, the findings on stratification have been coupled also by the more prosaic claim that what scientists cite is related to the content of what they are doing. In looking at a very heterogeneous field, Mullins (1968), for example, found that cultural similarity drove common research over stratification concerns. Baldi (1998) found that citations in a particular field of physics also reflected a search for content rather than gift-giving.11 Nevertheless, there is a fairly striking pattern of results that echoes earlier sociological studies. In addition, the spatial dimension of a link to Cambridge,
Massachusetts suggests the importance of social networks. We turn to this analysis now.
11 As our intention is not to review critically these articles, we note only in passing that since these articles, and the ones discussed below, differ in sampling and variables (for example, the Baldi (1998) article does not look at prestige of department and degree), it is not possible to arrive at definitive assessments of their contradictory conclusions.
17 Network Analysis
Attempts to understand macro-structures in citations have led to a search of the underlying sociological rules that generate emergent networks revealing an ‘invisible college’ of academics spanned by core researchers (Crane, 1969). We wish to show as a similar exercise that the citations coalesce around an inner core of authors. Co-citations result from a reference to two or more of the articles that we identified as published in economics journals on transition for the early 1990s. A co-citation represents then the ideational links made by subsequent articles to previous ones. The particular social network that we analyze is the positional and structural properties of authors to the original articles as derived from the citation relationships among the citing articles. Our analysis examines the
91 articles out of the original 115 that had at least one citation. By position, we mean such properties as how central is an author; by structural role, we mean whether we can assign an author to a particular class – we will rely upon the simple notion of core and periphery.
Based upon these data, we then created two affiliation matrices. An affiliation matrix is a bi-partite graph that links actors through their relationships to a common association. Examples are studies that look at the ties among business elite who are associated through the charities to which they contribute. We construct a “citing author affiliation matrix” that consists of the ties among citing authors as indicated by their common citation to one of the 91 core articles in our original sample that received at least one citation; the rows are citing authors and the columns are the cited articles. We also construct a “cited author affiliation matrix”; the rows are cited authors and cited articles.
From this, we derive a third affiliation matrix that is constructed by the Boolean inner product of these two matrices. This matrix multiplication creates a cited author by citing author matrix. We then transform this into a square matrix. A square relational matrix is called an “adjacency” matrix. We call this particular adjacency matrix a “co-
18 citation matrix” that indicates if authors are cited by a common author. This matrix lists the same authors along the rows and columns; the cells consist of a 0 or 1. A one means that an author cited both of them; a 0 means that they do not share a common direct citation.
Main Component and Centrality Measures
The first step in our analysis is to determine the “main component”, namely the largest grouping of authors who share common citing articles. This component has a size of
88. Thus, 97% of the authors who received at least one citation belonged to the main component. (Of the total, 77% belonged to the main component.) Though directly or indirectly connected through the chain of citing articles, they of course differ in their status in the literature. In Table 2, we report two standard measures for the top 25 authors: betweeness and eigenvector centrality. There are a number of important insights. First, the degree (the number of citations) does not correspond with other measures of centrality.
Peter Murrell, for example, is highly cited, but not especially central (betweeness). Second, note that being highly central in terms of betweenness (to what extent does an author intermediate in the geodesics among other authors) does not correspond directly with the eigenvector measure of Bonacich (1987) that if an author is connected to other central authors.
We employ the core-periphery algorithm of Borgatti and Everett (1999) to separate authors into two groups, with one group being core –they are cited directly or indirectly by other authors and they directly cite each other, the other being in the periphery. Applying this analysis to the main component of 88 authors, we find the core group to consist of the following authors:
Core group: Andrei Shleifer, Alan Gelb, Robert Vishny, Jeffrey Sachs, Stanley
Fischer, Natalia Tsukanova, Paul Joskow, Richard Schmalensee, and Peter Murrell.
19 Six of the authors are either faculty at Harvard or MIT, and two more co-authored with them;
Alan Gelb, an economist at the World Bank, was the principal author of the World Bank
1996 Development Report that analyzed the transition policies and their success. Peter
Murrell is the lone dissenter from the geography of the group who may belong to the core because he is defined ideationally as their opposite.
Given these observations, the implications of the centrality measures are that a few authors have high degree of citation, are central, and are connected to each other. These authors belong largely to a grouping that we can call “Cambridge Massachusetts” that also share ties to international financial institutions. Peter Murrell does not score high on betweenness, but he nevertheless is close to the core group. Most interestingly, two
European economists, Gerard Roland and his frequent co-author Mathias Dewatripont, do not score high on the eigenvector measure; they are outside the core, as we have shown above.
Co-Citation Networks and Graphical Presentations
An intuitive way to understand the overall structure of the relationships is a graph of the co-citation network. A node is an author, and a link is whether they are co-cited by another paper. We use a spring-embeddedness algorithm (available in NetDraw) to display the data; this algorithm minimizes the energy in a graph by seeking to correlate the “visual distance” to the “graph distance” based on geodesics among the nodes.
We wish to show that the network consists of a sub-graph of academics connected by strong links associated with Cambridge and weak links to international financial groups.
Consequently, we create a coding to indicate if the nodes have the binary attribute of being affiliated with a Boston university, or having received a Ph.D. from a Boston University, or having a Boston co-author. Thus the maximum value is 3, meaning a node is a Boston-based academic, with a Ph.D. from Boston, with a Boston co-author. Only one author scored 3.
20 Using the graphical package Netdraw (standard in Ucinet), we create three graphs that progressively retain nodes of increasing strength. Figure 1 is the complete network; squares represent academics and triangles indicate the author is affiliated with either the IMF or
World Bank. In Figure 2, black indicates authors that received a PhD from a school in
Cambridge, Massachusetts. Figure 3 shows author nodes in black having a PhD from
Cambridge, have worked at a school in Cambridge, or have a co-author who has worked in
Cambridge.
The progressive unlayering of the co-citation network reveals an inner core of academics who are strongly associated with Cambridge. In addition, this core maintains critical ties to the researchers at international financial institutions. The image that emerges is an academic community with a micro-structure spatially anchored to Cambridge. Of interest, there is no evidence –as shown by our statistical analysis- of a prestige effect on citations for authors who are affiliated with international financial institutions; yet, authors located at these institutions themselves are highly linked to Cambridge. Hierarchy, if not vassalage, is clearly apparent.
The regression analysis and graphical representation support the argument of Murrell
(1995) that the locus of agreement among economists had a strong geographic content:
Cambridge, Massachusetts. Authors who had connections to Cambridge had strong connections to international organizations and were more likely to be cited by others in the field. Those outside the Cambridge area may have disagreed with these core authors, but they were much less likely to gain an audience for their views.
Cambridge and Policy Linkages
The links between the Cambridge academics extended beyond the ivory tower to a strong policy network as well. Summers was a former economic professor at Harvard, colleague to Sachs, thesis adviser to Shleifer, and the former editor of the Quarterly Journal
21 of Economics (a position that Shleifer assumed in the early 1990s). After serving as the chief economist for the World Bank, he became the undersecretary of Treasury for international affairs during the early 1990s and a principle architect of US advice to Russia
(Talbott, 2002). Summer’s principal deputy at Treasury for dealing with Russia was David
Lipton, a primary co-author of Jeffrey Sachs (Talbott, 2002: 48). Stanley Fischer was a former MIT professor who had been senior economist for the World Bank before assuming the second ranked position at the IMF. Sachs, a student of Fischer’s at MIT and then a professor at Harvard, was heavily involved in the market reform debate in Poland and supervised the Harvard Institute for International Development (HIID). Sachs brought in
Andrei Shleifer, a former student of both Fischer and Summers and a colleague of Sachs in the economics department at Harvard, to advise directly on the Russian privatization program. In turn, Shleifer asked Maxim Boycko, a 32 year old Russian mathematical economist whom Shleifer had met earlier at an economic research meeting, to help with this task. He then invited Jonathon Hay, a newly minted Harvard Law graduate, to assist in legal advice for the privatization program. Finally, a few months later, he asked Robert Vishny, a former co-author working at the University of Chicago’s economic department, to join the group to work on designing the technical details of the mass privatization program (see
Boycko, Shleifer and Vishny, 1995: viii.).
HIID provided the initial funding for these advisors work in Moscow; the sources of this funding increasingly were the grants allocated by the United States Agency for
International Development (US AID). Because the HIID contract became publicly contested following revelations of noncompetitive funding agreements with US AID, the
Government Accounting Office (1996) conducted an inquiry into their activities, published in a public document. This document provides an unusual insight into the aid process and the content of the contracts. In October 1992, HIID submitted a proposal to the United
22 States Agency for International Development (US AID) seeking to provide technical assistance to Russia’s privatization program. US AID initially provided $2.1 million in funding for this agreement through a non-competitive cooperative agreement. Future noncompetitive amendments to the agreement increased the funding to $40.4 million by
September 1995. HIID’s activities now included “providing assistance in privatizing
Russian companies, developing a capital market, instituting legal reform and overseeing U.S. contractors’ delivery of over $285 million of technical assistance to Russian institutions and private companies” (GAO, 1996: 4).
HIID’s oversight of the technical assistance raised an issue of a conflict of interest, because of its close connections to the Russian Privatization Center (RPC), an organization designed to coordinate and supervise all western assistance to the Russian privatization program. As well as overseeing US aid to Russia, the RPC also supervised technical assistance to Russia from the World Bank and other international donors. Boycko eventually became the executive director of the RPC, and Shleifer a board member (see
Wedel, 1998: 140-145).
The ties to the World Bank are particularly relevant to the subsequent analysis. The
World Bank had traditionally seen itself as trying to improve management, whatever the type of ownership. By most accounts, the Thatcher Revolution in the UK heralded the sea change in thinking. 12 In 1985, the US Secretary of Treasury James Baker announced support for privatization in joint Bank-Fund meeting in Seoul. A July 1985 internal memo of the World Bank reported that the US Treasury department had shifted priorities for multilateral development banks from poverty reduction toward privatization, macroeconomic policies, and financial and management issues (Kapur, Lewis, Webb, 1997:
356n.109).
12 One of the clearest statements of this sea change is provided by Yergin and Stanislaw (1998).
23 This change in the ideational beliefs of the World Bank was hardly without consequences, for the primary business of the World Bank is to grant loans and concessionary financing to developing and middle income countries. A large proportion of these loans contain clauses of ‘conditionality’ that stipulate policy actions. By the end of the
1980s, 25% of funding was for reform ‘programs’ as opposed to project funding. Whereas through the 1960s, infrastructure absorbed over 60% of these structural loans, its share dropped to 24% by the 1990s, with agriculture and, in recent years, social (e.g. education, sanitation) growing to equal shares (Kapur, Lewis, Webb, 1997: 521). World Bank conditionality also broadened from principally free trade liberalization to a relative shift toward financial market, regulatory, and public enterprise reforms that made up 42% of policy conditions by 1991. Eleven percent of these loans by 1991 was for public enterprise reforms, principally privatization (Kapur, Lewis, Webb, 1997: 521). Thus, privatization had become a standard feature of loan conditionality by the 1990s.
If the World Bank had adopted privatization as an integral part of reform, it had not though adopted mass privatization programs as its modality. Yet, by mid 1992, it was committing important sums of money to the Russian program. In August 1992, a $600 million Rehabilitation loan was approved to support the Russian Federation’s reform program in enterprise reform, antimonopoly policies, foreign direct investment and safety net development (World Bank, 2002). The loan was distributed rapidly in a single tranche without conditionality. In December 1992, the World Bank approved a $90 million loan designed specifically to support Russia’s mass privatization program. To develop its support for Russian mass privatization, the World Bank worked closely with the United
States Agency for International Development (US AID), which pledged $58 million as well to support the privatization program. In June 1995, the World Bank approved a second
Rehabilitation Loan of $600 million with the aim of supporting macroeconomic stabilization
24 and structural reforms. US AID similarly followed up its initial loan with a pledge of $71 million to support post-privatization enterprise support; $77 million for capital market development; and $40 million for regulatory reform (GAO, 1996).
It is not privatization so much as the radical nature of the Russian privatization program that remains the feature to be explained. Why did a conservative international financial institution with thirty-five years of history endorse the mass privatization of over
16,000 enterprises in geographically the largest country, and one of the largest economies, in the world, all to be accomplished in two years? To understand the answer to this question, we now turn to the role that the core “Cambridge” group of academic advisors played in
Russia’s mass privatization program.
The Russian Mass Privatization Program
To summarize at the outset the chronology of events in the march towards mass privatization in Russia, we created in Table 3 an historical overview of the interaction between Harvard advisors, international organizations and Russian domestic policy makers.
The sequencing of events demonstrates the following points. First, prior to any western adviser involvement in the country, the privatization debate began in Russia under
Gorbachev. The “500-day” reform program and the June 1991 Russian law on privatization preceded the collapse of the Soviet Union, but included a call for a mass privatization program to be implemented rapidly in Russia. The Harvard academic advisors did not arrive in Russia until November 1991, after the initial decision to implement a large scale privatization program had already been made.
Second, the World Bank did not arrive in Russia preconditioned to support Russia’s mass privatization program. As will we later examine in fuller detail, initial World Bank advice to the Russian government called for a slower, smaller and better regulated program
25 than was eventually adopted. The Bank faced a critical decision of supporting a privatization program that contradicted its own advice about best practice.
In the following sections, we examine the contribution of western economists and the World Bank to the policy outcomes. We first look at the way in which domestic political factors played a large role in determining the eventual plan proposed by the Russian government. We then analyze World Bank internal documents regarding whether to support the proposed program. Finally, we examine the published justifications of these policies by the Harvard connected advisors and policy makers that helped to shape them.
The Domestic Politics of Russian Mass Privatization
Understanding the Russian debate on privatization is critical for an assessment of the influence of western ideas, and western economists, on economic policy. In many accounts of this debate, especially given by western sources, two sides are proposed: the reformers and the regressive elements, usually the Communist Party. This is a false picture, for there were many reform groups, some deeply attached to the Communist Party or its political offshoots. The politics over power and ownership quickly crowded out any sustained debate over the relative economic merits of proposed privatization programs.
The debate over privatization in Russia lagged only slightly the Polish discussion and it took an overtly more political route in content. It began openly in 1990, before the entry of western advisors and before the collapse of the Soviet Union. Prior to this time, the prevailing view had been expressed by Gorbachev who foresaw a dissolution of the control over enterprises by the ministries and a devolution of power in favor of the managers (Aron,
2000). This view played well among the higher ranks of the Communist Party and also emboldened a sense of entitlement towards control by the management. Consequently, privatization policies threatened the power of this group.
26 The discussion over privatization entered the reform agenda in 1990 with a proposed
“500-day program” of reform that called for the privatization of up to 70% of industry by the end of 500 days of reform. Grigory Yavlinsky, one of the main architects of the 500-day plan, had observed the early 1990’s debates over economic reform in Poland as an official of the Soviet government and incorporated many of its most radical elements in his proposals for economic change in Russia (Yergin and Stanislow, 1998). Gorbachev, however, deliberately stopped short of supporting the 500-day program. By July 1991, the USSR
Supreme Soviet adopted a rather more cautious legislation, “On the Basic Foundations of
Destatisation and Privatization of Enterprises.” The Soviet reform plan called for limited
‘destatisation’ of the economy through the reduction of the power of central ministers, although the direct privatization of large-scale companies into private hands was not envisioned (Cox, 1996).
The Russian Supreme Soviet adopted the “500-day Program” in direct opposition of the Soviet government in 1990. By June 1991, the Russian Supreme Soviet had passed a law on the privatization of state-owned enterprises that laid the background for Russia’s future privatization program. The law called for the transformation of large state-owned companies into joint-stock companies, whose shares were subsequently to be sold or distributed to workers, managers and the public at large.
Russia’s ability to control the privatization process, however, was closely tied to the growing struggle over property between the Soviet Union and the Russian Republic. The first major privatization of state-owned companies in Russia took place in the banking sector in 1988, mainly as an outcome of the “war of laws” between Russia and the Soviet Union over the control of financial resources and property (Johnson, 2000). Soviet legislation passed in 1990 formally advanced the dissolution of the Soviet banking system by calling for the transformation of these state-owned enterprises into joint-stock, commercial banks.
27 But changes were already occurring more rapidly at the sub-national level. As early as 1989, the Russian Central Bank hoped to entice the managers of Soviet banks with the prospect of private ownership if they switched their loyalty from Soviet to Russian control (Abarbanell and Meyendorff, 1997). In the next couple of years, as the Soviet state weakened and the government of the Russian republic grew in power and influence, hundreds of branches of state banks split off from their parent organizations to form autonomous banking units, licensed by the Central Bank of Russia.
In August 1991, a failed coup against Gorbachev tipped the balance of power toward Russia, and by December 1991 the Soviet Union failed to exist in all but name.
Yeltsin, who had engineered resistance to the coup attempt, quickly gained the support of a wide political spectrum within a newly independent Russia. Russia's Congress of People's
Deputy, a parliamentary body elected in 1990, granted Yeltsin super-ordinary power for one year to implement reform programs without parliamentary approval.
Alternative plans for privatization developed among a number of Yeltsin’s closest advisors immediately following the failed August coup. Yevgeny Saboruv, the Russian minister of the economy who had pushed through the July 1991 privatization laws, proposed a plan that emphasized the heavy privatization of the economy, even before the introduction of other reform efforts such as price liberalization (Aslund, 1995:71; Gaidar, 1996: 84).
Grigory Yavlinksy, the author of the ill-fated 500-day reform program and a former advisor to both Gorbachev and Yeltsin, similarly put forward a plan for radical change. He emphasized the deregulation of the economy above privatization, recommending a sales model of privatization that sold firms on a case-by-case basis rather than the mass distribution of property through vouchers as proposed in Saburov’s plan (Aslund, 1995: 71-
72).
28 Egor Gaidar led a third group of economists that gathered in the immediate aftermath of the failed August coup. Gaidar was an accomplished economist and the economic editor of the liberal communist party journal, Kommunist. Gaidar’s own thesis was on the application of the ideas of Mancur Olson and Oliver Williamson to the problem of industrial organization in Russia. Moreover, Gaidar, and the team of economists he assembled, spoke
English and were familiar with western economic theory and research. Gaidar’s proposal called for a similar ‘shock therapy’ plan in Russia as had been conducted in Poland: a rapid policy of price liberalization, currency stabilization and privatization (Aslund, 1995).
Yelstin appointed Gaidar to the post of deputy prime minister in November 1990, rejecting the leaders of the other proposals because of, among other reasons, their close association with the previous regime. Saburov was a protégé of the previous prime minister of Russia, and Yavlinsky was closely aligned with Gorbachev in the failed attempt to introduce radical economic reform under the Soviet system (Yeltsin, 1994). Gaidar and his team, however, were complete outsiders to government service. Table 4 shows that Gaidar appointed young academic economists like himself to the main ministerial positions under his control. All of his initial appointments were to candidates that had finished their initial dissertation in the field of economics and had previously been working as economic researchers. As Bockman and Eyal (2002) have argued, Soviet economists had already an exposure to the ideas of market socialism.
The appointment of Gaidar’s team of young academic economists to Russia’s first independent government corresponds to Eyal, Szelenyi and Townsley’s (1998) broader observation of the rise of a new intelligentsia elite throughout Eastern Europe. Among other
Russian economic advisers, Ruslan Khasbalutov, the speaker of the Russian parliament, believed that his credentials as an economics professor qualified him to run the reform program. Moreover, Khasbulotov did not like Gaidar’s candidacy. As an editor of an
29 economics journal, Gaidar had rejected Khasbalutov research as “banal” and “unproductive”
(Gaidar, 1996). Academic credentials became part of the legislative contention over economic policy.
The main challenge to Russia’s privatization program arose from the parliament.
Yeltsin had not called for new parliamentary elections upon his election to the Russian presidency, instead allowing the existing legislative body to remain in return for emergency power to implement reform without parliamentary approval for one year. Numerous studies of roll-call votes of the parliament identify two identifiable groups within Russia’s Congress of People’s Deputies (Remington et. al., 1994; Lane and Ross, 1999; Sobyanin, 1994). On one hand, a group of approximately 40% of the legislature consistently voted in favor of issues that followed the position of the old Communist party: they voted against Yeltsin and against the implementation of market oriented reform. On the other hand, a discernable bloc of up to 35% of the Congress consistently supported market oriented reform. This block of reformers consisted of a new “intellegentsia” class in Russian politics; deputies who had backgrounds as doctors, lawyers and academics in the former Soviet regime. For example, in the vote to introduce private property in Russia in December 1990, 48.7% of the deputies with professional backgrounds voted in support of the measure, while only 22% of the members who had previously held Soviet government experience voted in support of this measure (Lane and Ross, 1999).
Between these two relatively stable extremes, a group of centrists controlled the swing votes in the parliament. This middle group consisted mainly of managers of the largest enterprises in Russia, and did not demonstrate a consistent patter of either voting for or against Yeltsin’s policy. In general, this group was poorly organized, but did initially
30 oppose the government’s voucher privatization program.13 In order to pass the June 1992 privatization legislation through parliament, the Gaidar/Chubais team adopted a strategy of limited concession designed to appeal to the “industrialist” bloc by allowing managers and workers to gain control of 51% of privatized companies. The industrialists delivered their support to the privatization program in return for insider control of the privatized companies
(Boycko et. al., 1995; McFaul, 1995).
The battle for power and control in the post-Soviet environment did not end with the compromise over privatization. During May –June 1992, Yeltsin appointed a number of former state directors to key ministries. Viktor Chernomyrdin, a former minister of the
Soviet gas industry, became a deputy prime minister and took over responsibility for the energy sector from the academic Lopukhin. Shumeiko, formerly director of the giant
Krasnodar measuring instrument factory, was brought in as one of the two first deputy prime ministers. At the same time, Anatoly Chubais, the director of the Russian privatization program, was appointed to deputy prime minister as well to offset the introduction of new industrialists in the Russian parliament. By December 1992, the parliament forced Gaidar’s ouster with Chernomydin appointed as prime minister. Chubais remained in his positions of deputy prime minister and director of the GKI, and privatization pushed forward despite continued proposals from the parliament to end the privatization program.
The June 1992 privatization law was the last component of the privatization program that passed through the Russian parliament. A host of presidential decrees followed the
June 1992 law that filled in many of the details of voucher implementation that had previously been missing from previous legislation. The June 1992 privatization law called for the issuing of privatization checks through the use of registered “personalized accounts”
(Nelson and Kuzes, 1995). In this case, each voucher would be registered under the name of
13 See Sakwa (1996: 81-82) for a description of the attempt to organize an umbrella party of centrists, the Civic Union, within Russia’s emerging political system. The Civic Union, however, split up in 1995.
31 the individual, leading to a centralized registry of ownership rights as in the Czech Republic.
Yet, subsequent decrees in August and December 1992 in Russia stated that vouchers were not to be registered under individual names, but instead to be issued as bearer shares that could be freely traded on a secondary market. The function of registration of ownership was to fall to the privatized companies themselves to keep their own registration records.
Moreover, subsequent presidential decrees created the conditions for the creation of voucher investment funds, designed to act as a ‘mutual fund’ in the privatization process.
Individuals could invest their vouchers directly into a company, sell their vouchers on the open market, or buy a share in a closed-end mutual fund that would develop a portfolio of companies through the voucher privatization process. Voucher investment funds had been created with strict government control in the Polish mass privatization program but were created with virtually no government supervision in the Russian context.
Despite the rise to power of academic economists in post-communist Russia, the decision to choose among competing alternative privatization programs eventually became decided on a rationale of political expediency rather than economic best practice. Though believing that privatization was a necessary part of the economic reform package, Gaidar
(1996:74) stated that he did not know how best to achieve privatization in Russia: “it was so important that we find not so much economically optimal solutions – there were none – but socially acceptable and sustainable ones.” In fact, he wrote that he was at first “skeptical of the idea of introducing special payment notes – later known as “vouchers” – aimed at creating a demand for privatized property. The risks connected with inevitable and massive speculation were simply too obvious” (Gaidar, 1996: 75).14
14 Antaloly Chubais, the leader of the Russian mass privatization program, and Dmitry Vasileev, his assistant, also initially opposed the use of vouchers. See Chubais (1999) and Nellis (2002).
32 However, he finally supported the use of vouchers because of the need to implement privatization as quickly as possible in the highly politicized environment of post-Communist
Russian:
Of course, we would rather have avoided all this exotic stuff by applying, to the
maximum degree possible, privatization processes already worked in mature market
economies. However, coolheaded analysis forced us to concede that such a strategy
in Russia would mean simply giving up on the possibility of radically reducing the
amount of property owned by the state. What we gained in terms of effectiveness we
would lose in terms of time; we would miss the window of opportunity when a
breakthrough in restructuring property relations was still possible. (Gaidar, 1996: 75-
76).
Gaidar supported a voucher privatization program with strong insider ownership because it led to the rapid transformation of property relations before organized opposition could develop. Here again is Balcerowicz’s (1994) thesis of the period of “unusual politics.”
The amazing achievement of these efforts was that in one year following their rise to power in November 1991, the Gaidar government introduced a mass program of rapid privatization. Between December 1992 and December 1994 over 16,000 mid-to-large size companies were privatized through this program, making it one of the largest peaceful transfers of property in history. However, the particular strategies undertaken in the
Russian privatization program are also discernable in the type of ownership and market relations that developed from this program. In the vast majority of cases, insiders gained
51% of a company’s shares. On the average, only 29% of a company was auctioned to outsiders through voucher auctions, leaving the government with a remaining stake of up to
20% (Blasi et. al., 1997). Over 40 million new shareholders became created overnight in
Russia, but the shares they owned were unregistered and the funds in which they invested in
33 unregulated. The rapid speed of implementation made it impossible ex ante to develop any type of enforceable institutional infrastructure to support the corporate governance of enterprises or the development of financial markets to facilitate trading in company shares in the post-privatization environment.
The World Bank’s Decision to Endorse Mass Privatization
When the World Bank’s first mission to post-communist Russia arrived in early
1992, they found two pre-existing conditions. First, the Gaidar government had already decided to place speed of implementation as the primary goal of its privatization program.
Second, the Harvard advisors were already ‘on the ground’ when the World Bank arrived and had established relationships with the young academic reformers in the Russian government. Sachs had begun to advise Boris Federov in the Ministry of Finance, and
Shleifer and his team had begun to advise Anatoly Chubais in the State Committee on State
Property (GKI). These new advisors supported the political compromises being made to the privatization program.15
The prioritization of political over economic objectives in the privatization program represented a major challenge for the World Bank. Its mission and experience was to advise and assist in economic, not political, restructuring. The field mission were experienced technocrats who had what Scott (1998) would call a practical knowledge of how to privatize.
They were ideologically unprepared for the Russian decision to privatize en masse.
To examine the World Bank’s discussion of its support for such a politically-charged privatization program, we examine an assemblage of documents between the World Bank
Russian team, its Russian counterparts, and the US World Bank desk. We officially requested and received surviving documents from the personal archives of a World Bank
15 See Wedel (1998), GAO (1996), and Reddaway and Glinski (2001) for a description of the close relationship between the Harvard advisors and the young academics in the Russian government. For good histories of foreign aid to Russia, see Blaszczcky and Radygin (2002), Estrin and Bevan (2002) and Alice Galenson (World Bank, 2004).
34 manager active in the Russian and other European transition economies. From these documents, we identified the office memorandum, back to office reports, minutes of meetings and internal policy papers written between January 1992 and July 1994 that referred to the Russian privatization program. We chose these dates to capture the thinking within the World Bank about Russia’s privatization program at the early stages of its development and implementation. We excluded documents on topics that were not directly related to the Russian privatization program. Nor did the documents we studied contain any internally-classified information. In all, we identified 51 documents that met our criteria.
We coded each paragraph of the 51 documents for mention of nine pre-established categories. These categories were designed to cover the degree to which field and staff reports were concerned with the regulation of capital markets and the emergence of self- organizing regulatory groups, or their attention to political conditions in Russia or to donor country priorities. By donors, we mean the contributing governments to the World Bank. In designing the categories, we expected some to score quite low.
Because we had two coders, we only counted a category as being mentioned within a paragraph when both coders agreed. In the first round of coding, reliability was poor for several of the constructs. The authors of the study identified the paragraphs in conflict and clarified the construct under question. The coders then recoded without consulting the authors or each other. This second round produced high agreement and we used these results for the final analysis. This iteration in scoring is akin to delphi methods that sample expert opinions.
Table 5 summarizes the results and the final categories used. The frequencies are notable for what was highly discussed and for what was not. The reports dedicate considerable attention to the operational tasks of making mass privatization work and to explain the program to Russian and international participants. The highest number of
35 mentions in the initial discussion revolved around the need for regulation, for law and control over the privatization process. Statements about the belief of “market ideology” to solve growing problems start only after the program is initiated and the advisors begin to observe the difficulties in capital market development and corporate governance development through the program.
These documents reflect a primary concern with transferring the operational knowledge to implement privatization by earnest international advisers. The Western field advisers who helped implement privatization were, quite simply, relatively knowledgeable of capitalism and how it works in pragmatic terms and actively advised to implement a well- regulated privatization program with a strong rule of law and social support. Early reports express skepticism with the desire of the Russian government to emphasize speed at all costs.
In March 1992, the World Bank advisory team made a final report to Anatoly Chubais and the Russian government to explain their recommendations for the design of Russian privatization.16 They acknowledge the benefits of speed, but warn that:
[s]peed must not compromise stability. Distributing state property through exchange
for vouchers may well be a quick method of privatisation. But vouchers, on their own,
do not address the above–stated imperative for corporate stability and decision-making
after privatisation. A “voucher program” that is not part of a broader mass
privatization program risks diffusing ownership among thousands of inexperienced
shareholders potentially dispersed over a vast geographical area. The prospect of
corporate paralysis during the critical period after privatisation may be heightened by
16 The advisory report to Chubais is the result of an extended World Bank mission to Russia: “From March 16 to March 27, 1992 an advisory team under the auspices of the World Bank and the EBRD visited Moscow to work with GOSKOMIMUSESTVO (GKI), the Russian State property or privatization agency. The objective of the mission was to work with Deputy Chairman Vasiliev and his team (Andrei Schleifer [sic], Maxim Boycko and Jonathan Hay) to assist them in conceptualizing a Mass Privatization Program, inclusive of a voucher distribution system” (April 4, 1992, Back to Office Report, World Bank/EBRD Advisory Council). Note that the April 1992 World Bank report identifies the Harvard-supported advisors, led by Shleifer, as part of the “Russian” team already in place at GKI.
36 the absence of capital markets and proxy mechanisms in Russia. The risk is that
current management be entrenched, free of shareholder discipline, and able to
misallocate assets, or to do nothing at all to enhance the prospects of the company.
(World Bank/EBRD Advisory Council, Memorandum for Chairman Anatoly Chubais,
GOSKOMIMUSHESTVO, re Achieving Mass Privatization, March 25, 1992)
The World Bank’s advice was to introduce a voucher program as one component of a broader privatization effort that included demonstration projects and cash sales. They also argued for the importance of institutional restructuring, especially in financial markets, before the introduction of a large voucher program.
Given that Chubais’ decision to implement privatization quickly with little regulatory control contradicted the World Banks’ initial advice, why then did the Bank agree to support such a project? A February 1993 back-to-office memo describing the World
Bank’s strategy in Russia explains the political reasoning behind this decision:
From the beginning of our working relationship with GKI, the Minister of
Privatization and now a Deputy Prime Minister, Anatoly Chubais, has stressed the
need for speed. He recognized that the reformist government, then headed by Gaidar,
has a certain window of opportunity to begin a serious privatization program, a
cornerstone of the reform efforts, before political forces opposed to reform curtail their
efforts. Also, from the beginning the program was focused on Mass Privatization,
inclusive of voucher distribution to the entire Russian population and sales of shares in
companies in exchange for vouchers. In doing this, Chubais was making an implicit
decision to accept second, and, at times, third best solutions to complex problems such
as corporatization, enterprise governance, restructuring, etc. We have consistently
supported this view and have assisted GKI throughout with substantial advisory
37 assistance. (February 8, 1993, World Bank Back to Office Report, Privatization
Implementation Assistance Project First Supervision Mission)
Despite the World Bank advisors’ acknowledgement that Russian privatization represented
“second, and, at times, third best solutions to complex problems,” they supported the implementation of the Russian privatization program because of the underlying political rationale for these compromises.
Foreign funding enabled the Russian privatization program to achieve the speed and scope that otherwise would have been difficult to achieve. The background documentation explaining the rationale for a proposed 1992 World Bank/EBRD loan to support the implementation of Russia’s privatization program states:
The most serious problem of privatisation in Russia is the mis-match between the size
and complexity of the task, on one hand, and of the ability of the civil service system
to provide the resources, in qualitative and quantitative terms for its execution, on the
other. It is realistically impossible to recruit, from within the system or into the system,
a sufficient number of experts of the caliber required to implement the program in a
satisfactory manner. (Background Information on the Project, Privatisation Loan to the
Russian Federation, Operations Committee Review, June/July 1992)
Without international assistance, the document asserts that that GKI’s envisioned goal of implementing voucher privatization by the end of 1992 would be unobtainable.17
The World Bank’s eventual decision to approve the $90 million loan allowed for foreign advisors to compensate for the lack of indigenous state capabilities. The Russian mass privatization program required a certain level of requisite technical support to be
17 An April 1992 report is even more specific about the complete absence of organization at the Russian State Committee on Privatization (GKI) at the time: “Given that GKI lacks human resources, material resources (a budget of any kind), equipment such as faxes, computers, etc. it is highly unlikely that they will be able to implement an extensive nation wide program in the envisaged time table.” (April 4, 1992, Back to Office Report, World Bank/EBRD Advisory Council).
38 successfully implemented. Vouchers needed to be printed and distributed; auctions set up and supervised; regulations written and disseminated; and new types of financial organizations, such as investment funds, developed and certified. Contrary to its initial advice, the World Bank’s decision to provide technical assistance enabled GKI to achieve its goals of implementing mass privatization quickly.
The World Bank documents we reviewed are notable for their understanding of the enormity of the task of implementing such a massive privatization program so rapidly.
Privatizing thousands of large firms, distributing vouchers, supervising auctions and working with limited numbers of people posed a massive technical challenge. The reports dedicate considerable attention to the operational tasks of making mass privatization work, while at the same time, trying to explain this to Russian and international participants.
The analysis of these documents should raise doubts that portray international institutions as scripted agents in the diffusion of a world ideology. The debates inside the
World Bank represent a discursive understanding of what they knew and what they found
“on the ground”. Many countries have faced macro-economic difficulties and have sought
IMF and World Bank lending. Statistical studies have found that neither fiscal deficits, nor
IMF or World Bank loans predict privatization counts (Brune, Garrett, and Kogut, 2004).
Kogut and Macpherson (2005) find though that IMF loans (and the number of American trained economists) predict the implementation of privatization programs. It is likely that in some countries, as Hanley et. al. (2002) claim for Hungary, IMF loan conditionality forced privatization. What the Russian history shows is that the World Bank did not impose mass privatization; it had to be persuaded to endorse the program.
Economic Policy Making with Endogenous Economists
Given the absence of academic discussion justifying Russia’s mass privatization program prior to the program itself, the innovational contribution of western academics to
39 Russian policy formulation appears minor. They arrive after the famous meeting of Gaidar and his associates at the “dacha”, after the decision is made to pursue mass privatization.
Moreover, as the advisors themselves explicitly point out (Boycko et. al. 1993, 1995), the deviations for initial programmatic plans such as 51% insider ownership and the strategy of speed, were directly the result of domestic political considerations. The intellectual challenge for the advisors, especially in their roles as brokers with the broader international community, was to articulate an economic rationale for the policy decisions already being made in Russia. Their arrival in Russia appears almost inexplicable, except as an act of entrepreneurship: the seizing of an opportunity to proffer advice. Yet, their participation was nevertheless consequential, for in these uncertain events, their articulation of policy was valuable, as were the financial resources they brokered with financial institutions.
An examination of the academic writings of the Harvard advisors that provided this articulation suggests there are at least three discernible theses of why the choices made in
Russia’s mass privatization program deserved international support. The first thesis is to strengthen the hands of reformers. The articles reveal by and large a strong belief in the importance of choosing the right reformers to enact the right policies. A pointed expression for the preference of choosing the right reformers and policies is the quotation from the prize-winning book by Boycko, Shleifer and Vishny, Privatizing Russia:
There have been quite a few market reformers around the world in recent years,
including Margaret Thatcher of Britain, Carlos Salinas de Gortari of Mexico ... Gaidar
and Chubais of Russia, not to mention free-market dictators such as Augusto Pinochet
of Chile. All of them oversaw a massive retreat of government from economic activity.
What do they all have in common? We believe that the free-market reformers are
politicians whose political constituency is the productive part of the economy, and
whose political enemies represent the unproductive part. ... Their opponents, in
40 contrast, are public sector employees and welfare recipients who benefit from
government spending. (Boycko et. al., 1995: 48)
This citation reflects perhaps an extreme stance, but one held by important authors in the citation network of economists.
A more nuanced position was offered in an article of the late 1990s written by Stan
Fischer. Reflecting on the ambiguous evidence of the efficacy of IMF programs because of politics, Fischer writes:
There can be little doubt that the idea for the IMF (and the World Bank) is to support
well-designed programs that are fully owned by their governments. But such
situations are rare. More often, the IMF’s political-economy role is to strengthen the
hands of reformers within a given country. (Fischer, 1997: 23-27).
This statement is not qualified on whether the government in power is democratically- elected or not, or if “reformers” might be more diverse than what qualifies under the IMF appellation.
The second theme is the insistence that reforms are packages consisting of interacting policies that work for all countries, sometimes justifying “one best way”. Thus,
“shock therapy” consisted of macroeconomic policies and structural reforms (i.e. privatization). The conditionality of IMF and World Bank loans insisted on a standard set of reforms for all countries. In the 1996 World Development report that presented the World
Bank’s analysis of transition progress and its own programs, the econometric analysis purported to show that the more a country adopted reforms, the better its progress (World
Bank, 1996). Later assessments by independent scholars and even the EBRD report (1999) rejected this claim.
The belief in the importance of reforms as a package reflected a larger interest in economics in the notion of “complementarities”. Though having a specific technical
41 definition, the idea of complementarities is similar to the notion of Weber’s ideal type, or
Ragin’s (1987) configuration, insofar that a set of conditions must be achieved in order to establish an outcome (see Milgrom and Roberts, 1990). However, for Weber and comparative sociologists, the methodological standpoint served as a way to understand systematic differences among countries, not to argue for a single set of conditions, or reforms, as necessary and sufficient conditions for economic growth. The most glaring omission in the economic analysis was that even if optimal reforms should be of one variety, countries themselves differed. In other words, a theory of complementarities logically leads to the analysis of whether reform packages were complements to country conditions. This high order complexity would appear by this logic to be absolutely critical for assessment of policies attentive to national conditions, and yet it was ignored in theoretical and empirical research as well as in stated policy. In short, the indexicality (i.e. the context dependence) of theory was ignored.
The last theme of “depoliticization” is the core of the contribution by the central economic authors (see Boycko et. al., 1993, 1995). This awkward term is defined as the elimination of state control over the economy, as best seen in the transfer of ownership of state enterprises to private hands. A more accurate though not any more felicitous term for this transfer is “destatization”; privatization and other similar reforms, such as the abolition of price controls, remove the state from making micro-economic decision-making. The leap of faith is that these policies remove politics from the economy, which presumably would then operate closer to the idealized market economy of theory. This thesis is radically different than the studies in sociology pointing to the importance of strong state and society relationships (Evans, 1995; Stark and Bruzt, 1998) and in political science arguing for a sequencing of democratic reforms prior to economic reforms (Linz and Stepan, 1996).
42 This theoretical stance of depoliticization has many antecedents in economics, especially in the rent-seeking theory of the Stanford economics professor and former chief economist Anne Krueger (see Krueger 1974); Krueger served as chief economist at the
World Bank in the 1980s and is credited with a major redirection of research towards the benefits of markets. The theory of depolicitization represented nevertheless a major transformation of the debate on reforms as representing better corporate governance to one of political liberal reforms. In the initial statements of Russian reforms, Boycko, Shleifer and Vishny (1993) had themselves argued that privatization by auction would be difficult in
Russia because of the lack of capital and investment confidence witnessed by capital flight.
Shortly after, they reinterpreted this flight to indicate corruption in the Soviet state that could be cured by privatization. In a later text, Shleifer and Vishny (1998) call this behavior the “grabbing hand” of the State. Laws, institutions, and private ownership are needed to prevent the state from “grabbing” control over assets or demanding corrupt payments. At the same time, the literature on the deleterious effects of corruption boomed in general, and measures to insist on transparency and corporate governance principles became part of new
World Bank and IMF conditions for loans. The academic economic ideational innovations in the late 1990s appeared to grease the wheel of policy adoption by international agencies, even as the effects of their prior advice proved to be ambiguous if not disastrous by many accounts.
There is an odd omission in this analysis. Mass privatization, far from depoliticizing
Russia, led to opportunities for a few oligarchs to secure vast economic wealth and control over minerals, energy, and communication enterprises and, consequently, to exercise extensive political powers. In analyzing the grabbing hand, it is remarkable that the hand of business, quite visible unlike the mythic hand of the market, plays a secondary role to the seedy drama of the unbridled State.
43 The academic economic literature reveals then considerable learning and evolution during the 1990s, perhaps in reaction to the observations of policy failures in Russia. This learning is abetted by the size of the community, as well as research organizations, such as the National Bureau of Economic Research, which has no parallel in other social sciences in the United States. The size of the economic community could support theoretically what could be called euphemistically a “high error-correction rate” by which bad ideas die and good ideas survive. Certainly, as the largest literature in the 1990s, the economics transition literature reveals a high rate of idea turnover. Indeed, the past decade has witnessed in economics an increasing interest in institutions, law, and politics. According to La Porta et al. (1998), for example, development of financial markets requires an environment of
English law. To some economists, these new ideas finally have it ‘right’ (Easterly, 2002).
Sociology
As a type of counterfactual, it is useful to conduct a similar analysis of sociological articles and authors during the identical period of time. Recall that the statistical analysis of the economic literature provides a surprising conformity to the standard stratification results for the natural and social sciences. The citation count shows a power law fit, meaning a few people and papers are highly cited and most are rarely cited. The regression analysis shows that recognition is accorded to papers authored by academics at prestigious universities.
These standard results are augmented by the network analysis, which reveals starkly the spatial dimension to the associative linkages among papers and by implication the cognitive structure of the economics community. The affiliation of ideas to one location –Cambridge,
Massachusetts— dominates the spatial contours of the production of economic ideas. The economic researchers at the International Financial Institutions and at the new western research centers in Russia and elsewhere were closely tied the core of this network. Those who lacked Cambridge ties or international financial institution ties tended to be at the
44 periphery; many academics lacking these attributes were ignored entirely. At the same time, the structure of the economics community reveals a healthy structuration, in which core and periphery are linked, ideas are emergent and differentiated, and hierarchy is created.
In the plurality of social sciences, the omissions in one field might be compensated by the strengths of another. The evidence on the feedback effects of early success on careers and ideas raises an important question. For if economics is unusual as a social science in having institutionalized its trade as the lingua franca of international financial institutions and development, what then has been the effect on other disciplines?
To provide a comparison to economics, we conducted a similar analysis of articles published in sociology, using the JSTOR database on sociology journals. We used the same keywords and publication dates, January 1990 to January 1996, to create our initial list of articles as was done for the economists. Sociology is numerically a smaller field than economics and the number of journals and of articles is fewer. For this period, we identified
69 cited articles that were published by 82 authors.18 The sociological sample is thus smaller than that of the economists.
Table 6 repeats the regression for the sociologists on citations as conducted in the economics case.19 In this case, we see similar measures of prestige in predicting citation count, although the geographical distributions of these effects are more widely spread.
Instead of developing a single core group as in the economics data, the sociology data demonstrates competing centers of power. There is no spatial agglomeration of authors and the most central authors range in their ideas from a modified contractual approach (e.g.
18 We added articles from the journal, Theory and Society, to the sample in 2004 as this important journal was missing from the original JSTOR sample. Twenty articles that met our criteria were published here. Moreover, we found that the ISI citation database had no citations to the Akos Rona-Tas article, “The First Shall Be Last: Entrepreneurship and Communist Cadres in the Transition from Socialism.” In contrast, we identified 22 articles in JSTOR that cited this article, and these 22 articles were added to our citation analysis. 19 The ranking of departments and PhD programs for the 89 authors on the list were gathered from the National Survey of Graduate Faculty, 1993, as reported in Golderberger, Maher and Ebert (1995). The ranking of journals came from the 1994 Social Science Citation Impact Report.
45 Victor Nee and Andrew Walder) to structuralist (David Stark) to Marxist (Michael
Burawoy). Ties to Cambridge, Massachusetts remains significant in the sociological sample, but so do connections to Cornell and the UC system.
The fragmentation of the field is also apparent in the network graph presented in
Figure 4. The co-citation network consists of 14 components, with the main component consisting of 49 authors. Thus, 60% of the original authors belonged to the largest component and thus 40% shared no co-citations. For economics, 77% belonged to the giant component and over 97% of the cited economic authors shared a link.20
The sociologists demonstrate none of the connections with international organizations as found in the economics literature. None of the papers in the sociology sample are authored, or co-authored, by researchers affiliated with the international financial institutions. An analysis of the Bank’s World Development Report on transition economies,
From Plan to Market, shows that none of the core sociologist in our sample receives a citation, while the core economists are frequently referenced (World Bank, 1996).
These results for the sociology of transition or transformation echo the broader macro data on sociologists, who do not demonstrate the same intersection with policy careers as economists. For 2003, the American Sociology Association reports 13,157 members for which they have employment data on 9,667. Of these, 83% were in education
(including elementary/secondary school) and of the remaining 17%, less than 4% were in for-profit business; 3.9% indicated they worked in state or federal government; there was no category for international organizations.21 The percentage entering government is far lower than the figures given earlier for economics. Abbott (1997:1150) correctly observes that
20 One might speculate that compared to economics, there was less “percolation” in the co-citation graph of sociologists, that is, no comparable giant component emerged. The substantive explanation for this smaller main component might be simply the lower amount of sociological production, but it also might reflect ideational fragmentation. 21 We would like to thank Roberta Spalter-Roth of the ASA for her assistance in assembling the data.
46 sociology has been replaced “as a policy advisor to governments, a role that has been almost completely assumed by economists.”
An interesting insight into the relation of sociology and economics is presented in
Figure 5 for a joint co-citation network. The picture shows fairly clearly that these are two distinct fields. A brokering role is played by industrial relations (consisting of economists and sociologists). In addition, there are many close ties between particular individuals in economics and sociology. For example, a sociologist such as Victor Nee is closely allied with economics through his own citations to them. There is, in fact, a type of fractal quality to the two disciplines similar to the proposal of Abbott (2001). For within sociology, there are sociologists who are more “economist” insofar that they take into account self-interested motivations of individuals as central to their analysis. Within economics, there are economists who are more ‘sociological’ regarding the social and political motivations of people. Yet, by and large, these sub-groups are more integrated within their disciplines than across them. Accountability cannot be maintained by competition, because sociology and economics are for their constituent members cognitively two different fields.
In the messy process of economic reform and privatization, many questions arise which the social sciences find difficult to answer: If a country privatizes, who should own?
How should markets be developed? What kind of state and what kind of polity supports economic transitions? It can be argued that social sciences outside of economics had complementary knowledge to address these questions, but were effectively absent in the policy arena.22 The streetwise explanation is that economics is an expansive discipline, claiming a large jurisdictional scope. But conflicting jurisdictional claims are not unusual in any professional arena. Rather as Abbott argues, it is not sufficient for an organized structure to claim jurisdiction. In order to claim jurisdiction, a profession must ask “society
22 For a review of this non-economic literature, see Kogut and Spicer (2004), a document prepared for the World Bank Operations Evaluation Division.
47 to recognize its cognitive structure through exclusive rights” (Abbott 1988: 59). Certainly, these exclusive rights dominated the international financial institutions’ formulation of privatization policies for the former socialist countries.
What then are the consequences of this exclusivity for other social sciences? The
World Bank in recent years has made ostensible efforts to broaden its research to other social sciences.23 However, the sociology of science has the cautionary tale that these efforts are unlikely to be sustainable. The dynamics of a now long history of exclusion from the policy table have meant that there has been little incentive for the non-economic social sciences to develop a rich capacity in the making of policy. Consider simply, from the data we provided earlier, the paucity of articles in sociology journals in the early 1990s that spoke to the needed policies regarding privatization and economic transformation.
Feedback loops can be negative as well as positive. There can be a status quo in which policy makers desire only economics, and the non-economic social sciences do not attend to policy implications.
Accountability for Endogenous Economists
Ironically, in the many accounts of the contribution of economics to policy, a common observation is that the annealing of economics and policy is not smooth. One of the more skilled pliers of economics to policy, Alice Rivlin (1987), noted in her Presidential
Speech to the American Economic Association:
Knowledge of how the domestic economy works and interacts with the rest of the
world is imperfect. Economists keep coming up with ingenious theories, but they
have a hard time testing them. Data are inadequate and controlled experimentation
nearly impossible. Modeling has greatly enhanced our understanding of the past, but
shows few visible signs of improving the reliability of macroeconomic prediction.
23These efforts, highlighted particularly by Joseph Stiglitz, former chief economist, are visible in the more eclectic references of the recent annual research reports out by the bank See Stiglitz’s (2002) criticism of international financial organizations; and the response of Wade (2001) and Rogoff’s (2002).
48 Forecasting even for short periods remains an uncertain art in which neither
economists nor politicians can have much confidence.
The gap between economics as disciplinary knowledge and good economic policy analysis has in fact been a long term issue in economics, as addressed across generations by Irving
Fisher (1919), Fritz Machlup (1943), and Arnold Harberger (1993). Despite his personal activism for the imposition of a world view, George Stigler (1960) was also duly skeptical of the direct utility of economic theory to the many competing policy implications. 24
Recognizing the errors of past generations to propose policies without evidence, Stigler proposed that policies should not be recommended prior to the research that will eventually resolve the issue. Yet, the evidence regarding the welfare consequences of privatization was largely unknown in 1990.
We return then to Polanyi’s (1962) observation: were the policies endorsed by academic economists “useful”? If the question is were they enacted –leaving aside the contribution of academics to this enactment, then the answer is yes for Russia and many other countries. If rather the issue is, was mass privatization good for Russia, then there is no consensual answer (see Djankov and Murrell, 2002; Bevan et. al., 2001; Galenson, 2004).
Without question though, the data relating to Russian reform present a picture far worse than in many other transition countries, with lower life expectancy, higher infant mortality, and dramatically lower living standards than prior the reforms (Gerber and Hout, 1998; Gerber,
2002). The major success cases of recent years are firms associated with oligarchs and in the primary sectors. These firms were not part of the mass privatization programs and their performance is best explained by the price for commodities than a theory of governance or of depoliticization. Proving causal links between a given policy of mass privatization and broad economic outcomes is difficult given the complexity of events. Yet, if complexity
24 See also Coats (1986) and Ross (1991); as an example, see Dumez and Jeunemaitre’s (1998) discussion of anti-trust theories and the variety of policies in the United States.
49 defies conclusive ex post analysis, then how strong is the ex ante argument for extreme radical policies, such as mass privatization? This observation points to the fundamental contradiction in the confidence in the advocated theory and the dismissal of the possibility of subsequent verifiability.
The most interesting omission in academic treatment of transition is the failure to analyze the economics of economic advisers. In a heady literature filled with black-hole theorems of lobbyists and government ministries, of rent-seeking and corruption, and of empirical effects of the number of lawyers on growth, the effects of academic entrepreneurs on society are unexamined. A consistent analysis would ask what objectives are academic entrepreneurs maximizing (e.g. career, reputation, money or social capital more broadly) and with what consequences for policy and welfare.
A disturbing element of this history is the well-known investigations into potential conflict of interest by the HIID and academic economists. The US Congressional call for accountability led to the GAO’s report on HIID’s activity. Its ultimate finding was that US
AID did not initially have the in-house capacity to formulate policy and administer aid to formerly command economies, and therefore took unusual steps in relying on HIID to play a leading role in the efforts to build those capabilities: “this led to an oversight and management structure that did not follow the traditional pattern. This approach resulted in
HIID’s having substantial control over the U.S. assistance program” (GAO, 1996: 17). The absence of accountability for the Harvard group, they suggest, led to a lack of oversight over these powerful actors.
An eventual civil law conviction of Andrei Shleifer in 2004 for self-dealing in the financial markets to which he served as a policy adviser further raised questions about the lack of accountability over the Harvard actors. The judge based his final judgment on the argument that Shleifer, his deputy, Jonathan Hay, and the two men’s wives used their
50 privileged position to help open Russia’s first mutual fund company (Robbins, 2004).
Leaving aside a judgment on these events, they demonstrate that there are boundary conditions which, when crossed, set in place formal and reactive mechanisms of legal accountability.
There are also pro-active institutions of accountability. The World Bank has an internal group, called the ‘Operations Evaluation Department’, that provides an audit of major programs. The OED issued a report in 2004 that evaluated the results of the invested money and technical assistance. A summary of its negative findings consisted of the following. From 1989 to 2004, the World Bank committed $42 billion in 26 countries of the former Soviet bloc. Initially, GDP fell more than anticipated, poverty increased, inequality increased, educational participation fell, and over half the labor force fell out of the formal system. It noted that there was a policy neglect of the social dimension of transition
(Galenson, 2004: 7-8). The report noted the absence of strong evidence that links the adoption of early reforms to economic outcomes. Among the positive findings are increased private ownership, sensible policies in the energy sector – including environmental measures, and substantial number of projects that had satisfactory outcomes. Thus, the OED endorses a philosophy of experimental method in trying to infer good practice from past actions.
Thus, reactive and pro-active accountability does exist in the domain of application.
In contradistinction, there is very weak governance in academic communities for advice offered to the world. The weak occupational control of academic professions reflects particular conventions. Allegiance to the principle of freedom of ideas has created an umbrella that shields academics from self-governance. In the American context, the early experience of American and western social sciences and their fight for academic freedom
51 marked its most important research institutions to adhere to non-partisan principles.25 No doubt the tacit ideology bequeathed to academics by this history and similar histories in other countries posits a reflexive reliance on Plato’s insistence on the market place of ideas, of competition, as the arbitrator of the quality of research. Let the journals decide is a valid defense of accountability. The size and ideational homogeneity of the active economics research community permit theoretically a higher ‘error-correction rate’ than could prevail in numerically smaller and more heterogeneous fields. Yet, this Mertonian scientific ideal neglects the stratification in the ‘market of ideas’ regarding dynamics of careers, hierarchy, and prestige that we have seen to be pertinent to economics. The ownership and attribution of ideas correlate with a stable academic hierarchy. These very dynamics render internal ex post accountability difficult. As Bacon and Foucault remind us, knowledge and power are correlated attributes. Accountability for successful ideas has to confront the institutionalized power accrued by this very success.
More incisively, the criteria by which good academic research is chosen are different than that by which society might select good ideas.26 Here, disciplinary diversity might serve to expose this gap between the realms of ideas and action that we noted earlier. Given the significant jurisdictional claim of economics on development policies and its institutional policy infrastructure, cross-disciplinary competition within a system of academic professions is currently a weak force for accountability. A change in this status would require the construction of institutional ties among non-economic disciplines into the international policy arena, a construction that is hard to achieve because, due to the feedback loops discussed earlier, the evidence for its merits is itself weakened by the very institutional weakness meant to be corrected.
25 Regarding American social science, see the interesting history of Ross (1991). These are also concerns of European social scientists, such as Weber (1946b) and Myrdal (1953). For skepticism regarding the public intellectual, see Aron (1955). 26 This gap between academic selection and social selection is not unlike the gap between science and commercial utlity, as found in biotechnology (Gittelman and Kogut, 2003).
52 It is surely an intriguing question whether the performative outcomes of logically true beliefs that advocate empirically ambiguous policies should be of professional concern in the evaluation of research programs and careers. The feasibility of such accountability depends profoundly on whether the word ‘advocate’ needs to be replaced by ‘enact’ or
‘perform” per the observations of Callon and MacKenzie and Millo. In the case of Russian privatization, this replacement is not easily justified as it may be for the incorporation of an options trading algorithm in computer-driven transactions. The chain of cause and effect between ideas and action is usually complex, allowing for sins of commission as well as of omission.
It should be recalled that the initial economic writings omitted the social implications of mass privatization and the problems of corruption, good public governance, and the endogeneity of technocratic advisers. That current writings emphasize some of these elements are nevertheless after-thoughts. In contradistinction to the traditional focus by the
World Bank on public management, good public governance was singularly missing in the
World Bank loans to the transitions economies, as the OED report notes:
Public expenditure analysis has long been a central focus of Bank economic work,
but … it received little attention in the transition economies until the late 1990s. In
the meantime, the Bank had transferred considerable sums to transition economies
(especially Russia) in the form of adjustment loans, without the benefit of credible
systems of public financial accountability, detailed knowledge of inter- and intra-
sectoral expenditure allocations, or information on the distortions from budget
execution… (Galenson, 2004: 23).
This neglect of contextual knowledge of government practice is a relatively strong characteristic of, though not unique to, contemporaneous economics literature. In other social sciences, government management and politics were accorded relatively more central
53 importance.27 The initial economics transition literature generally advocated an invariant set of reforms along with the removal of the state from ownership without a corresponding emphasis on the quality of government governance and public/social partnership in general.
Academics have few instances of the exercise of professional accountability regarding the content of ideas. The litany of explanations for this lack of formal accountability echo distantly David Stark’s analysis of ‘accounts’ in reference to arguments to forgive debt repayment of the newly privatized firms (Stark, 1996): firms provide jobs, they are becoming efficient; they are the future, they are victims of the past; they are run by employees or by managers. The argument for academic leniency has a similar litany: our ideas do not harm, our ideas are good for the world, our work is impartial, our work is motivated by the common good, the public does not read our work, the public cannot understand our work, our work is right, politics is wrong. Stark ends his analysis of accounts by asking, “And so we must ask, into whose account and by which account will debt forgiveness flow? Or, in such a situation, is anyone accountable?” Given what we know of the structuration of research effort and recognition by prestige, it is an intriguing question if a discipline can or should be accountable for its negative externalities of these career dynamics on the world. Or we might want to ask more prosaically, can social science hold itself accountable to society and if so, how?
27 See Kogut and Spicer, 2004, for an assessment of the non-economics literature; for representative work, see Offe (1991) and Nelson (1994).
54
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63
Table 1: Prestige as a Determinant of Citation Counts (Economics) (Standard errors in parenthesis)
Model 1 Model 2 Model 3 Model 4
Position prestige 0.083** 0.072* 0.064 0.063 (0.040) (0.040) (0.040) (0.040) PhD Prestige 0.115** 0.108** 0.133** 0.119** (0.055) (0.055) (0.054) (0.055) Journal Ranking 0.176*** 0.174*** 0.174*** 0.172*** (0.046) (0.046) (0.045) (0.045) Cambridge Position - 12.886 - - - (8.070) - - Cambridge PhD. - - 11.039** 11.308** - - (5.289) (5.311) IFI Affiliation - - - -2.556 - - - (7.258) Constant -31.974 -30.150 -34.850 -31.468 (8.387) (8.663) (8.341) (8.696) Log likelihood = - Log likelihood = - Log likelihood = - Log likelihood = - 517.40294 515.42459 515.2963 514.42142 *: p<.10;**: p<.05; ***: p<.01 N= 128 (20 censored)
64 Table 2: Centrality Measures of Cited Economists
Betweenness Eigenvector 1 STANLEY FISCHER 7.6 27.3 2 NATALIA TSUKANOVA 3.2 26.9 3 PAUL L. JOSKOW 3.2 26.9 4 RICHARD SCHMALENSEE 3.2 26.9 5 ANDREI SHLEIFER 7.8 26.4 6 ROBERT W. VISHNY 7.8 26.4 7 JEFFREY D. SACHS 7.5 26.1 8 PETER MURRELL 2.8 24.9 9 DEREK C. JONES 3.3 24.3 10 AVNER BEN-NER 0.7 24.2 11 J. MICHAEL MONTIAS 0.7 24.2 12 ALAN GELB 1.6 24.1 Figure 1:
Graph of Economist Co-Citation Patterns: Affiliated With International Financial Institutions
Triangle = economist affiliated with international government agency Square = non-affiliated economist
66 Figure 2:
Graph of Economist Co-Citation Patterns: PhD in Cambridge
Dark = PhD in Cambridge Light= PhD not in Cambridge
67 Figure 3:
Graph of Economist Co-Citation Patterns: Any Tie to Cambridge
Dark = PhD in Cambridge; current job in Cambridge; co-author works in Cambridge Light = no ties to Cambridge
68 Table 3: Western Advisors and the Russian Privatization Program
Date Event Description Sept.-Oct. 1990 “500-Day” Reform Program Program calls for the privatization of up to 70% of Debated in Soviet Union industry, although voucher free-distribution is not mentioned. Soviet leadership rejects the program, but Russian leadership actively supports it. July 1991 Russian Congress of People’s Laws call for privatization auctions to be held for state- Deputies passes privatization owned enterprises. Privatization “investment accounts” laws to be made available in state banks for all citizens. 25% insider ownership proposed. Aug. 1991 Failed coup attempt. Independent groups meet to advise Yeltsin on future Communist Party dissolved. economic policy for an independent Russia. Nov. 1991 Yeltsin appoints Gaidar to post Gaidar, a 35 year old theoretical economist, appoints of deputy prime minister. other young economists to cabinet positions, including the 36 year old Chubais to head the new State Committee on State Property (GKI). Nov. 1991 Jeffrey Sachs, Harvard Sachs, head of the Harvard Institute for International economist, introduces his Development (HIID), begins to advise Russian Ministry colleague, Andrei Shleifer, to of Finance. Shleifer brings in Jonathon Hay, a young Chubais. Harvard lawyer, and Robert Vishny, a frequent co- author, to fill out the HIID advisory team to the GKI. Jan. 1992 Prices liberalized Yelstin announces that rapid mass privatization will be next component of “shock therapy” program Mar. 2002 World Bank’s Working Group World Bank argues that focus on speed in privatization on Privatization presents may hinder future economic restructuring. They advise to advisory report to GKI use multiple means of privatization beyond vouchers, to begin with pilot projects, and to build regulatory capacity. June 2002 Russian parliament passes Law calls for up to 51% insider-ownership in mass privatization law. privatization program. Law does not mention paper vouchers nor state a starting date. Aug. 2002 Chubais announces start of Announcements state that tradable, paper vouchers will voucher mass privatization be distributed to population. Vacationing Russian program lawmakers angry over vouchers and October start of program. Sept.- Oct. 1992 Foreign aid committed to Despite initial doubts, World Bank commits $90 million accelerated privatization to support Russia’s privatization program. US AID program commits $58 million. HIID awarded first non- competitive US AID grant to assist GKI and to oversee US AID projects in Russia. Oct. 1992 Initial privatization vouchers Mass privatization runs through June 1994. Western delivered to the population consultants supervise all major components of the program.
69 Table 4: Academic Economists in Gaidar’s Government
Position Age in 1991
Pyotr Aven, Minister of Foreign Economic Relations 36
Anatoly Chubais, Minister of Privatization 36
Victor Danilov-Danilyan, Minister of Ecology 53
Yegor Gaidar, First Deputy Prime Minister 35
Viktor Khlystun, Minister of Agriculture 45
Vladimir Lopukhin, Minister of Fuel and Energy 36
Vladimir Mashitz, Chairman of the Committee on 38 Cooperation with the CIS Andrei Nechaev, Minister of Economics 38
Ella Pamfilova, Minister of Social Affairs 38
Boris Saltykov, Minister of Scientific and Scholarly 51 Affairs 40 Aleksandr Shokhin, Minister of Labor
Source: Adapted from Gaidar (1996: 96)
70 Table 5: Content Coding of World Bank Documents
Type of Reference No. of Category Definition References Market Regulation 59 The need for legal framework to regulate market activity Privatization Training 46 The need to support newly privatized firms through training or technical assistance
44 Mechanisms to Trade The need for financial mechanisms to trade Privatization Vouchers vouchers, e.g. stock markets, brokers, etc.
Speed in Implementation 40 The need for speed in implementing mass privatization Social Equity 28 The need to make preparations for improved social protection
Market Ideology 27 The need for open competition and free markets to drive economic growth
Financial Markets 14 The need to develop sustainable markets for the buying and selling of securities
Donor Preferences 12 The need to manage differences of foreign donors (USAID/EBRD/WB) Self-Regulating Groups 5 The need for regulation to encourage professional groups to self-organize
71 Figure 4:
Graph of Co-citations to Sociologists
Dark (black): UC PhD Intermediate (red): Harvard Light (yellow): Other
72
UC Position Position Cambridge Ranking Journal Position Prestige PhD Prestige Constant Cornell PhD UC PhD PhD Cambridge Cornell Position * significant at 10%; ** significant at 5%; *** significant at 1% at 5%; *** significant at 10%; ** significant * significant N=82 log likelihood 3.6*-32.564* -37.167* .1**0.934*** 1.117*** [0.276] [0.107] -0.270** 1.1][17.090] [18.710]
uhrQaiyPDSau fiito ttsAflainCrelPDSau h onl All Effects PhD Cornell PhD Status Cornell Affiliation Status Affiliation PhD Status Quality Author Table 6 : Prestige as a Determinant of Citation 23456 3 12 -343.01 log likelihood -11.799 [0.244] 56.258*** [0.101] -0.207** [16.046] [13.234] (Standard errors in parenthesis) -336.5 Counts (Sociology) log likelihood 1.036*** -37.205* 3.361 [0.103] -0.244** 41.156* [0.270] [18.775] [10.975] [21.167] -341.24 log likelihood 0.747*** 3.5* -32.564* -32.950** 50.254*** -0.11 13.797 [0.199] [13.783] [0.078] [15.784] [8.291] [14.221] 105.559*** -321.23 log likelihood log 0.934*** -0.207** -11.799 [0.244] 628* 451* 27.407** 54.581*** 56.258*** [17.090] [0.101] [16.046] [13.234]
-336.5 log likelihood 0.973*** -0.216** -33.423* -13.243 [0.251] [17.293] [0.101] [16.084] [13.270] [20.029] -18.942 -336.05 log likelihood log 0.762*** -0.105 -33.113** -12.158 49.322*** 17.286** [0.191] [13.218] 100.891*** [0.076] [14.367] [12.892] -39.708** [10.158] [15.278] [14.289] [7.988] -313.89 7
73
Figure 5: Graph of Co-Citations to Economists and Sociologists
Dark (Black): Economics Intermediate (Red): Sociology Light (yellow): industrial economics/sociology
74