Tell Us a Little About Your Background. Your Grandfather Was the Author Of

Background

Dr. Gaidar, welcome to Berkeley.

Thank you.

Tell us a little about your background. Your grandfather was the author of

children's books and your father was a military correspondent for Pravda.

Yes that's right. Both of my grandfathers were writers and Arkadi Gaidar was probably one of the most famous in our country. He also was a very well known hero of the Civil War and of the Second World War. He really was a very good writer, but also a part of the communist pantheon. He is pictured, usually, as a perfect communist hero. That was not really the truth. He was a talented man caught in a terrible tragedy of revolution and civil war. He started to write when he was 14, a regiment commander when he was 17, many times wounded. At 22, demobilized from the army, after the war, as a regiment commander, very ill. So with this kind of biography, you could expect the person to be a misanthrope. He started to write very, very nice, very interesting children's books.

How does having a grandfather like that influence a young person? He was killed in the war, so he was dead before you were born.

Yes. Well, there were two visions of this. First of all, he really was part of this ideology and this pressure on the children, somehow, so when I came to school, everybody all the time tried to speak with me about my grandfather. I think of the first words that my first teacher spoke to me: "Well, how could you write so badly when your grandfather was so great a writer?" So I was so sick of it, I tried to study hard so that nobody would compare me with my grandfather. But all the same, I really love his books even now. I read them a year ago and they're really interesting. It's good Russian literature. So it was as if there were two Arkadi Gaidars, one a part of the communist pantheon, and another very talented, not very happy person whom I was able to know from the tales of my father and grandmother.

So that was a real challenge, moving between these two images. And your father was a military correspondent for Pravda, but he wanted you to be an economist? Yes. He was in the navy before and I wanted very much to follow his steps and also to go into the navy. I was very much interested in it. But then he very delicately pushed me in the direction of economics. Somehow, he had a feeling that the economy would play a very important role in the history of our country during the next generation.

And he proved to be right.

Early Training in Economics

Tell me a little about your economic training. You got your Ph.D. in Russia.

At Moscow State University.

Which theorist most influenced you that we in the West would be familiar with?

Well of course, the economic training during the Soviet era was first of all based on orthodox Marxism. So you were told something about the bourgeois economic theories, but if you would prefer not to know them, you could use textbooks that never went in depth. So that still creates some problems. But if you were willing to study, there were libraries. If you knew English you could find the books. You had to explain why you had to read all of these bourgeois theories, but you could explain it. So a lot depended on whether you were willing. I think that probably Adam Smith had a major influence on me. And what in particular? His concept of the market?

Yes, concept of the market, of the market world, his liberal picture of the world of course.

When you were younger, as part of your education, you studied in Yugoslavia and Cuba.

When I was a schoolboy, yes.

And what did you get from that experience? Did it make you a better communist?

Well, I was in Cuba when I was very young. And that was exactly after the Cuban Revolution and during the Missile Crisis, etc.

So you were there during the Missile Crisis as a young kid?

Yes. It was terribly interesting, terribly romantic because it was a young revolution, nice. There was still a working American tourist civilization, still everything functioned. But also, the girls who would set their machine guns in the corner before making up our room, etc. It was all very romantic for a 7-year-old boy. But also it was the first time that I started to ask some economic questions. For instance, the fruit in the Havana markets was very limited, but if you went 100 kilometers from Havana, there were mountains of oranges remaining unused.

So there was a supply and demand problem. Somehow it was impossible to get it from here to Havana because of spoilage. And it was very difficult for anyone to explain to me why this was so.

Did you ask?

That's interesting. Your generation was fortunate in the sense that you could still benefit in your education as the system was coming down and, in a way, prepare for the future even if it was "on the side," even if the system didn't formally allow you to.

Well yes. Our generation really was fortunate because we were already old enough to have a possibility of using the opportunity and young enough to be able to adopt the new realities to the rapidly changing world. Confronting Economic Chaos

So you are an economist, the wall comes down in Eastern Europe, communism in essence loses power, although it's still there -- how did you get thrust into government service?

Well, it was a moment of a very, very difficult political and economic situation. I was then a young head of probably the best Russian economic institution, which was called the Institute of Economic Policy of the Russian Academy of Sciences. We were able to create a team of young, market-oriented economists from the different institutions and from St. Petersburg. Well after the August coup, it was evident that the old system didn't function anymore.

This would be the coup against Gorbachev.

Yes, October '91. It was evident that the economy was in a shambles. It was very difficult to understand what was do-able in this type of situation, so the line of those willing to take that responsibility was very, very short. It was a time when Yeltsin was having negotiations with the different personalities with whom he proposed to head the government, and everybody refused to do it. And I can very well understand the grounds on which they refused. So from the beginning, he asked me and my colleagues to act as his advisors, which was a much more natural role for an academic than to be an actual government leader. And we were absolutely prepared for exactly this role. But then it was evident that it's very nice to give advice, but how do you implement it? So that's when we started to discuss the possibilities that probably we would have to not only give advice but also implement it and take responsibility for what we were doing.

You say that no one was in the line to take this job. Why was that? Because they had no ideas about what to do? Or were they afraid to do it? Or did they still believe in the old system?

Well, first of all because they were afraid to do it or had no ideas about what should be done.

It was evident that the time for nice solutions, pleasant solutions, solutions for which you would be praised, was back in the past. Now we had to deal with very, very difficult, unpleasant solutions. For instance, just a few things that we had to do were to cut down military expenditure five times -- do you think that's easy? We had to cut down subsidies to agriculture a few times -- it's conflictual. We had to introduce a high value-added tax -- that's conflictual. We had to regularize the prices, which inevitably led to the realization that a lot of the savings of the population were artificial savings with nothing behind them -- it's difficult. We had to deal with the countryside -- which had grain reserves which should last you until February -- without hard currency, without gold; and the countryside was unable to pay for previous accumulated debt. How would one manage that? So that was exactly the time that it was evident that even if you would be able to find some solutions to these problems, they would not be the popular solutions. We have seen the experience of our friends in Eastern Europe who had incomparably easier tasks, and some of them have done it splendidly. But I don't remember that any of them was praised very much for doing it. And it was evident for us and for anybody else that even if you are successful, it would not be the case that anybody would tell you -- "How nice," "Let us praise you," etc.

So you were in the situation of the parent giving the child castor oil for its health.

Yes, but having to do much more dangerous operations. And with a child who is able to kill his parents.

So what impelled you to say "I'll do it?" Was it your belief in the ideas that you were going to implement? Or was it a kind of a natural self-confidence that you had acquired from your childhood? Well, of course it was a belief in the ideas. I was not absolutely sure that we would succeed, but I was absolutely sure that there was no other way. And I was absolutely sure that delay would be suicide for the country. And if you do believe in it, you have to try, you have to do it. It's not a personal matter, it's a matter of your country. Rebuilding the Economy

What you were trying to do was move the Soviet economy, and then the Russian economy after the Soviet Union had broken apart, to a market economy. How could we explain to people what that means? Could you draw a picture for the average person of what that old way of life meant and what a change involves? For example, for people of your generation, what were their possibilities for the future that you envisioned which they didn't have in the old system?

Well first of all, you have to understand that the socialist system was a very, very specific set of comprehensive institutions. So it's not as if you are taking some details from this and combining them with a market -- it was very, very comprehensive. And it is very difficult to put a person who had no chance to live under the system in a position to understand how it works, how it is structured, and also how dangerous it is when it's starting to fall apart. For instance, you come to the retail store and you're absolutely sure that you will get bread in this retail store, that you will get milk in this retail store, that you will get meat, if you need it, in this retail store. You go to the gasoline station and you know that they have gasoline there. You know that the light will turn on in your room. And it is not, as Adam Smith mentioned once, it's not because you depend on the charity or good view of the baker, or anyone else. It's the normal work of the market mechanism.

So let us imagine, for a minute, that none of these things work, that if the state has not given precise orders to the grain producers telling them what to produce, where to send the grain, what to do with the grain, where to produce milk, where to send the milk, where to produce the components necessary for milk production, etc., nothing will be done because there is no interest in it. Money doesn't work, the market doesn't work. Only if this very comprehensive system -- which is based not on vested interest but on power; which goes through all the enormous country from Moscow to Kamchatka; which depends on the possibility of the highest level to influence directly, by order that will be implemented, on developments in Kaliningrad, Kamchatka, Sakhalin, etc. -- only then could the system work. So imagine for a minute that you withdrew power from this system -- power isn't efficient anymore. Well, the coup failed, the Communist Party doesn't exist, the KGB doesn't exist, there is no fear -- what will happen? You will not be confronted with some economic problems. You will be confronted with complete economic collapse because there will be no bread in the shops because there is no vested interest, and no bread in the shops because there are no efficient orders. There is no electricity because there is no vested interest, and no vested interest because no orders to produce coal to supply electricity. So you are having a full- scale catastrophe of that very, very delicate mechanism of the modern industrial society. That was really the starting point. So it was not, for instance, as though we had a working socialist economy -- "it functions, it's nice, we are implementing a program of reform, we are thinking about how to make it better" -- no.

When communism collapsed, it was the start of the collapse of all the mechanisms of microeconomic regulation. Soldiers were not getting bread because nobody supplied them. Big cities were without food. The population was preparing to save itself somehow. It was very well pictured in Russian novels, exactly at moments, this expectation of catastrophe. So when we had to start, we had to elaborate the plan first of all, not on how to build a splendid, nice, perfect, stable market economy, but to urgently, somehow, without preparations, without the necessary preconditions, make markets work. It was evident that it would be impossible to make the state farms supply grain without food orders. So somehow, in a very short period of time, we had to reintroduce efficient money in the economy and to make a market mechanism work. That was the essence of the plan we were elaborating. It was evident to us that there was no 100 percent efficient solution, that no strategy guaranteed success. But at least it was evident what you had to try to do. For instance, what I was thinking at the moment as a possible model: You are flying in a plane. Then you see that the crew of the plane has parachuted out. Then, either you crash or somebody will at least try to do something. That was exactly my view of the situation in '91. Setting Monetary Policy

What became the key to coming up with a response? Did market theory give you a general guideline as to how to formulate policy?

Well first of all, during the few years before, we were all the time doing concrete research on the workings of the Russian economy. We had a more or less precise picture of where the weak points were, the most dangerous problems. We had pictures of how the crisis would work. We had an understanding of our weakest point. We had an understanding of what direction we should try to move as rapidly as we could.

So what was the plan? Give me some indicators of what you were trying to do.

What was the plan? Well first of all, the crucial short-term problem was the food supply to the cities. If you cannot do it by orders, then the only way you can do it is by creating efficient money. So the crucial thing was to create efficient money which would allow us to create the food market. To create efficient money, we had to deal with a few separate problems. The first problem was the problem of ruble- zone. We were still living in a country in which 16 independent banks were creating money, the union bank and 15 republic banks. And all had a very serious stimulus to compete because, in this situation, those who were printing money faster than others were getting additional benefits. For instance, let us imagine the situation here. There is no United States anymore, there are 51 independent states starting tomorrow. You are living in California. You somehow have to regain the possibility of financial control. All the states are competing in printing money. You cannot just close your borders because you do not have the instruments. How do you make the transactions, how do you define which money to accept and which not to accept? How? The first and the crucial precondition was, as rapidly as you can, divide the ruble- zone and create an independent Russian central bank which will regain control over money creation in the ruble-zone. But you need some time to do it, at least six to eight months. It's impossible to do it differently. So the crucial point is that somehow you have to live through this six to eight months. You do not have food reserves to last you through this period. So to wait so long for price stabilization is impossible. To liberalize prices with the possibility of money creation runs an enormous risk of hyperinflation. So, let us liberalize the prices immediately, let us face this risk, but let us add to it a very, very serious tightening of the budgetary monetary policy in Russia. Russia is still 60% of the Soviet Union economy, so if Russia is radically tightening policy, radically cutting military expenditure, radically cutting subsidies, introducing high value-added taxes, etc., it means that this enormous flow of money will be confronted with at least some obstacles. So there's a chance that we will be confronted with high inflation but not with a hyperinflation catastrophe which would make all of your monetary mechanisms impossible.

You do not have customs. Practically, you do not have customs because all Soviet customs do not exist anymore and Russian customs do not exist yet. You have terrible problems with the food supply, so let us for a temporary period, for half a year, introduce a zero import tax so that imports could then play a substantial role in making the market mechanism work. Well, you have to deal with a 100% nationalized retail trade and economy generally. This retail trade, during the decades, was recreating the shortage because a salesman in a Soviet shop was not just a salesman. He was a big boss. He was deciding -- maybe he would give you something or he would refuse. To have a friend who was a salesman was a great social success. So it was evident that the retail trade would do anything it could to recreate the shortage phenomenon. So that's why we immediately issued a decree which allowed trade to everybody, anyplace, without any restrictions.

It was evident that we'd have to start structural reforms like privatization. It was also evident that only fools could think that you could privatize the economy in a two-month period of time. So, try to start these reforms as rapidly as you can, but don't wait until the results of these reforms are evident. Monopolies and anti- monopoly policy -- well, it is evident that you cannot change the structure of an economy that was formed through the decades during the few weeks before the price stabilization. So the most efficient thing you can do to fight the monopolies is opening the economy as rapidly as you can. So those were approximately a few of the lines we were trying to implement. Leadership amidst Revolution

So the challenge was systemic -- you had to act across the board in the whole economy. Now as an economist, a person who has been trained in theory, how do you change when you take on a role like this? You obviously are still informed by the theory, but you're really making up things, in part, as you go along -- right?

Yes. What is important in this type of situation? Well, usually deep economic training is not necessary for decision makers; there is no danger. Usually they have economic advisors or deputy ministers of finance who read economically, but it is not the job of a prime minister to know the economic details because usually the changes are slow, not very radical, everything is very natural, and it's just unnecessary. In this situation of very rapid changes, when common sense does not give you answers because the advice of common sense could be terribly harmful, as we have seen during this transition, of course you need to have a clear picture of what works, what should be done, what are the problems, which are the most dangerous points, etc. But also when you are starting to do this you are confronted with day-to-day urgent political problems in different fields. You cannot just concentrate on making reforms. You have to deal with national problems, with the relationship with a dozen other republics, problems with the CIS (Russian minorities and Baltic States), conflict between Ingushetia and North Osetia, war in Moldova, etc. Inevitably you have to deal with all of these problems. What sort of a political leader do you need in a situation like this? Did Yeltsin meet that test?

Well, generally yes.

First of all you need a political leader who has a general feeling about what should be done, not in technical details but the direction. Second, you need a leader who has a feeling for the popular mood because it is not a technocratic solution. We as technocrats would advise, we know what to do. But it's very difficult for us to have a feeling about what could be done, not just what could not be done.

So you might say to cut the subsidies on bread, but Yeltsin has to have a feeling....

...whether it is possible or impossible. And if it's possible, he has the possibility to tell the people that it is necessary to do which I, of course, never have. And then, of course, you need to be a decisive person, a person who can make a decision and stick with that decision. And generally Yeltsin, I think, had all of these facets.

What lesson do you draw from this experience for your colleagues as economists about what it's like to be, I guess, in the frying pan? or in the cockpit of the plane after the crew has just left, to follow up on your metaphor?

Well, generally my advice would be not to make too complicated schemes. I do remember participating in long discussions about the sequencing of measures in the reform process. A major part of these were nonsense. You cannot influence life in such a detailed way. You usually have very crude weapons, very imprecise. Don't try fine-tuning, especially in a situation like this.

As you look back at what you did and these enormous constraints that you were under, the obstacles you faced, what sort of a grade do you give yourself? What would you have done differently in this period?

Probably a lot technically. I'd make the system of international trade and hard currency relations from the third of January '92 simpler than it was done. I would distribute licenses in a little bit different way. So, a lot of the technical details I probably would do another way if I were to have that chance. But in general directions, keeping in mind the political possibilities, not if I was the God almighty but in this concrete situation, I think that generally I would do exactly what I have done. Social Changes

In the course of doing all of these things you're, in essence, creating your own opposition in the short term. But also in the back of your mind must be the idea that you're creating new classes of people who will be supporters of the system now and in the future.

Of course that was one of our crucial ideas. All the time we were trying to create a social basis for the reforms which would make them sustainable. Let's help the audience understand that. That means that the system has now come apart, where orders came from the top and there was this here and that there. Now you're trying to create a class of people who are entrepreneurs, who would supply the food because they see that they would make a profit and they know that there's a market for it.

We feel, if you compare Russia '91 and Russia '96, that is an enormous difference, because we have created this class. It's not only a country of the very rich and the very poor. That is a very simplified picture. What is important is that it is a country with an increasing middle class, with an increasing part of the population experiencing the living standards of the middle class. When you are traveling, for instance, to a middle-sized Russian city, say Magnitogorsk, and on Friday you see a long, long line of not-very-expensive automobiles bringing Russian families to their dachas 10 kms from Magnitogorsk, you see exactly this emerging Russian middle class. And with all of these problems, it's evident that this middle class is being developed, that it is connected to the market economy. And exactly this middle class, from my point of view, played a crucial role in Yeltsin's victory in the '96 presidential elections.

In your short monograph describing your plan and its implementation, you describe almost with wonder the way constituents would change. There's some reference, I think, to military suppliers who, over the time of your involvement in policy, changed their view of the world and began to think, "Well, how will we sell our product?" That must have been quite satisfying.

It was satisfying. Also I have seen different examples. I have seen a lot of representatives of the previous elites, business elites, absolutely amenable to adapting to the new realities. And there are sad stories among them, for their business enterprises, etc., but also I have seen the success stories.

Academic Life versus Government Service

As I hear the complexity of these tasks that you undertook, I am amazed by your capacity to undertake all of this and I want to understand exactly again (we talked a little about this), what motivates you? What allows you to continue in this turmoil? In this chaos? And undertake these different directions when, in fact, you don't know if it's really going to work? I mean your theory suggests that it will, but what does it take? Enormous self-confidence? What are the elements there of undertaking such an enormous enterprise?

Well, somebody had to do it. Maybe it could be another person and maybe he would be sitting in my place, but somebody would have to do it and answer these questions. In some of your press conferences and I think just a few moments ago, you were suggesting that in a way, you realized that you might be a sacrificial lamb.

Of course.

But since you were not a professional politician, were you willing to try because you knew, after having done it, you could leave the scene?

Well partly yes. First of all, the problem was that nobody was sure that we would be able to leave the scene. When the situation was discussed in '91, nobody was sure that we would be able to just peacefully leave the scene, that we would not be shot, for instance. But the point that I never had political ambitions, and never wanted political roles, and my only dream was to come back to my academic work -- of course it helped. I didn't have to think all the time about how it would influence my long-term political prospects, whether it would help me or impede me in being elected president in the year 2008, etc.

It sounds like there was a kind of ferment and excitement in this team that you put together. It sounds almost like the New Deal in the U.S. but in a much more difficult situation. You were running an academic seminar in a way, but actually applying your discussions quite immediately.

Yes. We started as an academic seminar and somehow we had to implement our ideas in practice.

But now, leaving the burdens of office is not a problem for you. It must be very difficult for somebody with an academic temperament to be thrown in this vortex.

Yes, it is.

What are the sort of pressures on you, other than you never sleep, it sounds like?

First of all, it is the problem of a different time clock. When you are an academic, you are planning your life in weeks, months, and years. When you are starting to be an advisor, for instance, members of the Council of Economic Advisors, you are planning your time in days and hours. When you are a decision maker in a situation of extreme crisis, you have to plan your time in minutes. On many occasions you have 15 minutes to listen to the arguments and then to make solutions on which a terrible lot depends in your country. The comfort of thinking 30 minutes calmly is an enormous comfort for a decision maker in a crisis. And for the academician, not being able to think for 30 minutes calmly is a very serious pain.

What would you advise young people in terms of studying in the academy and preparing for this world?

I hope they never will be in my situation like myself and my colleagues. Just understand one thing -- revolutions sound terribly romantic. It's nice to read about them, very interesting to study. My advice -- never experience one yourself because it's terribly difficult for your country. Russia's Future, the Weimar Analogy, and Lessons Learned

Why was there not more violence? Why, with the breakdown caused by the pain that was being inflicted, did all of the dire predictions not come true?

I think it was mostly because the difference between the Russian Revolutions in 1917 and 1991 - 1993 was that now we were still dealing with an industrialized society, a literate society, a well-educated society, a society which survived a very difficult experience during the 20th century, a society which was prepared to understand how dangerous it is to put all of your stakes on force. And we practically had a short-term civil war in Russia on the third and the fourth of October 1993. But the fact that we were able to prevent large-scale civil war, I think, is first of all connected to the fact that during the century Russian society became much more material. Now we do understand how terribly dangerous it is to start a full scale civil war.

What is next on the agenda for the Soviet economy? What, if things stabilize somewhat, is the next major set of reforms that have to be undertaken?

A few are very important. I will just mention them. A reform of the system of social protection, which is terribly inefficient at the present stage.

The reform of the system of the interrelationship between the federal budget and the regional budget, which is terribly inefficient. Tax reform, because the tax structure is very much distorted. Land reform, agricultural reform, private property should be implemented in these fields. Further reforms connected with the regulation of the national monopolies, which are still poorly regulated, etc., etc., etc. So of course we have a lot to do to make this economy more efficient, more stable, more socially just.

But is Russia over the hump now, in the sense that addressing these problems is much more manageable than it was?

Well, we were really passing through a period of revolution. The period of revolution is the period when your chance to plan anything and implement it is very much constrained. All the time you have big government in revolutions, you have to deal with very, very strong problems and pressures. Now I think that we're past this period. Now I think that the whole history of communism in Russia is really over. Now we are confronted with a lot of problems, not dissimilar to many problems with which other market economies have been confronted. And it is the time for a serious, maybe difficult, technically complicated, but manageable reform.

One problem that we haven't addressed is that in all of this Russia has lost its empire. One thinks of the Weimar Period in Germany and the dislocation, the disillusionment that is caused when a great power becomes less of a great power. Does that remain a problem for Russia? What are the possibilities of a kind of right-wing nationalist response that would be dangerous for the world?

If I am not mistaken, I think that I was the first to mention the parallel between the situation in post-Soviet Russia and Weimar Germany. It was, I think, in the summer of '92. And, of course, I still do think that it is a very, very dangerous parallel because it's very easy. The easiest policy making is to play on hurt national feelings. "It was all a Jewish-American plot, we were never beaten in battle, we were betrayed from the back, now we have to recover it, we have to be a new power once again, we will reconquer it," etc. So all of this rhetoric is very, very familiar from the German thirties. And for instance, when you read a lot of the writings, including the writings of influential politicians of the opposition, you will see the evident analogies with Hitler's writings. So of course the danger is there, and from my point of view it is probably the most serious danger for my country, and maybe for the world.

What is the way of tackling these problems and solving them?

Of course fascism and National Socialism in Germany first of all triumphed because of these pains, but also because of the Great Depression. So the earlier we start the Russian economy moving, the earlier we will be in a position to create the preconditions for stable economic growth, the earlier we will be in a position to implement the reforms I mentioned, which will make this market economy more efficient and more socially stable, the less will be the chances for radical nationalists to use all these problems to grab power in Moscow.

And what is the role of the West in all of this? The European Community and the United States? How can they be of help without being seen as an intruder or someone who's trying to overly impact what should be Russian solutions?

I never overestimate the possibilities of the West to influence the situation in Russia. They are limited, but of course the West could do something. For instance, any serious step connected with opening of the markets, especially opening of markets to Russian manufacturing industries, would be an enormous help because it shows that you can be part of the world economy. It creates a stimulant for those who are able to adapt. So any step in this direction is very important. Try not to ignore the Russian national interests which do exist. Try to keep them in mind when you are planning your international policy. Try not to make you international policy dependent on purely domestic issues. It will be important because otherwise everybody will have to pay for it. Try not to look at the world from the position of winners and losers, because everybody is the winner because Russian communism disappears. So the problem is how we structure our future in the 21st century.

Dr. Gaidar, what thought would you like to leave us with, with regard to what you tried to achieve and what you achieved in transforming the Russian economy?

We were confronted, not with a splendid stable situation which was in need of a small improvement.

We were called to the government after the complete collapse of the previous regime. And that is a fact that is ignored by many of those who are trying to write about what happened in Russia during those few years. Our possibilities of implementing comprehensive reforms were very limited because we had always to deal with a crisis situation. Now I think that with all of the problems which still do exist in Russia, the major problems of the stabilization of the markets and democracy probably are solved. Now a lot depends on the ability of Russia to adjust to the new realities, to move farther, to create the bases for sustainable economic growth. And a lot depends of the ability of the world, leading nations first of all, to accept Russia as an equal in the family of industrial democracies.

Dr. Gaidar, thank you very much for coming in here today and explaining, describing, and helping us understand this very exciting period when you changed the course of the Russian economy. Thank you very much.

Thank you.

And thank YOU very much for joining us for this "Conversation on International Affairs."