How the United States is now Tasting the Medicine the West gave Russia Erik S. Reinert

Some time ago Foreign Policy published an article entitled Economists on the Run. Paul Krugman and other mainstream economic experts are now admitting that they were wrong about globalization: It hurt American workers far more than they thought it would.

The surprising thing here is that this recognition comes so late. Globalization and de-industrialization resulting from too abrupt free trade started hurting Latin American countries in a first wave in the late 1970s, and then, in a second wave after the fall of the 1989 Berlin Wall, seriously damaged former Soviet republics, most of all Russia and Ukraine. The third wave of globalization-induced poverty is now hitting the US and the EU periphery. Had US economists studied what globalization did during its first and second destructive waves, they would have seen that what now has happened in the US economy is in fact a chronicle of a disaster foretold.

Interestingly, the theory calling for protection of manufacturing industries had the same roots in Russia and the US. German economist Friedrich List (1789-1846), who became a US citizen, contributed to the already existing theories there. List’s main work The National System of Political Economy was translated into Russian by Sergei Witte, the minister of Finance during the Last two Tsars. So the Cold War economic competition between Western Capitalism and Communism had the same theoretical foundation. However, the huge differences between the economic systems made us blind to the fact that the economic strategy behind the two competing systems was exactly the same: Friedrich List’s cult of manufacturing + infrastructure. In Russia Sergei Witte promoted both. . 

The Fall of the Berlin Wall brought with it several shocks to the Russian economy. A free trade shock and a privatization shock produced by a group of mainly US advisors who seemed to care more about the stock market and the exchange market than the real economy. With my Estonian colleague Rainer Kattel we showed, in a paper produced for Expert, that from 1992 to 1998 both industrial and agricultural production in Russia fell by more than 50 %, while real wages – having risen a bit early on – later also dropped precipitously.

The surprising thing with the Russian economy during these years was that the value of the rouble skyrocketed while the real economy collapsed. Clearly, instead of making money from producing things in Russia, money was made by transferring roubles abroad at an artificially high exchange rate. US economic advisors clearly played a role in these destructive processes.

When attending the 2015 Gaidar Conference in Moscow, I was surprised that the economists most closely associated with the utterly destructive shock therapies of the 1990s – Prof. Jeffrey Sachs and Prof. Anders Åslund – were guests who were treated with the utmost respect and admiration. There and then it occurred to me that the Russian establishment appeared not to have understood the links between the destructive theories and the collapse of the Russian economy in the 1990s, from which the country had far from recovered. How was this possible? With respect I have to admit that the thought then struck me that the Russian elites had succumbed to a version of The Stockholm Syndrome: when victims identify and sympathize with those who have caused harm, when victims come to believe in the same values as the aggressor. Hopefully, now when also the US economy is suffering (although much more mildly) from the same kind of bad advice it is understood that it is time to resurrect a more realistic economic theory.

The United States started believing in the propaganda created by their own economists, and the elites did not perceive the de-industrialization and stagnant or falling real wages that followed. Instead the US started blaming neighboring Mexico, although real wages had fallen much more in Mexico than in the US. In fact, the US-Mexican relationship shows us a prototype of how one country loses while another gains from globalization. Mexico lost much of its traditional industry and specialized in the products that are technological dead-ends, products that cannot be mechanized. These products are made at assembly plants (maquilas) located along the border and pay lower wages than traditional industry in Mexico. While the US specializes in agricultural products that can be mechanically harvested – like wheat and maize – Mexico specializes in products that have to be picked by hand – like strawberries and citrus fruits.

In 2014 the life expectancy of white males in the US started declining, and declined by four months over the next three years. This effect of neo-liberal economics should not have been a surprise. Those who followed the effects of the de-industrialization of Russia knew that as the result of the shock therapy forced upon Russia by the West, life expectancy of Russian males declined by nearly 7 years. This was documented in a 2009 article in the prestigious medical journal Lancet. As it was in Russia, the declining life expectancy in the US is largely a result of social conditions. The richest 1% of American men today live 15 years longer than the average man.

Foreign Policy asks if US free market economists helped put a protectionist demagogue in the White House. The answer to this question is clearly yes. But long before then, the same dogmatic economists did immense damage to the Russian economy. USA has become ‘Russia lite’.

(Erik S. Reinert. Professor, Tallinn University of Technology and Honorary Professor, Institute for Innovation and Public Purpose, University College, London.)