Janine Wedel - Collision and Collusion - The Strange Case of Western Aid to Eastern Europe

Generally unregistered, unregulated, and unrestrained, a few highly visible econolobbyists were an integral part of the phase of Triumphalism and even gave it definition. As attention shifted from one country to another, the econolobbyists moved with, contributed to, and received attention in the period of euphoria and great expectations in whatever country they happened to be “helping to put back on track.” Yet they were scarcely to be found in the subsequent phase of Disillusionment. Both at home and abroad, the econolobbyists effectively leveraged their supposed access to and influence with policymakers and money sources. And, as the public hype over one country undergoing “reform” diminished, they typically abandoned it and moved on to another.

A case in point was Jeffrey Sachs, a prominent operative on the international economic reform circuit, who, in many ways, defined the circuit. A Harvard economist, Sachs promoted “shock therapy,” a popular term for austerity measures (usually associated with IMF stabilization policies) that entailed the reduction of a country’s budget deficit by eliminating subsidies and price controls and tightening credit supply.5 Sachs didn’t invent shock therapy, but helped to publicize the doctrine to such an extent that he became closely identified with it in both East and West. The symbolic association was so strong that Sachs received credit or blame even for policies he did not create or help to implement.6

Jetting to Warsaw between trips to Prague, Moscow, and São Paulo, he appeared frequently for several days at a time in Poland during the crucial period of its initial reforms in 1989-90. While Polish economists were stressing sacrifice, Sachs peddled a vision of economic change with relatively little pain. In the summer of 1989 in Poland, Sachs predicted an end to the suffering: “The crisis will be over in six months.”7

Sachs blossomed on prime time while other foreign advisers kept their consultations behind closed doors. His televised speech before the Solidarity Parliamentary Caucus in September 1989 galvanized public opinion, including that of some of the country’s new leaders. Among his points:

1. It’s necessary to take common-sense action.

2. You won’t succeed if you don’t.

3. If you act dramatically and make an impression, you will get money from the West.

4. Do something brave.

5. Figure out how much society can take, and then move three times quicker than that.

6. If you jump into the market economy, you will be first in line for credit—that’s a promise. Inflation will vanish and the standard of living will begin to rise within six months (emphasis added).8

To people looking for simple, painless solutions, no one held more sway than a Western expert, especially one from Harvard. He appealed to a populist mood sweeping Poland. “Very seductive,” Ryszard Bugaj, Solidarity economist and parliamentary representative, called Sachs’s televised address. Comparing him to a faith healer, Bugaj added: “I think Sachs perceived the general mood of his listeners very well, the nature of their emotions.… He talked in such a smooth, confident manner that many responded as if they were hearing a revelation.”9

Poland, perhaps unlike nations to its east, had many able economists, but in a country so long denied the gains it knew had been realized farther west, only a Westerner could galvanize public opinion and confidence. Polish officials learned to use Sachs, with his Harvard credential, American pizzazz, and boyish showmanship, to prepare their country psychologically for austerity. Stefan Kawalec, who as director general of the Ministry of Finance was intimately involved in nearly all critical economic decisions, summed up Sachs’s usefulness to the government: “Sachs didn’t make any new discoveries here, but he helped us in that he could make many people understand the obvious truths that they might not have understood otherwise.”10

If Sachs had come from a non-Western country, he could not have caused such a stir. He filled a temporary vacuum during a few extraordinary months in Polish history—from Solidarity’s landslide victory in June 1989 to its first term in office. His star began to fade by the summer of 1990. And by that time, the Marriott Brigade was at high tide throughout the former Soviet Bloc.

DISMANTLING THE “COMPANY TOWN”

One of the major tasks of the Marriott Brigade consultants hired by donor agencies was to aid in the privatization and economic restructuring of state-owned enterprises. In theory, at least, the donors (and certain parties and vested interests in the recipient countries) were committed to remaking entire economies according to an image of Western capitalism—which often was more a caricature than a well-informed understanding of the organization and diversity of Western economies and state-private relationships. Under the Soviet umbrella, properties throughout the region had been nationalized and, at least officially, private enterprise virtually eliminated. Entire communities of workers had been created around state-run enterprises. These “company towns,” guaranteeing not only lifetime employment but also housing, social security, and health and day care, exemplified a slice of socialist life that formed part of donor images of the region.

Thus, when communism unexpectedly collapsed under its own weight,11 a great moment of opportunity and anticipation had apparently arrived for the West. Having finally won the Cold War, the West could show that its ideology had been superior all along and put its own stamp on these formerly communist countries. It would help to create capitalist states: the “economic man” of Karl Marx was to be transformed into the economic man of Adam Smith. The fact that the collapse of communism came on the heels of a worldwide movement toward privatization headed by international financial institutions and the development community added momentum. And so the international lending institutions and the foreign aid community, often working in concert with reform-oriented indigenous elites, pressed the governments of Central and Eastern Europe to build market economies by introducing economic reforms, privatizing state-owned resources—and doing it within a few short years.12

It was in this spirit that privatization came to be seen as a yardstick of progress in the new democracies and that donors made it a mainstay of their aid efforts. The United States obligated more aid to “economic restructuring,” including privatization and private-sector development, than to any other single effort.13 A USAID official based in Central Europe remarked that “privatization is our first, second, and third priority.” USAID’s Action Plan for U.S. Assistance to Central and Eastern Europe of 1991 envisioned that

[a] large portion of A.I.D.’s assistance for economic restructuring will be targeted at the privatization process which is essential to the success of overall macroeconomic reform. Assistance to individual enterprises, helping existing businesses to restructure and privatize or to improve efficiency and adapt to the new market environment will be key endeavors in the economic restructuring effort.… The bulk of Eastern Europe’s productive capacity is in the hands of state-owned enterprises (SOEs). Large scale privatization of these SOEs is essential to the success of economic reform. The U.S. has excellent capability to provide assistance to this end, and the governments of several Eastern European countries have asked for it.14

Given that privatization was a leading signifier of capitalism to the donors, they often competed (and sometimes cooperated) to finance “model” and “demonstration” projects to show their political and ideological commitment to building capitalism. According to an official quoted in a report issued by the U.S. General Accounting Office (GAO), USAID “believed that privatizing a few large enterprises in the airline, steel, glass, and furniture industries would have a ripple effect on the economy.”15 The United States supported highly visible projects, notably the privatization of huge Polish enterprises employing thousands of people, such as the Huta Warszawa steel mill and the Sandomierz glass company, and national icons such as LOT, the Polish national airline.16 Although later, the United States expanded its priorities to focus more on supporting new private enterprises and creating stock exchanges and security and exchange commissions, many of the donors’ early goals focused on the privatization of company towns, with their socialist amenities such as health and day care and employee retreat centers. By transforming these “white elephants,” donors aimed to drive a silver stake through the heart of socialism and bury it forever.