- 1 year ago
- #woosays
In this three-part arc of #WooSays, we revisit some of the most consequential economic transformations of the 20th century: Poland, Russia, and China, to understand what went right, what went wrong, and what we can still learn today about the shift from central planning to market economies.
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00:00WU SAYS
00:10Hi, welcome to WU SAYS.
00:12This is another episode where we get real about the US, China, everywhere and everything in between.
00:18It's two superpowers, one global story.
00:21We're taking a step back in time this episode.
00:24We're continuing our conversation from the previous about the reform wave in the 1990s when post-communist countries were rebuilding their economies, shifting it from centrally planned economies to the future, to capitalist-led market structures.
00:45And these are the moments that offer insight into why reform is so hard and why impatience can backfire.
00:55So today on the show, we have Professor Wu Wingtai, who has been studying US-China relations and has been looking at economic history for the past decades.
01:04He has had a front row seat to some of these very consequential reform episodes in the 1990s.
01:11Prof Wu, last episode we were talking about Poland and Poland's immense reform episode.
01:21Talk to me a little bit about why today, in hindsight, we consider Poland a success story.
01:28Well, the foundations of the success came with first a political change.
01:34On the Polish election of June 4th, 1989, a non-communist government was overwhelmingly elected.
01:44Much to the surprise because everything had been gerrymandered such that the communist was expected to retain one-third of the seats so that the non-communist would not be able to amend the constitution.
02:01But what happened was, all the gerrymandered constituencies as opposed to vote communist,
02:08which were roughly the areas where the state bureaucrats lived, where the state factories were,
02:17they all voted for the non-communist because they all were inspired by the vision of the possibility of the country becoming like West Germany.
02:27So these people who came to power, quite unexpectedly, now with unconstrained power,
02:34because they got almost every seat except for two.
02:38Now, and with the fear of potential Russian invasion from the 1956 memory of Hungary, 1968 memory of Czechoslovakia,
02:51they decided they have to move very quickly in the directions that they have chosen, which is to become like West Germany.
02:59Germany.
03:00Okay.
03:01So four things, four steps.
03:02First step is overnight prices were freed.
03:08The state no longer set the prices.
03:11This is something that could be done overnight because all you've got to do is say,
03:16I won't enforce whatever the price is.
03:19The second thing that they did was to stop the inflation.
03:24The inflation was largely caused by the government trying to counter the economic slowdown by printing a lot of money to push purchasing power.
03:35But instead of enlivening output, it only enlivened inflation.
03:41Right.
03:42So, the next thing they did is to say, we stop printing money right now.
03:46Now, that is something you can do immediately too.
03:48Yes.
03:49You just…
03:50Just stop the printing presses.
03:51That's right.
03:52And the third thing is, we will open up the economy to trade.
03:56There used to be heavy tariff for goods that are coming in, heavy taxes on goods that are going out.
04:03Right.
04:04And if people want to send money, they've got to get permission.
04:07And if people want to send money in, they've got to get permission.
04:10The third is internationalization, where they say, we stop collecting taxes on goods moving in and out,
04:18as long as it is not opium that you are bringing in, and illegal drugs, any goods can pass through.
04:25Right.
04:26And money?
04:27You want to take money out?
04:28Go ahead.
04:29But you want to bring money in?
04:30Welcome.
04:31So, instant internationalization.
04:34Okay.
04:35These things can be done immediately because all it needs is the government to stop enforcing the regulations.
04:41Right.
04:42The fourth thing that they did could not be done overnight, which was privatization of the economy.
04:50Because the economy was almost 100% state owned.
04:53State owned.
04:54Other than the bicycle you own yourself.
04:56Now, given in that situation, you know that you cannot give instant privatization.
05:03Because what happens is that the managers would just take it.
05:07They are the ones in charge.
05:08If you say it privatized, then straight away take it.
05:12So, they committed to total privatization, but they would launch a process by which the privatization would be fair.
05:22How do we distribute the assets to the people?
05:27Oh.
05:28So, the commitment to privatization was there.
05:31And to get the commitment to privatization is that it's legal to run your own enterprises.
05:40You can open any kind of, you can open a small shop, you can open a factory, whatever you do, that's fine.
05:47Yeah, yeah.
05:48What's the immediate consequence?
05:49The western press crowded in.
05:52The immediate thing they see was prices rose 50% the first day.
06:00Prices rose another 50% the second day.
06:05After one week, prices had driven up by a thousand percent.
06:10And all the western press, New York Times, Washington Post, Times of London, they said,
06:16My God, the Polish government's gone mad.
06:20They free the prices and the prices have jumped.
06:23And the prices are so high, such that when you go to the store, you see that the goods are there.
06:31Because the price is so high, people cannot afford to buy it.
06:35There will be a rejection of this government.
06:39They have reformed too quickly.
06:42That was the verdict in the initial verdict.
06:44That was the initial verdict.
06:45Oh, okay.
06:46And because you look at China, China did not free up all the prices.
06:50China, as we talked about in the previous episode, had two prices for the same thing.
06:55One in the state store, one in the free market.
06:58That's right, yes.
06:59These guys just rejected it.
07:02So they think this is going to be a disaster.
07:05Right.
07:06But after 1992, after the fall of the Soviet Union, the KGB archives were opened.
07:16And you know what the KGB reported to Gorbachev?
07:19Because Gorbachev was very interested to see what are they doing and what were the results.
07:24The reports that came back to Gorbachev is, the Poles have done it.
07:30They have succeeded in what we have not been able to do in the last 20 years.
07:36The stalls are full of goods, unlike the empty shelves.
07:42Now, let's talk about that question.
07:46On one side, the Russian agents saw all these goods on the store.
07:52They were very impressed.
07:53They said this is a good thing.
07:55And they thought it was a good thing.
07:56And whereas the Western reporters saw all these goods in the store,
08:00and they said, my God, look at the inflation.
08:03No one can afford to buy.
08:05The truth was, if a store cannot sell the goods,
08:11would it just leave the goods sitting on the shelf?
08:14It would try to return it to the distributor or to launch a fire sale to get rid of the goods.
08:24The reason is the following.
08:26The rise in prices was really fake.
08:30Because under central planning, the price of goods was very, very low.
08:35The only trouble was when you go buy it, it is not there.
08:40Low price, but you cannot buy the goods.
08:42And since the price was low, you have to ration that.
08:47So everybody had a coupon.
08:48So just because you got a coupon doesn't mean that you can buy.
08:51But if you happen to be the first in line, your coupon will be able to use it.
08:55So you get it.
08:56Whereas if you use the last in line with the coupon, come back tomorrow.
09:00There's nothing left here.
09:01So suppose you cannot buy bread that day.
09:03Does it mean your family doesn't eat?
09:05No.
09:06There's a black market.
09:07The black market sells bread.
09:09The black market sells vegetables.
09:11The black market, what is the price of the black market?
09:14The price of the black market is here.
09:16And the price in the state store is here.
09:21So if you need to buy something, you got to pay the black market price.
09:26Now, think of what happened when they removed the price controls.
09:33The state prices go up.
09:36Where would it go up to?
09:38In the direction of the black market.
09:40The black market prices were so high because people were taking risk.
09:45to sell, to get the goods and sell it to you.
09:48Because it was illegal.
09:49It was illegal.
09:50They could be short.
09:52They could be short.
09:55But now, you can be a big shot selling the goods at a lower price.
10:00You are not taking the risk anymore.
10:02So what happened is, state prices go up and the black market price comes down.
10:06And they still meet closer to the black market prices.
10:10The inflation is basically capturing a phenomenon that already happened.
10:16Which is, the actual price of what you need to buy is closer to the black market price.
10:23So that jump in the inflation was a jump that actually had already happened.
10:31A recognition.
10:32Artificial.
10:33Artificial.
10:34Yes.
10:35And the other thing that you could see was, the government stopped printing money.
10:40Which means that, and who were the money given to?
10:44The loss-making enterprises.
10:46The loss-making enterprises were selling goods that people were not buying.
10:51What were the loss-making enterprises?
10:54If you look at industry, like industrial goods, shoes, textiles, washing machine versus cement, iron, chemicals.
11:07Cement and iron are important if you want to build another factory.
11:14And if you want to lay more railroads.
11:19Whether you run any train on it or not, it doesn't matter.
11:22But you got to lay.
11:24What the mark of central planning was, all these countries began as pretty poor economies.
11:32So they had to invest heavily in urbanization, building new factories, building towns.
11:39So cement and iron were high priority.
11:42But by 1980, these are already fully urbanized, industrialized economies.
11:50But they still continue to make proportionally the same amount of iron and steel.
11:57And not making consumer goods.
12:00Right.
12:01So the iron factories were all loss-making.
12:04They were making, they put them in storage.
12:06Or you open another iron factory to make more iron.
12:09So all this printing of money was to subsidize these people.
12:15So when you stop printing money, they couldn't make more iron, they cannot make more cement.
12:19So output fell.
12:21So GNP fell in all these countries.
12:24So the Western reporters say, Mati Mati, this is terrible.
12:27Prices so high, people cannot buy the goods.
12:29And you look at GDP is falling.
12:32But the amazing thing is, this was done in January 1st, 1991.
12:441990.
12:45January 1st, 1990.
12:47All of this.
12:48The elections at the end of 1991.
12:53The same party got elected.
12:55Again.
12:56Again.
12:57Despite this collapse in output and rising inflation.
13:01Wow.
13:02Because the collapse was in iron and steel and cement.
13:05Who eats iron and cement?
13:07You cannot eat that many iron pills.
13:10You know.
13:11That's the wrong kind of iron pills.
13:14But what happened was, all these private businesses were booming.
13:19And do you think that if you are making money, the first thing you do is to rush to the Department of Statistics and say,
13:27Hey, I'm making lots of money.
13:29Make sure I appear in the GDP statistics.
13:31If you do that, you are volunteering to say, come collect some taxes.
13:36Yes, that's right.
13:37So, increases in output were not registered.
13:40Collapse in output is fully recorded.
13:44And at the same time, when they opened up the economy, goods started flowing in from abroad.
13:53So, that's why the stores were filled up with goods.
13:58And they were filled up with goods because people could actually afford to buy the goods.
14:03That's what happened.
14:05They were buying the black market goods anyway.
14:07The growing pains of a free market economy.
14:12Yes.
14:13So, it was just chaos.
14:15But you could see people were unhappy.
14:17They elected the same party one year later.
14:21Okay.
14:22Alright.
14:23So, if Poland was a success story, talk to me about Russia in comparison with the pain that Poland went through
14:28and the results that they saw after that.
14:31How does Russia compare?
14:33That was a very big difference.
14:36Because the first thing for a government to run is you must be able to pay the civil service.
14:42That's very important.
14:44And you want to be able to pay the civil service without causing high inflation.
14:50If you just print the money to give it to them, but the production of goods has not increased, right?
14:57Right.
14:58So, paying them more just means prices will go up.
15:01In the case of Poland, the West came in with financial aid.
15:07Oh.
15:08Which allowed the government to be able to pay the civil service to keep it going.
15:16And they got external aid to buy crucial materials.
15:22Like if the factory machine breaks down, all you need is a certain waft.
15:27Oh.
15:28You need the foreign exchange to buy it.
15:30The IMF, the World Bank, the US, the Europeans, basically took out their wallet and put it on the table.
15:40And said, take what you want.
15:41Take what you need.
15:42Okay.
15:43Wow.
15:44Because they saw it as temporary.
15:45Okay.
15:46Because once you can get things back to normal, Poland will have lots of high ability to repay everything.
15:55Okay.
15:56And furthermore, it will no longer be an ally of Russia, which was still a communist.
16:01That was the political considerations, yes.
16:04So, when the Russians were greatly impressed by what happened in Poland, because they saw this economic miracle.
16:13And at the same time, the collapse continued under Gorbachev.
16:17And, of course, Gorbachev tried to make changes, but his changes failed to work, failed to revitalize the economy.
16:28So, the establishment, which is the KGB, conducted a coup against Gorbachev.
16:37So, Gorbachev was arrested in August 1991 and a new person came in.
16:46And this new person was so unfit for the job.
16:50Because, you must understand, everybody got promoted because they were able to follow orders.
16:56He was so nervous of taking over, such that after announcing the coup, he collapsed on public TV because he was totally drunk.
17:06He had fortified himself with alcohol so that he could stand and make the announcement.
17:11Liquid courage, I see.
17:13And the liquid just went through him by the time.
17:18Okay.
17:19At that time, there was a second, another power center emerged with Yat-Sing.
17:25And the army split.
17:27So, there was one group with the KGB, one group with Yat-Sing.
17:31And they fought the most rational of wars.
17:34They sent people to each other side to count how many guns the other side got, how many planes the other side got.
17:42And they found out Yat-Sing got more guns and more planes.
17:45So, the other side said, okay, don't kill us and we'll go back.
17:49You win.
17:50So, Yat-Sing, that was a very rational war.
17:53We see who would win in the end and say, okay, you would win in the end.
17:57Very practical.
17:58Very practical.
17:59Very practical.
18:00That's no need to fight.
18:01Yes.
18:02Let's over.
18:03Okay.
18:04He took over.
18:05And his people wanted to do exactly what the polls did on the forefront.
18:10Oh.
18:11Which is the free prices.
18:13Price liberalization.
18:14And.
18:15Stop inflation.
18:16They, that they could do, but they, they wanted to stop inflation.
18:21Hmm.
18:22They wanted to have internationalization, but the domestic industries are so powerful.
18:28Oh.
18:29That they prevented the internationalization.
18:31They said, no, you cannot kill us.
18:32We are your strongest supporters.
18:34And so he was afraid of the factories closing.
18:38He did not internationalize.
18:40To buy political support because Yat-Sing now has to have a new election.
18:45Because he, a new election as president of Russia.
18:50So he privatized the enterprises by basically selling it to people who would donate to his political campaign.
19:01This is the rise of the oligarchs.
19:03The rise of the oligarchs.
19:04Got it.
19:05So this privatization was basically mass stealing.
19:09Like oil fields of Russia were given to individuals.
19:13Yeah.
19:14These are national assets handed to individuals.
19:17That's why he called Khododovsky.
19:18Hmm.
19:19Who, uh, who founded a company called Yukos, which owned most of the Russian oil.
19:24Yeah.
19:25So you could see it was a very corrupt process.
19:27And why was that done?
19:29No.
19:30Because the Russians were expecting the West to give it the same aid as he gave Poland.
19:36Oh.
19:37But Washington, someone in Washington, the Washington elite or the Western elite thought, Russians are evil.
19:49Well, there are many reasons.
19:51One group think they're just evil because you don't have evil people.
19:54Right.
19:55The other one says that they are not evil, but they are going to be a big strong country after everything is over.
20:02And a big strong country is a rival to us.
20:05And why should we build up our rival?
20:07We want them to become a rival longer time from now.
20:14Not just yet.
20:15And then there's a third group which says it's the time for them to be our friends.
20:20Let Russia join the West.
20:23Let Russia finally fulfill the goal of Peter the Great and Catherine the Great.
20:29Russia being part of the West.
20:33There was this group of people pushing for that.
20:37Here is a chance to extend a hand after years of confrontation.
20:43Say, I am your friend.
20:46And the Bush Junior was surrounded by people who had fought the Cold War, still hated Russia, still suspicious of Russia.
21:00So, no money for Russia.
21:02The sentiment was alright.
21:03We will see what it crashed.
21:05Oh.
21:06And because it crashed, they went on to recruit Eastern Europe into NATO.
21:15The promise to Gorbachev was if you don't invade Poland to make tickets back to central planning, NATO will not expand beyond its present borders.
21:29That was the guarantee given to Gorbachev.
21:32But, with the collapse of the Soviet Union, there was no way for Gorbachev to say, hey, you've got to honour the deal because it's too weak to make the threat.
21:44And the West expanded.
21:47And all of Eastern Europe now is part of NATO and part of EU.
21:52NATO expanded as well.
21:53So, that part was they needed the money because the West did not come through.
21:59So, how do you need the money?
22:02Corruption.
22:03And you just let the factory managers steal the firm.
22:10And that ultimately delegitimised the government.
22:14Corruption, in other words, is very important when undertaking reforms.
22:18If you do reforms but there's corruption, the reform, in a way, is delegitimised.
22:25And which, you could say, is why Xi Jinping went on this big corruption drive upon taking power.
22:33Because he sees that as the threat to China's continued economic growth.
22:40Okay.
22:41So, on that note, I want you to hold that thought.
22:44We're going to come back for another episode where we talk specifically about China's story.
22:49So, we'll be back with another episode of Wu Says.
22:52I'm Melissa Idris signing off for this episode where we get real about the US, China and everywhere and everything in between.
22:57Come back for the next one soon.
22:58We'll see you then.
22:59Bye-bye.