George Melloan

This selection first appeared in the Wall Street Journal on 14 July 1998. George Melloan is a columnist at the Journal.

Boris Yeltsin warned the world of his dark fears of an impending military coup and got the desired results: The International Monetary Fund over the weekend arranged a new bailout of the Russian financial system, this time totaling $17.1 billion. For the edification of the U.S. Congress, the German Bundestag, the Japanese Diet, and other legislatures that are asked to commit public resources to these exercises, the IMF has once again asserted that its largesse preserves peace and stability in the world. Send more money, please.

But as Congress ponders whether it should approve the further $18 billion U.S. commitment to the IMF that Bill Clinton is urging, it might want to look closely at whether the IMF money is in fact likely to banish the goblins that haunt Russia. Even the IMF emissary to Moscow, John Odling-Smee, seemed to have doubts initially. But they quickly vanished when Mr. Clinton and Germany's Helmut Kohl made it quite clear that they didn't want to hear any quibbling from some IMF bureaucrat. That Mr. Odling-Smee probably knows better than anyone else how past IMF transfusions have been squandered was clearly irrelevant to the political calculations of the Clinton-Kohl axis.

But legislators often are more concerned than heads of state with the interests of taxpayers and might want to ask a simple question--one that would occur, for example, to a reasonably bright high school student: What do we get for the money? If there is going to be a military coup in Russia, how will parceling out $17.1 billion between now and the end of next year [1999] prevent it?

Such questions have not lacked for answers from bailout proponents, of course. The hype that always precedes IMF "rescue" efforts has been particularly intense this time around. We have been reminded that Russia is a potentially dangerous nuclear power and that the fate of Mr. Yeltsin's new reformist government, headed by thirty-five-year-old Prime Minister Sergei Kiriyenko, is at stake. Unrest throughout the federation, with strikes or disruptions by miners and railroad workers, is cited. So is the collapse of the Russian stock market this year [1998]. And 80 percent interest rates, as the central bank struggles to avoid devaluation of the ruble, are pushing up government borrowing costs and the federal debt at a frightening pace.

All these things are true. Russia remains a dangerous country seven years after the end of the cold war, and the Yeltsin government clearly is in trouble. A flight from the ruble into dollars or marks, conducted particularly by Russian tycoons who prefer to ship their ill-gotten gains to some safe haven abroad, has diminished the government's hard currency reserves. A ruble devaluation would hit ordinary Russians, who have no Swiss bank accounts, further heightening their annoyance over the low yield on what has passed for economic reform these last seven years.

But how will the IMF bailout help? It will shore up the government's hard currency reserves and, perhaps, give the financial markets greater confidence in the ruble, which might allow interest rates to fall and attract some money back into the stock market. Please note that the IMF now is trying to stave off devaluation, whereas in Asia it encouraged same. A learning curve, perhaps?

Saving the ruble is a worthwhile goal, but an old question arises. Does an IMF bailout really aid economic reform or does it instead, in most cases, postpone it?

Economic reform hasn't failed in Russia. The failure has been an insufficiency of economic reform, which if properly undertaken would have a very broad scope. It would include not only privatization of state industry, which has made progress mainly because it has been in the interest of that small class of tycoons who have been busily appropriating state property, but judicial reform, particularly directed at enforcement of contract law. It would include the privatization of land to the extent of allowing land to be bought and sold freely. It would include real tax reform, not the cobbled-up plan now before the Duma. It would include a set of enforceable banking regulations that would provide a legal framework for reliable banks that would serve the needs of local businesses and farmers.

These measures, plus extensive deregulation, are needed to permit real entrepreneurship, the starting and development of new businesses at the grassroots level. So far, Russia's privatization has consisted mostly of former communist managers cannibalizing state assets for their own profit. Given the extent of crime and corruption, there is not yet a climate suitable for the development of honest business.

These things can only be accomplished politically. Boris Yeltsin is not really addressing them in any serious way. He has not yet created a well-organized political party to explain the country's reform needs to the Russian people. If he had such an organization, it could easily defeat the old communist hangers-on who control the Duma and could put forth a credible successor to Mr. Yeltsin, who is barred by present constitutional law from running for a third term. In a properly functioning political system, Mr. Yeltsin would have political backers in every region railing at the obstructionist, do-nothing Duma. That would be far more effective than the technique he once used of firing a few cannon shells through the windows of the White House, where representatives to the Duma have their offices. It would be a lot more legal, too.

With a true commitment to the politics of change, Mr. Yeltsin could safely disband the Duma and call for new elections with a great deal of confidence of electing a reformist legislature. But the longer that is postponed, the stronger radical elements, such as neo-fascists or politically ambitious generals, will become.

The problem with IMF bailouts is that they allow political solutions to be postponed. The government might be able to use the respite to pay some back salaries of government employees and to funnel money to losing enterprises. But that is like a corporation issuing bonds just to meet its arrearages, with no clue as to how to make more money and repay the debt. An ordinary lender or bond buyer wouldn't risk much on that kind of borrower. But that, in the final analysis, is what the IMF is doing, under heavy political pressure. Look for another crisis before Christmas [1998].