In December 1961, the Kennedy State Department advised the South Vietnamese government of Ngo Dinh Diem that unless it followed the economic advice of U.S. experts, the United States might not guarantee its further military and political support. The advice involved raising taxes left and right to raise revenues for social programs to win the minds and hearts of the people. In January, Diem acceded. In six months the economy caved in under the weight of the taxes, at which point JFK's economists advised currency devaluation, which sent the economy reeling. Diem became very unpopular. The Kennedy Administration advised the South Vietnamese military that it could no longer support an unpopular Diem. The military assassinated Diem in October 1963. What goes around, comes around. A month later, an assassin's bullet found JFK in Dallas. In the cleanup that followedr58,000 Americans died.
All these many years the same economists, and their sons and daughters and nephews, have been advising Third World governments around the world how to win the minds and hearts of their people. In Haiti. In Zaire. In Ethiopia. In Brazil. In Nicaragua. Et cetera. And during the last two years they have had an especially important influence on Russia, through the IMF, the World Bank and the Bush and Clinton administrations. They have been helping Boris Yeltsin in the manner that they helped Diem, demanding that he raise the price of state-owned oil — which is no different from raising the tax on oil, again and again and again. This has pushed the ruble toward collapse on the foreign exchange market as the central bank had no choice but to accommodate the rising oil price with fiat money.
The referendum last Sunday gave Yeltsin a "vote of confidence," in the same way that a referendum in Saigon in 1961 would have given Diem a vote of confidence. In either case, the people understand that their leader is doing the best he can given the external political pressures bearing down upon him -- and no other political leader has emerged with a better grasp of the alternatives. From our perspective, the economy has been driven to this desperate state by the U.S. government in collaboration with Western financial institutions — which in two years have forced Moscow to increase the domestic price of oil by a factor of 200, to R25,000 per metric ton from R120. The only thing that can bring relief to the economy is a systematic reduction in the ruble price of oil, which is an idea no visible Russian political leader is advocating. If Yeltsin were to do so, he would be defying the U.S. and the IMF, which might immediately announce that all promised financial aid would be cutoff.
Two years ago we advised the Russians that the IMF was playing games with them and that they would never get meaningful financial aid in any event. Every time they get close to meeting the IMF "shock therapy" conditions, the demands are increased and the population is further impoverished. There have been hundreds of headlines over this period announcing an imminent release of billions of dollars of aid, as long as a few more conditions were met. The ruble's value on the foreign exchange market continues its steady slide. It was 630 to the U.S. dollar before the "successful" summit in Vancouver and Yeltsin's triumph in Sunday's referendum; it is now at 815. Three weeks ago the IMF demand would have meant an oil price rise to R 100,000 before its conditions could be met. Now, it must go to roughly R 120,000. Is this not a perfect example of Santayana's definition of a fanatic as one who doubles his speed when he loses sight of his goal.
Meanwhile, inexorable market forces — which will force all prices to equilibrate with R25,000 oil -- are smothering the economy. The only thing that is preventing total collapse is the central bank's printing press, which is supplying the credits necessary to enable domestic industry and commerce to buy their own oil. The IMF plan would price oil beyond the reach of the people of Russia, putting all production into the world markets in order to earn the hard currency to pay off Moscow's external bank debt. The central bank has been tightening credits, which is steadily shutting down production. Fertilizer is being priced beyond the reach of the farmers. Oil field workers are threatening to strike because the credit squeeze is shrinking their already pitiful purchasing power. Boris Yeltsin's recent decrees to roll back consumer prices, especially of gasoline -- which were designed to increase his popularity going into the referendum ~ will soon produce shortages, as refiners are unable to recapture input costs.
As the vise tightens throughout the former Soviet Union, ethnic and religious conflict will expand as well, as it has with the splintering of Yugoslavia. If Russia were on track, in the way China has been, its experience would spread hope throughout Eastern Europe. We would even expect a revival of civility in Serbia, under meaningful admonishments from its patron in Moscow -- along with a promise of better days ahead for people of all ethnic and religious backgrounds. As it is, hope is disappearing among almost all the member states of the former Warsaw Pact, a sense of desperation that is encapsulated in the headline on the editorial page of today's Wall Street Journal: "Prevent Nuclear War, Invade Yugoslavia," over an article by Eugene V. Rostow. We're back full circle with Mr. Rostow, a champion of intervention in Vietnam after our economists had destroyed its political economy.
Of course, it is not enough to bomb Serbian emplacements in Bosnia, or to bomb Serbia. Henry Kissinger and Lawrence Eagleburger are quite correct in their assessment that it would take 300,000 grounds troops to pacify the region. Even then, with 30,000 nuclear warheads scattered throughout the region, we can easily imagine a dozen scenarios in which the introduction of 300,000 ground troops would trigger a nuclear war. The fact is, Colin Powell is correct. There is no scenario by which military intervention to "save Bosnia" will lead to anything but another Vietnam. The arguments emanating from our Establishment hawks — such as former Secretary of State George Shultz -- are as mindless and ill-considered as the President's 15-minute decision to bomb Waco, Texas. We even hear the argument from Rep. Frank McCloskey [D-Ind], a foreign policy expert, that intervention is necessary to preserve the moral authority of the United Nations, NATO and other international institutions. The IMF? The World Bank? The obvious next step to pressure the Serbs — an effective oil embargo — is out of the question because the IMF has turned all of Eastern Europe into a gigantic black market.
There is so little institutional memory in the President's young team that the disaster in Waco may have served a useful purpose by underscoring the unintended consequences of the use of force. That is, if not for Waco, the President might have already succumbed to the clamor to start the bombing. To prevent the possibility of child abuse by the Branch Davidians, the United States government wound up gassing the children and their mothers, and the religious zealots within burned Mt. Carmel to the ground. There is no more possibility of child abuse at the place. Saving the children of Bosnia via the bombing of the Balkans will yield the same result. The zealots will not only fight to the death, but with a determination to take everyone with them in an Apocalypse Now. Why not a surefire way of ending the ethnic cleansing of the region: Drop the big one.
So many of my old "supply-side" friends have chided me these last four years for wanting to help the Soviet Union, and now Russia, find its way to capitalism -- preferring that our communist adversary of the last half century be reduced to rubble. Eighteen months ago, I warned my old colleagues at The Wall Street Journal that the logical result of the destruction of the ruble savings of the people of the USSR — under the guidance of Harvard's Jeffrey Sachs and his friends at the IMF and World Bank ~ was a nuclear holocaust. Journal Editor Robert L. Bartley has instead supported Jeffrey Sachs every step of the way. Yesterday, in "Russia's Awesome Referendum," he tells us that "Credit also has to go to Jeffrey Sachs' Harvard team, which advised," and that Boris Yeltsin should now "seize the moment to gain control of the central bank," without mentioning the fact that this will shut down the economy. Today, the Journal offers us Mr. Rostow, warning of nuclear war unless we invade Bosnia.
Secretary of State Warren Christopher, thank goodness, is demonstrating some institutional memory in massing arguments against intervention. So is Colin Powell, who has established conditions under which he would agree that are impossible for President Clinton to meet. Now, we can sit back and watch the bloodshed, atrocities and civil war spread across all of Eastern Europe. Or, we can give them some good advice on how to become capitalists -- the only way to reestablish the authority of political leadership in the region, and certainly the only way to establish some hope.