American economist Paul Gregory is a research fellow at the Hoover Institution on War, Revolution and Peace at Stanford University. He is the author and co-author of 12 books and many articles on economic history, the Soviet economy, transition economies, comparative economics, and economic demography. His publications written while working at Hoover Archives were awarded Hewett Book Prize and the J.M. Montias Prize for best article in Journal of Comparative Economics. Paul Gregory is a member of the International Academic Board of the Kyiv School of Economics (KSE).
During his visit to Kyiv American economist spoke with VoxUkraine CEO Ilona Sologoub and the head of the Center for Excellence in Economic Journalism at KSE Andriy Yanitsky. They discussed international relations, the planned economy, Ukrainian reform, and Russia without Putin. The interview was conducted on February 1st 2020.
In the first part of the interview, which is available on YouTube, Paul Gregory discussed the Trump impeachment case as well as different economic paradigms. In particular, he thinks that the case for the market economy, which is captured by Adam Smith’s “invisible hand,” is hard for the average person to understand. Thus the various experiments with the planned economy and state capitalism. The most powerful arguments for free-market capitalism and against planning were advanced in the 1920s and remain relevant today. F.A. Hayek postulated that the planned economy cannot work even with supercomputers. Computers cannot model human behavior, nor can they generate the information that markets produce. ‘State capitalism’ is also not an effective model – and there is a number of cases demonstrating this conclusion (e.g. regulated prices, mismatched public investment, deficits, and black market). A major advantage of the market economy is that it learns from its mistakes and corrects them, unlike a state-run economy which must live with its missteps.
Ilona Sologoub (IS): The Soviet Union used to be the most influential state alongside the United States. Today, it seems that Russia is still trying to oppose the United States. Is Russia perceived as an equal opponent within the US?
Paul Gregory (PG): Russia is a very weak country albeit with a nuclear arsenal. This makes your question difficult to answer. We cannot dismiss Russia because the combination of weakness and nuclear weapons makes it more dangerous. For example, Russian military doctrine recognizes that, as a weaker country, it cannot win a [conventional] war. So they openly say that they may use nuclear weapons when they find themselves outmatched on the field of battle. They consider the nuclear weapons as an integral part of their military doctrine.
Today, the Russian economy is, say, some 5% of the world economy. In this sense, Russia is a weak country and it will continue to weaken in the absence of reforms.
The way I see it (and I speak only for myself) the greatest immediate danger is an alliance of China and Russia which then creates a Cold War II. Such an alliance would be a real rival to the United States. How to treat China (friend or foe?) is among the greatest issues in American politics. The Democrats have preferred to treat China as a potential friend, particularly if its growth continues. Under Trump, the Republicans have come to regard China as our greatest threat.
Another major political question in the US is whether we should withdraw from Europe and let Europe (including Ukraine) ‘take care of itself’. I believe “letting Europe take care of itself” is Trump’s position. And this is one of the reasons why Trump was elected. He pointed out to voters that the US has been at war for decades – Iraq, Afghanistan etc. – and has gotten nothing out of it. This idea has wide public support, and of course this affects Ukraine.
ІS: Do you think the union of Russia and China is possible at all? And if it is, what could be its terms?
PG: This is an interesting question… The realists, the deep thinkers who look far ahead, think that the real struggle will be between Russia and China, and the area of conflict will be Siberia, the eastern part of which remains largely unexploited. We do not have accurate data but there are millions of Chinese living in Eastern Siberia, and Russians don’t want to live there. This region contains Russia’s unexplored wealth and will become the source of tension between the two countries.
In the short run there will be agreements. There is a gas pipeline (‘Strength of Siberia’ – ed.) that was negotiated in a time when Russia was quite weak because of sanctions. I don’t think it was a good deal for Russia. But once you have a pipeline between the two countries, that will be an important factor that pushes them together.
IS: There is an opinion that in the near future, China might become a democratic country. As a result of the one-family-one-child policy, in the Chinese family the child received all the best that parents could give him or her, including education in the West. Do you think it will influence the democratic developments in China?
PG: That’s an odd way of thinking about it. I can’t really tie the two together. So what is the logic here: since a family has only one child and they have invested a lot in human capital of this child, will this child have a demand for democracy? Some have argued instead that, as China becomes more affluent, it will move towards democracy. This is the argument for treating China not as an enemy, but trying to promote its development.
The fact is that no undemocratic country has escaped the so-called middle-income trap (i.e. moving from middle to high income group of states). Consider that China has grown. If such growth continues it will become a rich country. And rich countries appear to demand democracy. Under Xi, China does not appear to be on the path to democracy; in fact, just the opposite. The proposition that we should cooperate with China so that China will become democratic has been largely abandoned under Trump.
There has been a remarkable turnaround. People used to think of China as a difficult trading partner but a civilized country headed by educated people who make decisions in an institutionalized way (via the Politburo). Xi has recreated a Stalinist state – a state that monitors its people, punishes citizens for non-regime support, and has GULAGs for millions of people. So I think dreams of China becoming a civilized democratic state have largely disappeared. Thanks to Xi.
IS: One of your most famous books is dedicated to the GULAG, particularly to women in the GULAG. What is the main point of this book and why did you become interested in this topic?
PG: As an economic historian who reads Russian, I spent a lot of time in the Hoover archives that have an abundance of GULAG documents, including those of the GULAG administration. While reading about the organization, structure, and rules of the GULAG, I encountered the unforgettable stories of people who were caught in the GULAG system. These stories convinced me to write, not about the GULAG system but about its individual victims.
I began my study of the GULAG with an economic question. It is tempting to think that you can create a ‘surplus’ out of slave labour. And the idea is very simple. You say “Ok, we have a diamond mine here, and no one wants to go there because the weather is terrible. But we can arrest people and send them there, and we can pay them subsistence.” So you arrest people and send them there, you provide them subsistence, they dig up diamonds which are worth more than the subsistence cost of the prisoners. On the backs of prisoners, you can therefore build a prosperous economy. This was both an economic and a ‘class enemy’ idea because if you have a class enemy you want to keep them away from the rest of the population. What better place of isolation than some freezing mining region than, say, the Trans Baikal.
However, quite early the functionaries who ran the GULAG understood that it wasn’t working. They were running huge losses in the GULAG. Which raises a puzzling economic question – how can you have labour working at subsistence and lose money? And the answer is that their productivity was below their subsistence. So quite early Beria and others were arguing to do away with the GULAG. But this could only be done after Stalin’s death.
I was attracted to those issues and wrote some scholarly books which were read primarily by fellow scholars. But I kept encountering all those interesting stories. I decided to find five women who left behind vivid memoirs. I wrote a book that describes their experiences. Then I found a partner-filmmaker from Russia – Marianna Yarovskaya. She and I made a documentary film which made it into the final 10 of the Academy awards. It’s being shown all around the world now (e.g. you can watch it on Aeroflot flights).
There has been no successful slave economy throughout history. And the reason is simple – slaves are very inefficient, they have very low productivity. It seems like a reasonable idea but the Russians tried it and it didn’t work.
Andriy Yanitsky (AY): The Gulag system is horrible and inefficient. But in my view using taxpayers’ money for prisoners is not a good idea either. How did you resolve this in the United States?
PG: In the US, some prisoners work. But they do manual tasks like manufacturing license plates [for cars] or cleaning up litter on highways. So it’s not a serious business. The US solution to a large prison population is decriminalization. Then you don’t have to put so many people in prison. This is a big part of the democratic platform. But Trump outperformed Democrats: he passed a law that largely decriminalized drug use – if you are not a major dealer, you don’t go to jail. Marijuana has been long decriminalized in many US states.
Decriminalization is a standard feature of libertarian philosophy which is ‘if you want to harm yourself – go ahead, but don’t harm others’. This is the major argument for decriminalization. The important part of libertarianism is that you let individuals make their own decisions – whether they are harmful or not. The other [part of libertarianism] is that you don’t get involved into foreign affairs.
And so a true libertarian in the US would say ‘Well, eastern Ukraine is occupied. The Russians are to blame, but it’s not our business, it’s their business.’ A key libertarian in the senate is Rand Paul, he is against of any type of foreign engagement. It is noteworthy that the House impeachment of Trump focused on Trump’s presumed violation of “the established consensus” of American foreign policy. I found this accusation strange because the US President, according to the Constitution, is in charge of foreign policy. The turn of US foreign policy towards isolationism will continue; so my advice to Ukraine is to be prepared to defend yourself – a tough piece of advice. Under Trump, despite the move towards noninvolvement, Ukraine was better served than under Obama. Ukraine, I believe, can thank the Republican US Senate, which has been a strong supporter of Ukraine, and I expect this support to continue.
IS: How would you comment on Ukrainian reforms?
PG: I’m not an authority on the Ukrainian economy but I was reviewing the record going all the way back to 1991 and it was quite dreadful in the first decade of independence. I don’t have a good answer as to why this was so. This should be an agenda for research. The transformation recession of Ukraine was among the worst, in the order of Central Asia. This should not have been the case. Ukraine lies on Europe’s border. Ukraine has talented, well educated people. So the puzzle is why those first ten years were so dreadful. And Ukraine has really not recovered from this.
Corruption is Ukraine’s biggest problem. However, corruption has been a common feature of transition from a planned to a market economy. It happens this way: In a planned economy, assets are owned by the state. During privatization, these assets fall into private hands in an opaque process. Once the assets are in the hands of oligarchs, they buy TV stations, found political parties, make sure friendly judges are appointed, and hire PR operators. The returns are huge, and they accumulate incredible power. They create billionaires in what is still a poor country. Once they are embedded, they are almost impossible to rout out. This is the process in which Ukraine finds itself right now, and I wish Ukraine good luck. Ukraine has a chance to succeed because voters demand an end to corruption as are international donors. Another reason why anti-corruption is difficult is that very often it is used to get someone’s political enemies. If you look at the anti-corruption campaign of Xi in China, it is not anti-corruption, he is just getting rid of his enemies. It is popular when he puts people in jail. But these people are his political rivals. One has to be suspicious of anyone who claims to be running an anti-corruption campaign because it’s an easy way to get read of your enemies.
I think President Zelenskyi is sincere [about anti-corruption], and I think Ukrainians understand that if they don’t solve this problem they will be in a really bad shape. Zelenskyi has a strong anti-corruption mandate. He will be a failure if he does not make significant progress.
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