Guest Post by David Ellerman

[David Ellerman has worked in economics, mathematics, and philosophy, spent twenty years in academia, and was an economic advisor to the World Bank from 1992-2001. He is now retired from his full time roles and is a Visiting Scholar at UC Riverside. I had never heard of him that I recall until I received this fascinating email from him unbidden. I am reprinting it here with his permission.]

I thought you might want to learn some of the backstory to the the Summers-Shleifer affair that you have so wonderfully written about in HuffPost (a link I got from David Warsh who is also a player in the story).

The general theme is the role played by the Harvard wunderkinder, Sachs, Summers, and Shleifer, in the imposition of shock therapy in many of the post-socialist countries, principally the Former Soviet Union and particularly Russia. I was part of the opposing side promoting forms of employee ownership (like the American Employee Stock Ownership Plan or ESOP) so that the people in those countries would “meet the market” as something that empowered them since the employee ownership would legalize in a sustainable private form the de facto rights that employees had acquired in one form or another in the socialist enterprises.

The shock therapy side wanted to eradicate any such de facto rights as “remnants of communism” and to throw the ownership of all enterprises of any size onto the easily manipulated stock markets through some form of voucher privatization (each citizen would get a voucher to buy shares in companies or mutual funds on the stock market in exchange for their accumulated de facto rights in their own enterprise). With all the marbles set loose on the table top, anyone with any power could tilt the table in their direction so, in country after country, we saw the rise of the oligarchs (not just in Russia) and the disenfranchising of the population and their disillusionment with the market, private property, and western democracy. No group of westerners played a larger role than the Harvard wunderkinder in this sorry period of recent history in establishing the Big Bang that eventually became the big bust for everyone but the new elites in those countries.

Jeff Sachs was first out of the blocks in the promotion of shock therapy and voucher privatization in the late 80’s (leaving his great Harvard rival in the Econ Dept green with envy). I had left academia (teaching economics, math, and computer science) to set up a consulting company in Ljubljana Slovenia (then part of Yugoslavia where the workers’ de facto rights were the greatest). As the ESOP law I helped draft with local professors (with PhDs from Penn and Cornell) was sailing through Parliament, Jeff Sachs was brought in by a group of ex-Yugoslav right-wingers to apply Harvard’s and his prestige against the bill, which they succeeded in stopping. David Warsh tells the story well in the attached Boston Globe column from 1991. But the workers, managers, and many other local groups (even Rotary Club!) rallied to defeat the Sachs voucher privatization law, so Slovenia had no privatization law for several years. Since I could not then do the consulting work I planned to do, I accepted an offer to join the World Bank (to help fight the shock therapy from the inside as it were).

That is where Larry Summers enters the picture. I first met Larry in late 89 when Larry, Lester Thurow, and I were invited to come down from Boston to NYC to have a lunch with Yeltsin in the latter’s first trip to the US. Larry was anxious to get a piece of the action that was then captured by his great rival as an economicswunderkinder, Jeff. Since Larry was not the P.T.Barnum of self-promotion like Jeff, he decided to take the institutional route and accepted the Chief Economist’s job in the World Bank. From there Larry moved on to Treasury in the Clinton Administration where he was able to engineer the Russian contracts his protégé Shleifer, and you know the rest of that story. Through it all, he promoted the themes and the people in Russia who were behind voucher privatization and the stock-marketization of the economy, e.g., Chubias and Vasielev (who was head of the stock market dept in the govt. designing the regulations etc.).

In this manner, Larry eventually eclipsed his internal Harvard rival who could not bring similar resources to the table, so Sachs turned his attention to “saving Africa.”

But the Sachs-Summers story had at least one more chapter. Larry’s contract for Shleifer at the HIID was set up under Dwight Perkins, so when Jeff took over HIID, it was a substantial part of the HIID business. This was not to the liking of Jeff’s ego. Since I was doing most of my work for the World Bank in Russia, rumors about the dubious activities of the “Center for Law-Based Economy” (Shleifer and Hays’ outfit) had been circulating for some time. The rumors were that they would write legislation and regulations “by day” and then “by night” consult with friends (and wives) to help them get the jump on the rivals for entry into the Russian financial markets. One of the big Swiss banking concerns who was edged out of getting the first license even spread the rumors far and wide outside of Moscow. The press and USAID paid little attention, but when Jeff heard the rumors, then he went into overdrive to surface the stories and force some investigations which eventuated in the Justice Dept. suit (Sarah Bloom, one of lead attorneys there, scheduled me to testify in the Shleifer/Harvard suit but they eventually settled out of court).

Since Shleifer was the one directly involved in Russia, he was particularly keen to sabotage any attempt to have an ESOP option in the Russian privatization law. When some Russians drafted by ESOP option, he went into high gear to have it killed. He enlisted an American ESOP expert to testify how bad the proposed Russian ESOP was in exchange for helping him to draft a “good Russian ESOP law” he would be the father of the Russian ESOP etc. Since I was a primary proponent of an ESOP privatization law (like we tried to do in Slovenia), the American ESOP expert arranged a “secret meeting” between Shleifer and myself, him coming down from Boston and me coming up from the World Bank in Washington to meet for a late dinner in an Italian restaurant in NYC. I wasn’t buying the deal, but they managed to scuttle the proposed Russian law without my help. Once that law was killed, the offer to help the American ESOP expert draft a “good law” evaporated.

By 1997, I had become advisor and speechwriter to the new World Bank Chief Economist, Joe Stiglitz, and I wrote speeches and papers, principally the one called “Whither Reform?”, that finally started turning the tide against shock therapy in the Bank but the damage had long since been done. Much of this sorry history is in the attached Challenge article which reviewed the situation ten years later (and there is much else on my website:www.ellerman.org ).

My point is that the human damage done by the Harvard wunderkinder, mainly Summers/Shleifer, in the imposition of shock therapy and voucher privatization in Russia (and many other countries) goes far beyond the issues that were at stake in the Harvard Suit or Larry’s tempests in the Harvard teapot during his Presidency.