Russia in 1983 Jude Wanniski June 5, 2004

Memo To: SSU Students
From: Jude Wanniski
Re: My Trip to Russia and China

This first offering of the summer session is the Part One of a report I sent to Polyconomics' clients in October 1983 after a trip to Russia and China. Because of the length of the report, today's part will cover my experience in the Soviet Union. Next weekend's will cover the People's Republic of China. My findings were at the time completely at odds with what our intelligence agencies were reporting and what was available in the national news media. JW]

The Political Economy in Perspective
TRIP TO RUSSIA AND CHINA

by Jude Wanniski

On Sunday afternoon, August 21, I began an 18-day "People-to-People" tour of the U.S.S.R. and the People's Republic of China. The tour group of 24 men and 12 women was composed largely of independent oilmen and their wives, members of the Independent Petroleum Association of America, a Polyconomics client. The trip was especially illuminating to those of us who had visited neither country before; the members of the touring party-inquisitive, politically active, successful entrepreneurs-were serious about learning as much about the politics and economics of the two Communist countries as they could. There were meetings with oil-ministry officials but no great emphasis on matters relating to petroleum.

There was sufficient time in five cities to get a rough feel of things: Leningrad, Moscow and Baku (Azerbaijan) in the U.S.S.R.; Beijing and Shanghai in the PRC. The tour overlapped the fatal trip of Korean Airlines' flight 007, news of which reached us in Beijing on the Voice of America 36 hours after leaving Moscow. For analytical purposes, my vantage point was extraordinary.

The whole experience, in fact, turned out to be more valuable than I could have anticipated. It forced adjustments in my preconceptions of the Soviet Union and China at a time when U.S. relationships with both nations are undergoing dramatic change, and at a time when new tensions are causing foreign affairs to bubble to the top of the political cauldron everywhere in the West.

The Soviet Union, I found, is in much worse economic condition than I'd expected, in a way making it more dangerous than I'd believed. China is surprisingly further along a "capitalist road" than I'd thought, and while political reforms lag liberal economic reforms, there is exciting promise for the future.

October 4, 1983
@ 1983 Jude Wanniski All rights reserved.

SOVIET UNION

There is an economic depression in the Soviet Union, but not of the kind that is characterized by high unemployment. There is no "unemployment" at all in the USSR, and for the first days after arrival, the fact is a bit uncomfortable to an American. The Intourist guide, a smart, sophisticated woman in her fifties, makes frequent reference to the absence of unemployment and sly mentions of the jobless picture in the U.S. Radio Moscow, we discover, makes daily references to U.S. and Western unemployment in its news broadcasts, and the message has been so hammered home that a young man, encountering an American on Leningrad's main street, asks solicitously if he is without work. A member of our group comments on this "benefit" of the Soviet system, a troubling point.

By our last days in Moscow, though, the point no longer troubles. By then, it strikes one that the Soviet Union is not a nation-state at all, but a vast national penitentiary. Everyone is guaranteed a minimum standard of living, everyone works and eats and has medical care and shelter. But the same can be said of Leavenworth.

The metaphor is neither inaccurate nor unfair. We'd been aware that political prisons in many forms exist within the Soviet Union, but there had also been a casual assumption that the ordinary citizen is not directly touched by the Gulags. So it comes as something of a shock to realize that there is no Soviet citizenry. There are only inmates. There are wardens, guards, trustees and inmates. The metaphor helps explain the mental depression that creeps over us as the stay lengthened. At first you might assume the people of Moscow and Leningrad just happen to look grim, joyless, vacant, as we perhaps might seem when riding the Lexington Avenue Express. But beyond this normal big-city grimness there is a desperation and hopelessness, long-time inmates who have persuaded themselves that things will never get better and they can never get out.

* * * *

There is no unemployment, but still there is a serious economic depression, a depression characterized by an incredible paucity of both goods and services dribbling out of a fully-employed work force that is really not working. There is literally almost nothing to buy with your roubles in the Soviet Union that is worth having. Spend an entire afternoon in Moscow wandering through the department stores along Kalinin Prospekt, the country's closest equivalent to New York's Fifth Avenue. There is only junk, absolutely nothing anywhere of either quality or style, and throngs of listless shoppers picking their way among items of houseware or apparel that in the United States could only be found at a mission or perhaps a final K-Mart clearance. And this is the best available in all the Soviet Union.

We've all heard of the endless lines, the meager supply of goods allocated by queuing instead of price. But it's a shock when you walk through supermarkets in what are said to be the more desirable sections of the cities and see the abysmal quality of the goods. Last week's produce. Chickens that look like they were starved to death. Women lined up to buy cuts of meat that look like they might have been hacked out of a rhinoceros with random blows. Only the bread looks appetizing and relatively cheap. (On the last three days in Moscow I was so upset with the deplorable food served at supposedly the finest restaurants available that I ate only bread and ice cream.) We heard before coming that there were quality goods reserved for the political elites, in special shops. But the difference can hardly be worth noting. We saw not a single sign of opulence. Not a well-dressed Russian anywhere. And on the streets, young men approach with offers to buy my belt, my watch, my fountain pen, at such extravagant rouble prices that I might be tempted if I didn't already realize there was nothing I would want to buy with the roubles. In the hotels, you can buy undrinkable Russian beer for roubles, but for anything imported, only hard foreign currencies are accepted.

Wages range from 100 to 500 roubles a month-a rouble worth roughly a dollar. And with everyone guaranteed the basic necessities free or almost free-an apartment including telephone and utilities is had for 8 or 9 roubles a month-there is plenty of discretionary income. But with little of value to buy, the savings rate is the highest in the world and the government banks bulge with rouble deposits. Perhaps the people expect an improvement in the economy will occur and consumer goods will someday be available. There's also an incentive to save the 10,000-plus roubles it takes to buy an auto or the 50,000-plus roubles it takes to acquire a "dacha," or country house. We're also told people save to travel domestically, this being one way to consume rouble income and display relative "wealth." But the government really had no room to encourage greater productivity through higher money wages. The lines and the waiting lists would simply get longer.

The line we get is that the reason for the shortages is a manpower shortage linked to the 20 million Soviets who died in World War II, a ridiculous idea. It's only slightly more plausible to suggest, as we heard at the American Embassy, that the shortage in consumer goods exists because the military claims so much of the nation's resources. With 275 million people compared to our 237 million, the Soviets have a Gross National Product that could only be generously estimated at half our $3-plus trillion. Yet, at least until the Reagan years, they were allegedly outspending the U.S. in real terms on defense.

Assuming the most optimistic arms agreement imaginable, which becomes less and less imaginable in the chill between Moscow and Washington, there would be hardly a perceptible rise in the Soviet standard of living. The problem isn't in budget allocations (any more than U.S. economic problems are being caused by government borrowing). The fact is that the socialist framework itself has worn out and can only be invigorated by reforms which increase the efficiency of the system and get the fully employed work force working.

As an example of the colossal waste in the central-planning system, we saw throughout the three cities we visited hundreds of massive construction cranes sitting idle at building sites. Men, material and equipment are moved about according to shifting political priorities, which leads to staggering losses of efficiency and productivity and in these construction cranes alone, billions of dollars in grossly underutilized capital. In Leningrad, the guide boasted that each day in the city 127 apartment units are completed-which would be enough to maintain the housing stock in the city of 4 million. But we saw no construction workers anywhere during the three perfect-weather, midweek days spent there. The only vigorous work activity seen anywhere is from the old ladies who sweep the streets. The service in the hotels is uniformly lackadaisical and at times offensive. At the year-old Pulkovskaya Hotel in Leningrad, run by the state to try to earn hard currencies from tourists, I asked a waiter for a second cup of coffee at breakfast and he snapped "No!" One pot for our table of eight, and that's that. There's no tipping permitted and the service people get paid whether or not there's any business, with no bonus even if revenues double or triple. They stand about. The state loses foreign exchange that the tourists would payout for an extra cup of coffee and a tip, if these were available, and the tourist goes home and discourages his neighbors from traveling to the Soviet Union. Intourist complains that a mere 20,000 Americans visit annually, down from 10 times that at the peak in the 1970s.

* * * *

There is a slight contrast in Baku, capital of the autonomous Republic of Azerbaijan and one of the earliest oil regions of the old Russian Empire. The city, about 3,000 miles southeast of Leningrad and a scant 200 from Teheran, has a more unkempt look and the hotel rooms at their best are deplorable. But the people seem far less forlorn than the Leningraders we'd left, with more vitality and eagerness to please, along with open disdain for the white European Russians who rule from Moscow. The Russians are just as blatant in their patronizing attitude toward these "Eastern" comrades in this Moslem region that adjoins Iran. In conversations with white Americans, incidentally, Moscow Russians are evenly more openly racist toward blacks, as if there is common consent that "blacks should all move back to Africa and stay there," as one Moscow woman volunteered. (The American Embassy in Moscow confirmed my small opinion sample on this point.)

The primary reason for the greater vitality in Azerbaijan seems to be the greater leeway permitted this "autonomous Republic" in its adherence to Marxism-Leninism and a bit more tolerance of the "capitalist road." While the standard of living has been in decline since about 1978, Azerbaijan has probably improved on the strength of the agricultural reforms that increased private production and collective incentives. There are more automobiles per capita in Baku than in either Moscow or Leningrad, and they honk their horns freely despite a national prohibition against horn-honking. In Moscow or Leningrad, horns are silent.

It's said that the high auto population has to do with the number of oilfield workers around Baku, among the highest paid of all industrial workers. Yet it is also freely disclosed that there's a serious problem getting people to work in the oil fields, even at the higher wages. With so much wage compression in this egalitarian system, why knock yourself out in the oilfields if you can earn a somewhat lesser amount by doing far less strenuous work? Especially when there's so little a rouble can buy anyway?

A separate, related problem in this centrally planned economy is the glut of professionals, being cranked out relentlessly by an education system that need not respond to the demands of the marketplace. A Baku oilfield superintendent, cheerfully explaining why there were such few signs of work in his oilfield, said the government keeps sending him engineers instead of workers. If the pay is the same and schooling is virtually free, engineers are produced instead of oilfield roughnecks. A Texas oilman in our group observed that his roughnecks earn more than engineering professors.

Nevertheless, the Soviet Union produces more oil than any other nation, and with all the problems of this sector, we were not left with the impression that they would have trouble meeting their future production goals. For all the inefficiencies, their natural resource base is so enormous that production can continue to expand, but not so much that the Soviets could become a major factor in the world oil markets. If they were to become as efficient in their exploratory and production efforts as Americans, our touring group seemed to think, they could "drown the world in oil and gas," which is how one of my colleagues put it. Production equipment we saw was considered obsolete decades ago. There were no signs of pollution or safety controls. A number of the Americans suspected they could make fortunes by taking over abandoned oilfields and paying the government a 50 percent royalty on oil that could be brought out with modern techniques. At the same time, the Russians have drilled the world's deepest well at 33,000 feet on Siberia's Kola Peninsula, and they say they plan one of 45,000 feet in Baku. It would undoubtedly be far more efficient to use those resources to recover more oil from shallower wells, or even to increase agricultural production so oil would not have to be produced and exported to pay for grain. But ironically, it is the nature of Soviet socialism that capital is heavily subsidized, and therefore wasted.

* * * *

There's a glut of engineers, we heard everywhere. There's probably a surplus of economists, too. A 30-year-old woman who studied at the Moscow Economics Institute is now assigned the job of renting bowling shoes at a Moscow bowling alley in a hotel built for the 1980 Olympics. We sat on a park bench and I talked of the economic reforms underway in Eastern Europe, in China, and suggested that economic reforms would soon be forced on the Soviet Union and things would greatly improve. She looked her most forlorn look: "No, it will never happen. It's in our nature to live this way." She's lived all her life with her parents and younger sister in a one-bedroom flat. She said she doesn't think of the future and doesn't think she has any influence over it. The conversation wasn't an unusual one, but fairly typical of those we engaged in with younger citizens who seem interested in talking, if only to practice English. As cheerful as they might be in conversation, they were uniformly fatalistic in the view that things would not improve for them. Nobody we met, including those most ardent in defense of their system, could see the day when they'd be able to travel abroad, to the U.S. The mere suggestion would elicit a grim smirk. "Where do you vacation?" I asked the woman. "The Black Sea, although I do not like the Black Sea." "Why do you go then?" "Because that is where they send me." "Do you have to go?" "No, I can stay home."

The exchange startled me. I'd always more or less given the Soviet system credit for providing low-cost vacation spas for the workers, but even here there is a stifling regimentation. A resort within the national penitentiary; you go or stay in your cell.

The most disturbing revelation of this kind came on the weekend of August 27-28, when we saw all over Moscow parents greeting the buses that brought their children home from summer camp. Again, my preconception was that this practice of providing camps for kids was worth bonus points for the Kremlin. In reality, it's another accommodation to the alleged manpower shortage.

For the nominal cost of 16 roubles a month, city children spend the three months of summer at the camps-from the time they are four, years old. Parents are advised not to visit the children during the three months because it upsets the children, who have difficulty adjusting to separation in the first place. But there are places set up where parents can watch their children play without being seen.

We're told this by a Russian grandmother, who described the practice in glowing terms, one of the benefits of socialism. But she then went on to say she had not sent her children to summer camps and advised her daughter not to send her grandchildren. They're away so long that when they come back the parents and children don't know each other, and the relationship is often not the same anymore. The camps teach the children different ways of behaving, different rules, and she thought it preferable that the parents do this themselves.

Is the purpose of all this indoctrination? Perhaps, but another practical result is that everyone keeps working, something the central planners very much want. Mothers don't have to stop working during the summer to watch the kids. And with most people sending the children, few are left to play with those who don't go. The pressures to send the children to camp are sufficient to keep the cities depleted of them. The thought of having your children taken away by bus in early June and returned at the end of August was among the most depressing I encountered. It was soon after that the metaphor occurred me, the national penitentiary. After only nine days in the country, I was thoroughly depressed and eager to break out. Our group left Moscow late in the afternoon of August 30 on a Chinese airline bound for Beijing. The instant the wheels of the big Russian-made jet left the ground, everyone on board broke into spontaneous applause.