Dr. Jeffrey Sachs, Shock Therapist

By Peter Passell

The lobby of the Metropole, Moscow's lovingly restored grand hotel a few blocks from Red Square, is almost deserted on this gray spring afternoon. That's just fine with Jeffrey D. Sachs, a boyish-looking 38-year-old Harvard professor who is now probably the most important economist in the world. He has appropriated a cluster of comfortable armchairs for a meeting with two members of his team, Americans who work full time in Russia.

The agenda is Russia's safety net or, more precisely, whether unemployed workers will be able to make ends meet. Russia is plunging out of Communism, if not directly into a capitalist free market. Whether this huge, humiliated nation will stoically bear the pain of the transition is far from clear, and the strength of the safety net could make the difference.

There are plenty of laws on the books, but do they count? "All Russian citizens are legally entitled to free health care," points out Judith Shapiro, a senior lecturer on policy economics who is on leave from Goldsmith College at the University of London. The catch: they often "only get what they pay for."

While employees of Government and big enterprises generally have access to adequate service at their own clinics, the less fortunate are denied modern surgery, drugs and even decent sanitation. The problem is apparently growing worse, she notes, because inflation has far outpaced physicians' salaries, which weren't high to begin with. Many are now emigrating, or deserting their posts for more lucrative jobs, like driving taxis.

Sachs's immediate concern is the implication for the Government's budget, which must be slashed in order to bring inflation under control. If much of the nation's health expenditures are now buried as fringe benefits on the books of enterprises that depend on Government subsidies, who will pick up the cost once the enterprises are forced to economize?

Getting a handle on the magnitude of the problem is obviously difficult in a country that cannot even explain why life expectancy has fallen sharply in the last two decades. But some number is better than none. And by pressing officials to address this and other pivotal issues, Sachs hopes to accelerate the pace of reform.

Sachs's message of urgency is not universally accepted. Plenty of Western as well as Russian economists contend that a more gradual approach is not only possible but necessary. "Economic reform is a political process," says Padma Desai at the Harriman Institute at Columbia University. "First, you must build consensus."

And even his sympathizers acknowledge that Sachs's high profile and world-class impatience could generate a backlash in a nation still adjusting to the reality that it is no longer a superpower. "There's a real dilemma here," says Stanley Fischer, an international economist at the Massachusetts Institute of Technology. "You have to make a lot of noise to get the attention of the West. But the more noise you make, the more you make it seem that the reform program is a Western program. And that could be the kiss of death."

Still, Sachs's brand of "shock therapy" has worked elsewhere. And there is good reason to believe that Russia's future will turn on how well its leaders learn the catechism of change that he has worked so hard to promulgate.

TO AN AMERICAN JADED BY THE CHOICE OF breakfast flakes with or without bran, dates, sugar-coated raisins and 12 essential vitamins, there's nothing much to tease the palate or the eye in the Gastronom Smolensk near the center of Moscow. Deli counters, dominated by slabs of butter and wheels of stuff that must be cheese, are still presided over by gorgons in white smocks. Cans of vegetables still bear labels that look like rejects from high-school print shop. Odors of sour milk, industrial cleaner and damp wool assault the senses.

But Sachs recognizes what skeptics often miss. "You should have seen these food stores before the price reforms," he exclaims. Those were the lean years of perestroika, when everything but the dregs ended up in the commissaries of the well connected or fell off the backs of trucks on the trip from the warehouse.

Yes, there still are queues. But the lines are a result of socialist retailing practices, not food shortages. Shoppers first wait to pick out items for weighing and pricing. Then it's on to the cashier's line, where, after interminable delay, they exchange their rubles for receipts. Then it's back to the food-counter line to collect their 200 grams of smoked fish or half-kilo of margarine.

But goods are largely being allocated by price, notes Sachs, "rather than by whom you know." And the daily frustrations of shopping will be eased when privatized stores discover that supermarket-style checkout saves scads of money.

It's easy to overlook the significance of these modest signs of progress, and many Russians and Western intellectuals do. In spite of the strong popular vote of confidence that Boris Yeltsin won in the April referendum, they view Sachs's relentless optimism about Russia's capacity for rapid change as a denial of the inertia of a thousand years of Slavic feudalism.

But it is precisely Sachs's impatience, bolstered by seemingly infinite energy and a sophisticated grasp of modern economics, that has made him a force to reckon with. As an adviser to reform-minded governments from Bolivia to Slovenia to Poland, Sachs led successful battles for fiscal and monetary discipline in economies written off by more cautious practitioners of the dismal science. And as a fierce advocate of international debt relief for essentially bankrupt countries, he helped break the financial gridlock that consigned Latin America to economic stagnation for much of the 1980's. Now he is prodding the radicals who sometimes have the ear of Boris Yeltsin to press their advantage while they can.

"Poland, with its reforms in place, is the fastest-growing economy in Eastern Europe," says Sachs. "If Poland can do it, so can Russia."

SACHS, A specialist in monetary theory and international finance, started down the road to fame and controversy by accident. True, he was a prodigy at Harvard, passing his general exams for a Ph.D. in economics while still in college. And he was invited to join the university's Society of Fellows, an honor that might not qualify the recipient as a Friend of Bill but confers more status in academia than a Rhodes scholarship. And he won tenure in one of the nation's best economics departments at the age of 29.

But what might have been merely a distinguished scholarly career took an abrupt turn toward the practical in 1985. Harvard was host to a group of Bolivians, Sachs recalls, including one of his former students -- "and I was the only economist on the faculty to show up."

At the time Bolivia, the poorest country in South America, was suffering what may have been the most virulent inflation any economy has ever suffered outside wartime -- an astounding 24,000 percent annual rate. When the discussion turned to the near impossibility of stabilizing prices without triggering a killer recession, Sachs demurred. The least painful way to beat inflation, he argued, was a clean break with the past, a regimen of fiscal and monetary discipline combined with an end to economic regulation that protected the elites and blocked the free market. "If you think you can do it," challenged one official, "come to Bolivia and prove it."

He did, and quickly persuaded the newly elected Government to go along. Within weeks, hyperinflation was only a bad memory. And after months of tense negotiation, the country settled its mountain of debt to international lenders for about 11 cents on the dollar. "What Bolivia showed," concludes Sachs, "is that stabilization is doable, possible, sustainable."

As Sachs is the first to admit, what later become known as shock therapy was not plucked whole from thin air -- similar approaches had more or less worked in Germany after both world wars. Sachs's special insight was that the logic could apply to economies with no collective memory of free markets or history of evenhanded rules of contract law and property rights. In fact, he is confident that revolution is the natural means of economic change. "If you look at how reform has occurred, it has been through the rapid adaptation of foreign models," he concludes, "not a slow evolution of modern institutions."

Poland's success in stabilizing its currency and jump-starting growth is potent evidence that Sachs is right. But no test could be tougher -- or more important -- than the effort to transform the Russia of Stalin, Brezhnev and Gorbachev into a prosperous, consumer-driven economy in a single generation.

THE PRESSURE IS ON this morning in Sachs's temporary Moscow headquarters, a tiny suite in the Ministry of Labor that he and his assistants share with a group from the London School of Economics, two quietly efficient translators, a welter of computer equipment and a few empty pizza boxes. (Yes, they deliver in Russia.) A more comfortable home in the Ministry of Finance is still weeks away.

Topic A is the new agreement between the Finance Ministry and the Russian Central Bank, intended to tame the inflation that is running at 20 to 30 percent a month. It is, in Sachs's view, a cancer on the economy that is close to metastasis. Sachs has been deeply frustrated by the fatalism and political drift over the past year that has brought the economy to the brink. "Nobody says that 26 percent a month inflation is deeply ingrained in the Russian soul," he scoffs.

In most successful economies the central bank acts as a bulwark against politicians who have trouble denying goodies to their constituents. But in today's Russia the roles are reversed. Boris Fyodorov, the finance minister whom Sachs admiringly characterizes as "utterly matter of fact, not prone to rhetorical flourishes," is resolved to curb the inflationary budget deficit. But Viktor Gerashchenko, the chairman of the Central Bank, is an old-school bureaucrat who is publicly skeptical that capitalist monetary theory applies to the Motherland.

More to the point, Gerashchenko owes some allegiance to the Parliament, which is dominated by former Communists, pragmatic provincial pols and enterprise managers who share a common desire to keep the socialist patronage machine creaking along. And this means easy credit for giant state-owned enterprises that had always depended on a single customer -- a Moscow ministry -- to tell them what to make and where to get the materials.

Gerashchenko has also been playing Uncle Sugar to the former Soviet republics, handing out rubles to republic enterprises that are Russian industries' best -- sometimes only -- foreign customers. Sachs estimates that one-tenth of Russia's productive capacity last year was devoted to propping up the periphery of the old Soviet empire, with the ruble payments surging back to stoke the incipient hyperinflation.

Now -- thanks in no small part to Sachs's tireless lobbying -- America and the other rich countries have at long last assembled a hard-currency life raft to keep the reforms afloat. In return, the Finance Ministry has bludgeoned the Central Bank into an austerity pact designed to reduce inflation to a mere 5 percent to 10 percent a month by the end of 1993.

The bank has reluctantly promised to pare loans to the basket-case enterprises, to charge interest that approaches the rate of inflation and to leave decisions about credits for other republics to Russia's foreign-policy makers. But the Government budget must also be disciplined, and Sachs has taken on the job of outlining the cuts that Finance Minister Fyodorov could propose.

Sachs talks frequently with Fyodorov and the other dynamo of the economic reform drive, Anatoly Chubais, the chairman of the privatization agency. He has a good working relationship with other senior reformers, including Aleksandr Shokhin, a Deputy Prime Minister, and Sergei Glaziyev, the Minister for Foreign Economic Relations. But he is not an employee of the Russian Federation. "I make it a policy not to take money from the Governments that I advise," he says. "It's better for me and better for them."

Sachs does, however, need cash to cover his own travel expenses and to support a sizable staff. Over the last three years most of the money came from the United Nations World Institute for Development Economics Research in Helsinki. Now a good chunk consists of grants from the Swedish Government, the United States Agency for International Development and the Ford Foundation.

The task before Sachs and his Western economists this day is to identify the most expendable items in the budget. A primary target is energy, which Russia still produces (and wastes) in abundance. How much money would a cut in consumer subsidies on natural gas save? How much would it reduce the consumption of gas -- and could the resulting surplus be sold to Europe for hard currency? Since nobody present is an energy specialist, one economist is dispatched to research the experience in the former Eastern European satellites, which were left on their own to buy oil and gas when Mikhail Gorbachev cut them free.

It will be a long day -- indeed, days -- for the group to come up with a series of suggested budget savings that might withstand scrutiny from a skeptical presidential cabinet and a hostile Parliament. But nobody is complaining: Sachs, in spite of chronic jet lag, works harder than anyone. In fact, during most semesters, he actually carries a full teaching load at Harvard, squeezing his trips abroad between classes and during breaks in the academic calendar.

Besides, Sachs is offering these mostly young economists a role in the redemption of Russia -- a heady experience for academics who might otherwise be holed up in some dusty office calculating how many parameters could dance on the head of a computable general equilibrium model.

THE SCENE IS A CLEAN, well-lighted place with comfortable blond furniture, a conference room that could be found in a dozen northern European countries. But this pleasant chamber, part of the offices of the Russian Federation's Center for Economic Reform, is within the walled compound that was one of Stalin's country homes, a 10-minute drive from the Kremlin. Across the road in a grove of white birch stands the dacha of the late, unlamented Andrei Zhdanov, Stalin's ideologist in charge of purging socialist culture of bourgeois influences like Dmitri Shostakovich.

The center, which serves as a think tank for the Russian Government, holds regular seminars at the compound for the Moscow reformers, plus distinguished visitors. But the lecture that day is not inspired by pressing issues of Russia's transformation. An economist from the International Monetary Fund is amplifying his views on Spain's post-Franco conversion from stagnant, regulation-ridden state capitalism to member in good standing of the European Community.

What is Jeff Sachs doing here? Has he interrupted his Moscow workathon for a busman's holiday? Has he brought along a minivan load of his worker bees to enlighten them about Spanish steel making? "Listen to the subtext," he suggests.

It doesn't take much listening. The discussion quickly turns to the difficulties of pruning the privileges of special interests in a democracy -- and in particular, of letting big state-owned companies go bankrupt. Even when workers on unpaid furlough are counted, unemployment in Russia is now probably below 2 million out of a labor force of some 70 million. But an end to the bankrolling of dead-end enterprises this year could easily push this figure above five million, and everyone with an inkling of Russia's sad, violent history is apprehensive about the political consequences. That is why Sachs and his team are so passionate about the social safety net.

A senior Russian economist alludes to the success of Chile's reforms in the 1980's, implying that there are advantages to buttressing painful change with blood and iron. Others are impressed by China, whose octogenarian leaders have succeeded in following a capitalist line without abandoning the socialist legacy of state ownership. Sachs, who has been fiddling with his new Psion Series 3 palm-top computer, bursts into a well-practiced lecture intended to stiffen the spines of those committed to democratic capitalism.

General Pinochet was a tyrant, Sachs says, but he did represent the interests of the Chilean middle class and was thus a strong supporter of market reforms. In Russia, by contrast, an authoritarian government would undoubtedly serve as a front for the military-industrial complex, which Sachs believes is the primary obstacle to a capitalist rebirth.

China may be able to grow rapidly without shedding the burden of the industrial base that Mao built, Sachs goes on, but all the growth is taking place in the free market. China is no model for gradualism in Russia, he concludes, because the inefficient Russian state sector is so much bigger than China's and thus demands a level of care and feeding that would inevitably break the Government budget.

Now Sachs returns to the offense -- his preferred stance.

"Stabilization is good politics," he says flatly. Stable prices, preferably associated with easy convertibility of the ruble to Western currencies, he argues, would bring an enormous sense of relief. And while unemployment would exact pain, he concedes, "governments can survive high unemployment but not high inflation."

In any case, Poland's experience with shock therapy is upbeat evidence that the effect on living standards is likely to be more modest than popularly assumed. While the official Polish statistics showed output falling by a third after the shock, Sachs is certain that "the alleged drop was largely illusory." Some 700,000 small businesses sprang up in the first year of market liberalization, he estimates, employing 9 percent of the work force -- much of it off the books to avoid taxation.

Average consumption of meat and fruit, rough proxies for overall consumption, actually rose between 1989 and 1991. So, too, did the number of cars, washing machines, color TV's and VCR's owned by the typical household.

Plainly, there are losers -- mostly employees of the grotesquely inefficient heavy industries -- and they constitute a powerful constituency. Indeed, just last month Solidarity displayed its displeasure with reform by deserting the ruling coalition and bringing down the Government. But the numbers, Sachs argues, should be put in perspective. "Unemployment, while high," he concludes, "did not rise beyond levels familiar in Western Europe."

The first goal for reformers, says Sachs, is to get across the message that democracy and capitalism are inextricable. Sachs, as a matter of principle, refuses to advise unelected governments: When approached by Poland's Communist junta to help renegotiate the country's foreign debts, he turned them down flat. Sachs's unbending stand, one must assume, has more than a little to do with the experience of his wife, Sonia Ehrlich, a pediatrician in Cambridge, Mass., who fled Communist Czechoslovakia with her family at age 12.

The Russian researchers accept Sachs's interpretation of Chile and China without complaint, though it is difficult to know whether they are convinced or simply unaccustomed to challenging authority. At lunch over borscht, pork cutlets and cheese pastries, all the talk is about who is winning and who is losing at which ministries.

THE STATUE OF FELIKS Dzerzhinsky may be long gone from its pedestal in front of Lubyanka prison. Moscow's upwardly mobile may swarm McDonald's each day for a chance to savor two all-beef patties, special sauce, lettuce, cheese, pickles, onions on a sesame-seed bun. But time stands still in the anteroom of the former Central Committee building. Stonefaced guards in starched uniforms stare sullenly at the Americans walking the richly paneled, red-carpeted halls.

They may be sullen, but they know an order when they hear one. Once the proper permissions have been logged, Sachs is free to lead his small contingent to the cluttered office of Maksim Boiko, adviser to the chairman of the Committee on State Property Management. Sachs is paying a quick call on the Russian privatization agency), both to keep Boiko abreast on the latest monetary machinations and to lend moral support to the embattled agency.

The agency and its hard-driving chairman, Anatoly Chubais, whom Sachs labels "a freedom fighter," have been under attack by Parliament. The old guard wants to slow the privatization, or at least funnel more of the gravy to friends.

While the mechanics at the local level have proved more laborious than expected, there is apparently little popular resistance to small-scale privatization outside agriculture. Some 60,000 little businesses have been sold, and the pace shows no sign of slowing. In fact, a series of cross-cultural surveys conducted by Boiko along with Robert Shiller of Yale and Vladimir Korobov of the Kherson Pedagogical Institute strongly suggest that Russians are as enterprising as Westerners, and even as accepting of the vicissitudes of free markets. Russians are merely more suspicious that the rules will be rigged against them.

The decisive political battle on privatization (and perhaps the entire economic reform effort) will not be over the fate of small businesses, however. It will turn on the privatization of the larger enterprises, particularly the ones that equipped the Red Army with the latest weaponry. Many have been formally converted to joint-stock companies, and Russians have all been given vouchers that they can use to bid for shares. A recent showcase sale of ZIL, the conglomerate that made the stretch limos used by Kremlin big shots, was widely acknowledged a big success.

But Chubais's enemies have, for the moment, managed to exempt a good chunk of transportation, energy and high-technology enterprises from the auction block. And hand-wringing over the fate of these ersatz jewels in socialism's crown strains Sachs's steady affability. Concern for these mega-enterprises is motivated by "a mix of self-serving politics and wishful thinking," he says with scorn.

The output of the giant factories that had been integrated into the planned economy of Russia fell sharply in the last year, as it did in most of the industrial establishments of post-Communist Eastern Europe. And critics, Western and otherwise, cite this as evidence that shock therapy is a failure. Indeed, the conventional wisdom after Poland's sweeping reforms in 1990 was that collapsing output proved shock therapy was . . . well, too shocking. By the same logic, many analysts have linked the survival of an orderly Russian transition to a deal with the "centrists" in Parliament who represent the mega-enterprises.

"You just can't leap from here to there," argues Stephen F. Cohen, the director of Russian Studies at Princeton University, "and Yeltsin knows it." While Cohen acknowledges that Russians now accept the idea that free markets are needed to bring the nation to Western living standards, he thinks there is little support for changes that would shut down giant industrial employers. "The state sector will remain large: it's a tradition," he says, one that will not be broken by democratic means.

But Sachs notes that falling production of unwanted goods -- steel plate for tanks no longer being built, chemicals made so inefficiently that the finished products are worth less on world markets than the raw inputs -- does not reduce human welfare. In fact, he thinks it is critical that the military-industrial complex be left to fend for itself in order to free capital and skilled labor for market-driven development.

Sachs is also more optimistic than his critics about the capacity of some Russian enterprises to swim with the foreign sharks. In fact, he sees an industrial comeback worthy of postwar Japan. Russian industrial exports now total about $5 billion. "I'll bet they reach $50 billion by the turn of the century."

IT IS ALMOST TIME for Sachs to board a Swissair jet for Zurich (business class). There he will connect for the 6,000-mile flight for Sao Paulo, where he has been invited to spend a few days proselytizing shock therapy. Then it's on to Tokyo. Sachs, who seems to spend a quarter of his life on airplanes, usually orders the vegetarian plate.

But before leaving, he squeezes in an hour for cruising the Arbat, a once-quaint shopping street that has become a flea market. Tourists can buy everything here, from trash art to Red Army colonels' caps to a pensioner's family jewels. And the raw bargaining brings a rare glimpse of the material side to Sachs. "My wife hates it when I shop for bargains," he confides -- his gain, she reasons, must come at the expense of sellers who live on far less.

Sachs does like collecting old currency, and he is besieged by dealers. Here, in clear plastic envelopes, are rubles issued by the czars -- orders to pay proclaimed by absolute rulers with an absolute faith in their own legitimacy and that of their bank notes. Here, too, is the new money of the 1917 revolution, whose denominations, Sachs points out, quickly grew to six figures during the years of the Bolsheviks' fight for control. It is a sobering deja vu: a ruble, which had roughly the purchasing power of a dollar at the beginning of the Gorbachev era, is now worth less than a penny. And 10,000-ruble notes are now circulating on the streets.

Will the hopes of Yeltsin's reformers be smashed (as were those of Gorbachev's) against a wall of mismanagement, avarice and cynicism? "Big economies are harder to change than little ones," Sachs readily concedes. This evangelist for democratic capitalism leaves no doubt where he wants the Russian people to go. The giant question is whether they are prepared to follow.