austin-murphy-the-triumph-of-evil

218 THE TRIUMPH OF EVIL
(and often completely) at the whims of the marketplace, and the 1990s
have demonstrated that free markets can cause large fluctuations in cur­
rency values which can have very serious effects on the international
balance of payments, inflation, and economic output.
A good example is provided by Yeltsin's capitalist Russia, which (at
the suggestion of its primary USA economic advisor, Harvard Univer­
sity Professor Jeffrey Sachs) made its currency, the ruble (Rb), freely
convertible in December of 1991 (Hays, 1991 ). Although the average
purchasing power of the ruble in terms of what it could buy in real goods
and services was approximately the same as the dollar before 1991 (and
therefore approximated the official government exchange rate between
dollars and rubles that was about 1:1 at that time), Russia did not have
the products, reputation, and distribution system to be competitive in
international markets (Williamson, 1991 ). In addition, there was enor­
mous pent-up Russian demand for foreign products, including not only
fo r electronics goods that had long been in short supply in Russia under
communism but also for foreign brand-name versions of what was
much more cheaply available in Russia such as blue jeans, cigarettes,
and cola.
This situation represented one of extreme inelasticity of demand rela­
tive to price for Russian imports and exports (Caves, Frankel, and Jones,
1996). In particular, Russians were willing to pay almost any price for
foreign goods in 1991, and the demand for (or addiction to) foreign
goods continues strong even many years later (Associated Press, 1998).
On the other hand, fo reign countries were unwilling to pay any price
for Russian goods, which had not yet been adapted to sell in fo reign
markets, which had a poor reputation (from Cold War propaganda) if
they were known about at all, and which were not even being interna­
tionally distributed yet on any large scale (with the marketing necessary
to "sell" and distribute products in capitalism being a very costly and
time-consuming process).
As a result, when the ruble went from being almost fu lly inconvert­
ible (in terms of severe restrictions on any currency trading) to sud­
denly being fu lly convertible in December of 1991, there was an enor­
mous demand fo r fo reign currencies like dollars and almost no demand
for rubles. Not surprisingly, the currency immediately fe ll from about
Rb l/$ to about Rb 100/$.
CHAPTER 6 219
Such an enormous devaluation had an effect similar to making the
currency worthless, which would reduce hard currency exports to $0
if prices in the domestic currency remained the same. For instance, a
vodka exporter selling bottles at Rb5/bottle would have the amount of
dollars earned per bottle fall from $5 to $.05 when the exchange rate
changed from Rbl/$ to RblOO/$. At the same time, the dollar retail
price in an export market like the US might only fall by about a third
because transportation costs, tariffs, li.q uor taxes, and distribution costs
such as dealer mark-ups typically make up more than 2/3 of the final
retail price, and these costs may be largely independent of exchange
rates-as is also typical for many other products (such as textiles) pro­
duced in less developed countries, where even non-transportation dis­
tribution costs (i.e., rent and capital costs incorporated into wholesale
and retail mark-ups) easily make up over 2/3 of the retail value (Chos­
sudovsky, 1997). Even !fthe 33% drop in the retail price could lead to
a doubling of sales to 2 million bottles from 1 million, the amount of
export revenue would fall from $5 million to 2,000,000x$.05=$ 1 00,000.
ln. the meantime, "needed" technology and Western brand-name imports
ought only be halved despite 9900% higher Rb costs (caused by the
99% devaluation), resulting in a 4900% increase in Rb imports that can
not be paid for with a 100% increase in Rb exports. In this situation,
there was virtually no exchange rate that would balance the payments
for trade (or the international current account). Only investors seeking
to
. buy up Russian real estate and fixed assets at some extremely low
pnces (like 11100 of the prior cost) could bring the supply and demand
for rubles into the equilibrium at 100 rubles per dollar.
However, such a situation could not and did not last long. Exporters
prefer not to maximize revenue in a worthless currency, and so they
naturally increase their domestic currency prices in such a predicament
M � ps using collusion), unless there is both perfect competition and
�cJent capacity to meet the higher unit demand. With importers also
vmg to raise ruble prices to pay the same dollar price but with far
�ore � bles (and with those competing with importers doing likewise),
; :on rising from 5.4% in 1990 to about 1 000/o by the end of 1991 and
� � t trnmediate hyperinflation in Russia was the natural result, with
1�1 ut 13� % in 1992 (IMF, 1993). At the time of the devaluation in
'the chatrman of the Russian central bank (who disagreed strongly