It’s the economy, stupid

Collapse: The Fall of the Soviet Union by Vladislav Zubok was unexpectedly gripping. It’s a large tome, and I can’t remember how it came to be in my pile. But perhaps it’s because the events collectively described as the collapse of Communism marked history as part of my own life that I found the detailed descriptions here of Soviet politics over the years from the arrival of Garbachev and the collapse of the USSR so compelling. In the late 1980s I was working for DRI Europe where my job included trying to understand perestroika and the Soviet economic reforms to explain to clients. We were on holiday in remote Herefordshire watching the fall of the Berlin Wall on a small black and white TV, whose grainy footage felt somehow appropriate for a world historical event. Then came the Czechoslovak Velvet Revolution and the not-at-all-velvet overthrow of the Ceaucescus in Romania over the Christmas holiday. German re-unfication. And of course the collapse of the USSR and western ‘victory’ in the Cold War. If only we’d realised then that the West was a construct of the same system, except that its collapse on our side of the Iron Curtain would be a slower business.

Anyway, aside from the fascinating detail, the message I took away from Collapse was the perennial: it’s the economy, stupid. If there’s high inflation and people’s living standards are falling because of food shortages and other problems, you will have zero political room for manoeuvre and will open the way to political snake-oil peddlers to offer “easy” solutions. Oh.

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Coffee and communism

“This project was hugely successful, perhaps one of the most effective aid projects ever conducted.” What would you guess this to be?

The line is from Katja Hoyer’s Beyond The Wall: East Germany 1949-1990. The context was the fact that the GDR ran out of coffee in 1977. “Afternoon coffee had become a daily ritual, not just comforting but essential as a psychological crutch,” Hoyer writes. It signalled stability and material comfort after the deprivations the middle-aged and older generation had experienced as young adults. The commodities crisis and the GDR’s chronic lack of foreign exchange meant the country couldn’t import any more coffee. What to do?

The solution was to come to a fraternal socialist arrangement with Vietnam, desperately poor after its own conflict. “East Germany could help the brother state rebuild itself while solving its own coffee problem.” GDR provided an enormous aid package and helped build massive infrastructure including a hydropower plant, and in return would get half of Vietnam’s coffee output for 20 years.

Vietnam now produces 20 million 60kg bags of coffee a year – almost all exported – in an industry employing 2.6 million people, the book reports. Unfortunately for East Germany, the coffee plants didn’t produce their first beans until 1990, too late to save the Communist regime. The coffee shortage was a striking illustration of the economy’s long-term unsustainability. It was too small and unproductive to continue to provide enough material and consumerist comforts to keep the population satisfied.

For a few years in the late 1980s a small part of my job involved monitoring the Soviet economy during the era of perestroika. The best estimates in the west (the CIA’s) over-estimated the strength of the planned Communist economies in the years running up to 1989. Extensive borrowing – and for the USSR itself, resource exports – was needed to fund enough consumption for political stability, given low productivity. Beyond The Wall is very interesting in its highlighting of the social benefits of the stability and the growing comforts East Germany provided its population; for a (significant) minority life there was intolerable, but for the majority it had some compensations. Until it didn’t.



False lessons from history

Economic crises are clearly all different – they can be triggered by many types of shock, and occur in many different contexts. Yet we hope to bring to bear on each new crisis lessons learned in dealing with earlier ones. Thus Ben Bernanke’s deep study of the Great Depression was generally seen as a plus in his presence as Fed Chair in the 2008 Great Financial Crisis. Similarly, Reinhardt and Rogoff argued, with the ironic choice of title for their book This Time Is Different, that there are in fact commonalities in all debt crises due to the arithmetic of debt dynamics.

A very enjoyable new book by Harold James, Seven Crashes: The Economic Crises That Shaped Globalization, applies the lens of whether each the seven advanced or set back the process of globalization to crises ranging from famines and blights in the 1840s via wars and depressions, commodity price hikes in the 1970s, the GFC and the Covid lockdowns and Russian invasion of Ukraine.

Very broadly speaking, he suggests that supply shocks tended to advance globalization as economic activity reorganised itself around the shocks to find new sources of supply. These shocks always reveal narrow bottlenecks. Never mind Ukrainian sunflower oil and grain; who knew that the country also produced 90% of the neon gas needed to manufacture semi-conductor chips? Demand shocks tended to do the opposite, and lead to a retreat from global markets, tending to be deflationary. This is not a hard and fast rule, not least because demand and supply soon interact.

However, that’s as far as the generalization goes. The author – a very eminent economic historian – sets out a key argument early on: “The turning points of globalization in a world that is industrialized and interconnected do not resemble each other. Each moment of crisis challenges individuals, businesses and governments in new and unprecedented ways, and leads to a redrawing of the mental map.” Each time is different. He argues, furthermore, that it is a mistake to try to learn lessons from the past – new problems need new solutions, rather than policymakers who are focused on fighting the previous (metaphorical) war.

The bulk of the book consists of chapters giving an account of the context and specifics of each of the selected crises. These are masterly concise essays, covering the economic events but also weaving in the influential economic ideas in each case, often through a chosen examplar such as Keynes. The book also resists the temptation of offering a final ten bullet point recommendations for tackling the next crisis. Because it will be different.



Then and now

Two of my latest reads have been Melvyn Bragg’s memoir of growing up in mid-20th century, working class Cumbria, Back in the Day, and Alwyn Turner’s canter through early 21st century British politics, All In It Together. They make quite an instructive contrast. Bragg’s warm perspective on postwar optimism – despite material hardships – complements his own story of academic success through grammar school and Oxford scholarships. Turner’s jolly but fundamentally pessimistic account of a materially far richer country is a contribution to the large and sadly still-growing literature on the UK’s decline. Both good reads, although as a working class kid from the north west who clambered the social ladder via grammar school scholarship and Oxford (albeit 20+ years later) I particularly enjoyed Back in the Day: pick according to your mood.


European elegy

My non-econ reading lately has been Timothy Garton Ash’s Homelands: A Personal History of Europe. I describe it as an elegy because of its melancholy narrative trajectory: from the 2nd world war and ‘never again’, through the ups and downs of the EU project, to today’s brutal invasion of Ukraine, “illiberal democracies” tearing up the hard-won freedoms, and the pressures of mass immigration – which will only get more intense as climate change leads to conflict and destruction.

Like the author, I mourn the way our European citizenship has been stripped from those of us in the UK, by a slender margin, by voters who were lied to by mendacious and greedy politicians and businessmen. And at the same time recognise the challenges the EU itself needs to address. No wonder the book ends by quoting Gramsci on pessimisim/optimism. But also Vaclav Havel: “Hope is not prognostication. It is an orientation of the spirit, an orientation of the heart. …. It is not the conviction that something will turn out well, but the certainty that something makes sense, regardless of how it turns out.”

So, not a cheering read, at least for those likely to pick up a book about Europe. But a compelling read, by someone who had a ringside seat at many of the key meetings and ‘where were you when…’ events (above all the fall of the Berlin Wall) of the past 40 years.


PS For those who haven’t read it, Garton Ash’s The File: A Personal History is a must- read.