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April 3, 2005
David Warsh, Proprietor


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Housekeeping Matters

Why does Economic Principals write so often about Harvard’s failed Russia Project in the 1990s?  Why not write more frequently about quirky subjects that don’t get noticed much?

The answer, of course, is that the Russia Project is a quirky subject that doesn’t get noticed much. Why it should be neglected is itself a great curiosity.  At the very least, the world’s best-known university is maintaining a remarkable double standard.

For example, when Harvard Business School recently withdrew admission offers to a number of applicants who used an unauthorized Web-based procedure to learn in advance of its decisions, Dean Kim Clark explained his reasons in the student newspaper,

“Our mission is to educate principled leaders who make a difference in the world.  To achieve that, a person must have many skills and qualities, including the highest standards of integrity, sound judgment, and a strong moral compass — an intuitive sense of what is right and wrong.  Those who have hacked into this Website have failed to pass that test.”

So what happens when an economics professor gets caught in a serious conflict of interest while advising the government of an emerging democracy? It embarrasses the US government, the economics profession, the university and university president, who happens to be the offending professor’s long-time mentor. A government lawsuit costs Harvard tens of millions of dollars.

The university’s consistent internal response has been to blame the prosecutor, asserting she “has it in” for Harvard — and, externally, to vigorously defend the professor.

Do different parts of Harvard have different standards? Are there different standards for students and for faculty?  Or have those at the top of the university simply lost track of the difference between right and wrong? (A different question for another day.)

The news is that once again Harvard and its economist Andrei Shleifer apparently are negotiating with the government about settling the case against them. Late last month, US District Court Judge Douglas Woodlock postponed until Friday May 13 the next conference in the case.

The talks resumed a few weeks after the government ended a similar month-long quiet period in mid-February with a testy brief reiterating its demand that Harvard disclose its prospective witness list for the damages trial.

Twice since then Judge Woodlock has postponed the next conference — first from March 21 to March 31, after Shleifer switched lawyers (to Martin Murphy of Bingham McCutcheon, from Benjamin Rosenberg of New York’s Dechert firm); then again, without explanation,  to May 13.

Both Harvard and Shleifer already have been found liable by the judge in the civil suit — Harvard for having breached its $34 million contract to provide disinterested advice to the Russian government, Shleifer for fraud and treble damages — perhaps as much as $120 million.

Harvard has told the court that it wants to argue to a jury that its team did much good before Shleifer, its Harvard project leader, and his deputy were revealed in 1997 to be investing in projects on which they were advising, in violation of government conflict of interest rules.

At that point, the US Agency for International Development, which had hired Harvard to advise the Russians in the first place, investigated and quickly fired Harvard. Harvard fired the team’s deputy, lawyer Jonathan Hay, but stoutly defended its tenured professor.

Miffed at the loss of its consultants, the Russian government of Boris Yeltsin then fired USAID.

A damages trial, if it happens, could begin as early as this autumn, or as late as the summer of 2006, depending on rulings by the judge.  To this point, the university and its economics professor have presented a seamless defense. It is not clear at what point, if ever, their interests might diverge.

Meanwhile, a slightly desperate note was added to the proceedings when, also last month, Russian electricity czar Anatoly Chubais escaped an assassination attempt as he returned to Moscow from his country home.

Chubais, who served at various times as Yeltsin’s chief economic adviser, was among those to whom Shleifer had provided advice. He became a frequent visitor to Harvard, where Sheifer taught, and on at least one occasion, journeyed to Cape Cod with him and Shleifer’s mentor, Deputy Treasury Secretary (and now Harvard president) Lawrence Summers.

As the architect of a series of mass privatizations that gave ownership of Russia’s factories, natural resources and infrastructure to a handful of insiders at negligible prices, Chubais became a much-despised figure in Russia, where the standard of living of the masses was otherwise falling  – “the father of the oligarchs.”

As a relatively wealthy man himself now, thanks to share purchases, Chubais continues to push for the competitive restructuring of the country’s enormous electricity monopoly — a bold plan that has won him still more enemies among Russia’s business elite.

It is not clear what effect, if any, the deteriorating situation in Russia will have on Harvard’s stance before the court in Boston.  Nor, for that matter, is there any way of telling how Larry Summers weakened position at Harvard will affect the case.

* * *

Memory plays funny tricks. Economic Principals wrote last week that Harvard University in 1991 missed its chance to hire legal scholar Gerhard Casper, then provost at the University of Chicago, who was widely regarded as the most promising of the next generation of academic leaders. That much is true.

But I had it backwards when I wrote that Stanford acted first. Only after Harvard chose Neil Rudenstine did Stanford successfully recruit Casper to replace Donald Kennedy — to the chagrin of many faculty at Chicago. EP regrets the error.

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