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January 29, 2006
David Warsh, Proprietor


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When the Watchdog Doesn’t Bark

A persistent riddle of the Andrei Shleifer case has been the failure of three of the four major English language papers to report in any detail the story of Harvard’s failed Russia Project. The Wall Street Journal was quick to grasp its significance in 1997. Carla Anne Robbins’ aggressive reporting on page 1 when the investigation was new probably kept it from disappearing beneath the rug. Robbins, who is now a WSJ editor, wrote another incisive leader last autumn, after US District Court Judge Douglas Woodlock delivered his verdict of fraud and breach of contract.

But The New York Times, The Washington Post and the Financial Times took a pass, even after Shleifer’s close friendship with Harvard University President Lawrence Summers became an issue. Indeed, the Times had to run an embarrassing Editor’s Note after a business page columnist quoted Shleifer as an authority on corporate corruption without noting that, only a few days earlier, a federal judge had found the Harvard professor had committed massive fraud himself.

An authoritative account of what actually happened in the seamy affair exists only because an off-shore magazine paid an independent reporter to study the court record and then published his 25,000-word report. “How Harvard Lost Russia: The inside story of what happened the enormous power and resources of the United States government were put in the wrong hand,” by David McClintick, appears in the January international edition of Institutional Investor.

What’s a satisfying explanation for the lack of other interest? Simple inattention won’t suffice. There were those WSJ stories, after all.  A more plausible answer in this case can be found in the continual trading of information, appraisal, mentions, column inches, access and other favors that is at the heart of the business of newsgathering everywhere.

What does it take to keep a watchdog quiet?  Why did Harvard fail at what would seem to have been the easier task, short-circuiting the government investigation? Some indication of the relative strength of forces at work here can be found in an ingenious study of the checks and balances that underpin democracy by John McMillan and Pablo Zoido, both of Stanford University. It appeared a couple of years ago in the Journal of Economic Perspectives. Most political analysts study the institutions of democracy one at a time, they noted, isolating a particular mechanism in order to study it — elections, political parties, the judiciary, the media, and so on.

But the many elements of a democratic system form a system of incentives, they stated. Checks and balances work insofar as they interact and reinforce each other. Opposition parties can flourish only where the press is free. The media can’t function without judicial independence, which in turn depends on political competition. Which of these mechanisms is the most robust? Which is the most easily suborned? McMillan and Zoido turned to the experience of Peru in the 1990s to make their point. It was tantamount to a laboratory experiment.

Like every other nation in South America, Peru had been jostled by the events of the turbulent 1970s — the oil shocks in particular. A military dictatorship gave way to civilian rule in 1980s, and by 1990 all the apparatus of democracy was in place — regular elections, opposition parties, presidential term limits, judicial independence (with appropriate safeguards), and a free and competitive press. On the other hand, the economy was a shambles, mired in recession with annual inflation of 7000 percent, Shining Path guerillas were gaining strength in the hills.

What happened next was the basis for an opera. University administrator Alberto Fujimori defeated the novelist Mario Varga Llosa for president in 1990. A political neophyte, Fujimori hired as his “security adviser” and intelligence chief Vladimiro Montesinos Torres, an army officer who in the ’70s had been cashiered for selling secret documents to the US, who in the ’80s made a living as a lawyer for drug dealers.  Montesinos was ideally prepared to play on human weakness on all sides. Together, he and Fujimori — El Chino (the Chinaman) to his countrymen — proceeded to take over the state.

There were some striking early successes. Shining Path founder Abimael Guzman was captured in 1992 and his terrorist army collapsed. Meanwhile, “Fujishock” — a series of macroeconomic reforms and privatizations — reduced the inflation rate to around 10 percent by 1995 and stimulated steady economic growth. The CIA liberally financed the regime, despite warnings from the Peruvian military that Montesinos had taken over the government. (Eventually Transparency International would declare Fujimori the world’s the sixth most successful head-of-state embezzler, after Indonesia’s Suharto, the Philippines’ Marcos, Zaire’s Mobuto, Nigeria’s Abacha and Serbia’s Milosovic.)

And so through a combination of showmanship, bullying and, mostly, bribery, Fujimori and his secret police chief (or, perhaps more accurately, Montesinos and his puppet president) took over the country. They bribed politicians, judges, bureaucrats, journalists, business executives — more than 1,600 of them were kept on a regular payroll. They killed people, too, but mostly students and peasants. “Remember why Pinochet had his problems,” Montesinos told a subordinate in a session that was taped. “We will not be so clumsy.”

Instead, they closed Congress, suspended the constitution, reopened the “democracy” long enough to run for re-election in 1995, then persuaded Congress to abolish presidential term limits and won a third term in 2000. Three months later, after an opposition television station broadcast a tape of Montesinos paying a $15,000 bribe to a key congressman to switch sides, the government fell, Fujimori fled to Japan (where he was granted extradition-proof citizenship), and Montesinos sought asylum in Venezuela. (He has since been returned to Peru, and is awaiting trial in a maximum security prison that he had ordered built.)  Then last November, Fujimori surprised everybody by rolling the dice one more time. He flew into Chile and announced plans to run again for president of Peru.  He did not make his point.  Peru filed extradition papers, and Chile is slowly going through the legal procedures

McMillan and Zoido’s account of Montesinos’ activities as a corrupter makes gripping reading.  In the videos, he counsels those he is bribing on cooperation: “How do friends help friends?… They do not say, Hey, I give you this so you do this.” He gives lessons in the string-pulling arts. He routinely presents himself as a patriot. He is driven, he declares, “to bring peace back to the country” by ending terrorism and the drug trade. “Here we work of the national interest,” he tells a television executive on one tape. On another: “I get nothing out of this; on the contrary, only hate, passions, intrigues and resentment. I do it because of my vocation of service to the nation.” After Montesinos’ arrest, Peruvian police discovered $200 million in his foreign bank accounts. “His patriotism, evidently, did not preclude enrichment,” write the authors.

Montesinos’ great gift to economic science, however, was that he kept meticulous records. He required recipients of his bribes to sign receipts.  He routinely videotaped himself doling out cash and explaining exactly what he expected of those whom he paid (the tapes were quickly dubbed “Vladivideos” when they began to be shown on national television). Stanford’s McMillan and Zoida pored over the records, compiling what they described as price list for bribery, an instrument that could be used to measure the strength of countervailing forces that Montesinos was systematically disabling.  They wrote, “The size of the bribes measured what he was willing to pay to buy off those who could check his power.”

What they discovered was a well-demarcated hierarchy. A politician was worth slightly more than a judge. But the owner of a television station commanded about a hundred times more than a politician — five times more than the total of all opposition politicians’ bribes.  “Each channel takes $2 million monthly, but it is the only way,” he told a subordinate. “That is why we have won, because we have sacrificed in this way.”  Newspaper bribes, while higher than those of judges and politicians, were much less than television. The difference had to do with scale. Montesinos explained on tape:  “What do I care about El Comercio? They have an 80,000 print run. 80,000 newspapers is shit. What worries me is Channel 4… It reaches 2 million people.”

Thus, McMillan and Zoido concluded, the news media constitute “the chief watchdog” in a democracy. News organs can provide oversight even where political competition and an independent judiciary have broken down. (It was a small independent television station, one that Montesinos had never bribed, that aired the tape that finally brought the Fujimori regime crashing down.) “Safeguards for the media — ensuring they are protected from political influence and are credible to the public — may be crucial policies for shoring up democracy.”

Now the United States is not Peru, and Larry Summers and Andrei Shleifer are not El Chino and Vladi, though aspects of their relationship in the ’90s do bear a certain resemblance to the Peruvians’ symbiosis — the powerful academician in high office and his worldly agent in the field; the delicate issues of trust and betrayal between them.

And certainly the techniques that Fujimori and Montesinos exploited to subvert the normal functioning of the institutions of democracy are constantly in use with varying degrees of subtlety in nations all around the world.  For instance, I thought immediately of Montesinos in connection with the news earlier this month that Richard Scrushy had paid a free-lance writer (through a public relations firm) to write several friendly stories about him for a black-owned weekly newspaper, the Birmingham Times.  He reviewed at least two of the articles before publication, according to the Associated Press, which broke the story.

Scrushy, of course, is the former chief executive officer of HealthSouth who last year was acquitted on 36 counts of fraud, despite the testimony of many of his subordinates that he had been the architect of an accounting scam that caused the insurer’s collapse. Audrey Lewis, the author of the articles, told reporters for The New York Times, “I sat in that courtroom for six months, and I did everything possible to advocate for his cause.” She explained that Scrushy had paid her $10,000, plus $1,000 to buy a computer. He paid another $25,000 to the pastor of a church who was among a group of African-American supporters who frequently attended the trial, according to The Wall Street Journal. Scrushy is white. Eleven of eighteen jurors were black.  

So now to the really interesting question.  How did the defendants in the Russia project –Harvard, Shleifer, Hay and, though he was not charged with wrong-doing in the matter, Summers — convince the Times, the Post and the FT that the collapse of its Russia Project was not a worthy story?  What did they say, and how did they say it? To whom, and how often?  Let me stress that there is absolutely no question of actual money ever changing hands — of bribery. At the pinnacles of capitalism, the influence exchange is so deep and liquid that cash is almost never required, except, perhaps, within organizations, in the form of golden handshakes and the like.

Instead, the informal economy of capitalism is one of deference and respect, of favors today and the implicit promise of favors later, of jobs and dinner invitations and admissions to exclusive kindergartens. Its texture is extremely uneven: dense around, say, academic medical centers and aerospace contractors; sparse where incentives are weak; and, at least in democracies, full of relatively empty seams in the appropriate places, between countervailing sectors. Anyone who doubts that this informal economy extends to newspapers knows nothing about how newspapers work.

It is here that temptation comes in. Many of the judgments concerning the newsworthiness of the US government’s complaints about Harvard’s Russia project were made initially by editors in consultation with correspondents on the ground during the 1990s. All four major papers had series of superb reporters in Moscow in those years. Most of them were partial to the Russians’ efforts to bring communism to an abrupt end, and mindful of the allowances that Western experts had to make in order be useful advisers to their counterparts. John Lloyd of the Financial Times, for example, in a lengthy article in The New York Times Magazine, spoke for many of those correspondents when he concluded, “Russia suffered from our mistakes and preconceptions, but — barring catastrophe — ultimately will make its own accommodation. It was never ours to lose.  Russia lost, not itself but the trust that makes societies civil and functioning.”  

Matters were seen quite differently In the United States, however, first by investigators for the U.S. Agency for International Development, which paid Harvard to advise the Russian government, then by lawyers in the US Attorney’s office in Boston to whom they referred their findings. In Boston and Washington, most of the advice that was given to Russian economists who were seeking to create institutions of market economy was completely beside the point. It was the on-the-sly personal enrichment of the Harvard team-leaders that was viewed as being wrong.  Nor was the case ever seen as mainly a criminal matter, according to government sources, the usual possibilities of criminal charges of perjury having been wisely dismissed in the interests of focusing on the underlying case, a matter of breach of contract and fraud.

Harvard’s courtroom defense turned on technicalities:  though he was projector director, Shleifer somehow wasn’t covered by the contract. Its public relations campaign deployed a number of straw men. The prosecutor hated Harvard. Without criminal charges, the government case was of little consequence. The judge had declined to try the charges against the advisors’ wives. Janine Wedel, the author of a distinctly left-wing critique of shock therapy in general and the Harvard project in particular, “Collision and Collusion: The Strange Case of Western Aid to Eastern Europe,” was from “another planet.”

All that’s been put to rest now by the McClintick account. It is a straightforward explanation of the case that the government finally proved against Shleifer, Hay and Harvard before a practical and sophisticated judge. It’s in the nature of the news business that editors don’t ordinarily second-guess themselves and their reporters. They haven’t time. But this is one story where the editors of the Times, the Post and the FT may want to “walk back the cat” in order to discover how they got left so far behind on such an interesting story.

For at its heart, the Shleifer matter has always had less to do with the failure to export American values to Russia than with the inadvertent importation of Moscow rules to institutions in the United States. That’s why Harvard’s cockeyed defense is so alarming, why Shleifer’s elevation to positions of ever-greater authority in the economics profession is worrisome. No one doubts that he is an original and productive economic thinker. The good news is that it was Shleifer who, as editor of the Journal of Economic Perspectives, published McMillan and Zoido’s article on Montesinos. That’s the bad news, too, since the editorship confers vast and global favor-trading power.      

The worst thing of all is that, starting with his long-time mentor Larry Summers, Sheifer’s friends don’t seem to understand that they failed the young Russian émigré in the first instance, that they in turn have been betrayed and embarrassed. It is true, as Edward L. Glaeser and Claudia Goldin write in their introduction to the forthcoming “Corruption and Reform: Lessons from America’s Economic History” that the United States “changed from a place where political bribery was a routine event infecting politics at  all levels to a nation that now ranks among the least corrupt in the world.”  But it is also true that American aid-giving abroad in the 20th century (Herbert Hoover, George C. Marshall, Creighton Abrams) has been remarkably free of high level corruption — until now.

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