Ms. Wedel, author of "Collision and Collusion: The Strange
Case of Western Aid to Eastern Europe," is associate professor
in the Graduate School of Public and International Affairs at
the University of Pittsburgh.
After the breakup of the Soviet Union, the United States had
an opportunity to build a new political and economic relationship
with Russia. Instead, the most promising rapprochement of the
past century became a debacle. This is a cautionary tale of what
went wrong and what policy makers should learn from one of America's
greatest foreign policy blunders. The story takes off early in
the Clinton administration, when the U.S. Agency for International
Development (USAID) -- responsible for overseeing U.S. foreign
aid -- decided to funnel much of its economic assistance to Russia
through Harvard University's Harvard Institute for International
Development. That the United States essentially put one of its
most important foreign-policy initiatives in the hands of a private
entity is largely unprecedented. U.S. federal regulations would
seem to prohibit the delegation of such an "inherently governmental
function" as the conduct of foreign relations. Thanks to
Harvard's associates in the Clinton administration, the Institute's
requests for funding largely bypassed the normal public bidding
process for foreign-aid awards. "Foreign policy considerations"
was the justification. Soon, the Institute was dispensing U.S.
aid to and wielding influence in Russia.
Eventually, the Harvard group managed virtually the entire Russian
economic aid portfolio -- at least $350 million -- in addition
to the $40 million it received directly. Congress requested a
General Accounting Office investigation in 1996 in response to
growing complaints about Harvard projects and personnel. The GAO
concluded that the Harvard Institute was given "substantial
control of the U.S. assistance program." (The institute was
later dissolved by Harvard University amid a U.S. Department of
All this was "highly unusual," said Louis H. Zanardi,
who led the GAO investigation of Harvard's activities in Russia
and Ukraine. Such waivers for foreign-policy considerations are
"extremely rare," noted Steve Dean, the now retired
division chief then responsible for Eastern Europe and the former
Soviet states in USAID's procurement office. Phil Rodokanakis,
former senior agent investigating the allegations for USAID's
Office of the Inspector General, says "The excuse always
was, 'those [Harvard] guys we need them; they're the experts.'"
It is alleged that key Harvard players sometimes obstructed reform
initiatives that originated outside their own group. As Mr. Zanardi
observed: The Harvard people were motivated "to keep power
within their own structure."
When USAID awarded Stanford University a contract to work with
Russia's Federal Commission on Securities, the Russian commission's
top man turned down Stanford's help. Harvard University economics
professor Andre Shleifer explained that the man already "had
a group of people he was working with," i.e. Harvard. USAID
later awarded funds to Harvard for the same project that Stanford
was to have carried out.
In GAO bureaucratese, USAID's management and oversight of Harvard
was "lax." Mr. Rodokanakis puts it more plainly: USAID's
oversight over Harvard was "minimal to nonexistent. Harvard
was doing whatever it wanted."
The Harvard group worked directly with a small group of Russian
insiders, the so-called "Chubais Clan," named after
Anatoly Chubais, an aide to Russian President Boris Yeltsin through
much of the 1990s. U.S. Treasury Secretary Lawrence H. Summers,
a key architect of U.S. economic policy toward Russia since 1993,
dubbed the Chubais "reformers" a "dream team."
Mr. Summers -- who has just been named president of Harvard University
-- had deep-rooted ties to the principals of Harvard's Russia
project. Mr. Shleifer, the Harvard project director, was a protege
of Mr. Summers. The two have numerous joint publications and received
at least one foundation grant together. Mr. Summers' blurb endorsing
"Privatizing Russia," a book partly written by Mr. Shleifer,
declares: "[t]he authors did remarkable things in Russia."
Remarkable turns out to be an understatement. The administration
bolstered the Chubais Clan's standing as Russia's chief broker
with Western governments and international financial institutions;
the Clan helped manage hundreds of millions of dollars in Western
aid and loans. This virtual blank check hindered the development
of a legal and regulatory backbone for Russia's nascent market
The Chubais Clan, with help from Harvard, presided over a network
of USAID-funded and created organizations, set up to conduct economic
reforms. These funds may have contributed to the Clan's political
and financial base, according to USAID-paid consultants and information
obtained from the Chamber of Accounts, Russia's equivalent of
the GAO. While formally private, these organizations often acted
like government agencies, thereby helping to stunt the growth
of a truly democratic state.
The donors' flagship organization was the Moscow-based Russian
Privatization Center. Mr. Chubais served as chairman of the board;
Mr. Shleifer served on the board of directors. Center documents
state that Harvard University was both a "founder" and
a "Full Member." Although nongovernmental, the center
helped carry out government macroeconomic policy and negotiated
loans with international financial institutions on behalf of the
The center received some $45 million from USAID and hundreds
of millions of dollars more in grants from other Western countries,
the World Bank and the European Bank for Reconstruction and Development.
Another Harvard-Chubais run organization, the Institute for a
Law-Based Economy, was funded by USAID and the World Bank. The
Harvard Institute was supposed to help pass laws through the Russian
legislature. Instead, the Harvard-Chubais team concentrated on
writing presidential decrees and shunned other market reformers.
The ILBE's Russian directors were caught removing $500,000 worth
of U.S. office equipment from the organization's Moscow office
in August 1997. The equipment was later returned.
USAID's and Harvard's sponsorship of these dubious organizations
encouraged an opaque and unaccountable system -- precisely when
donors and international financial institutions should have been
demanding transparency, property rights, the sanctity of contracts
and other safeguards.
U.S.-sponsored "reforms" of the 1990s left many Russians
worse off. Many Russians blame the Western aid and advice they
have received. E. Wayne Merry, a former senior political officer
with the U.S. Embassy, explains: "The effort to build the
new socialist man, scientific socialism, had left people feeling
completely alienated from their authorities. One of the most-popular
slogans was 'No More Experiments.' . . . And unfortunately, what
they got in the 1990s was another series of experiments, where
many of the scientists conducting the experiments were not even
Russians, but were people sitting in the offices in Washington."
By promoting Harvard and the media-savvy Chubais reformers and
excluding other potential Russian allies, the United States may
have inadvertently encouraged anti-Western, antireform elements,
who can point with glee to the absence of real benefits to Russia.
In one poll, only 3.7% of respondents felt that the West was "trying
Using their Positions
This past fall, the U.S. government filed a $120 million suit
against Harvard University, the Harvard project's two principals
-- Mr. Shleifer and Harvard's on-site director, Jonathan Hay --
and their wives. The suit alleges that the two principals "were
using their positions, inside information and influence, as well
as USAID-funded resources, to advance their own personal business
interests and investments and those of their wives and friends."
All the defendants have denied the allegations in the U.S. government's
case. It can be argued that USAID was negligent in oversight;
it wasn't until 1997 -- after so much damage had been done --
that the agency's inspector general began to investigate.
But bringing to account a few officials and a few of Harvard's
best and brightest will treat the symptoms, not the disease. The
underlying problem is the U.S. government's decision to permit
foreign policy to be conducted through an unaccountable nongovernmental
entity that, in turn, provided legitimacy for a group of self-interested
insiders from both sides. Under the guise of economic reform and
in the name of democracy, the Clinton administration exported
a form of politics that resembled the informal and powerful patronage
networks that once ran the Soviet Union.
It is self-defeating when the means of reform instead mirror
and reinforce the very clannish and opaque political culture that
the U.S. purports to reform. Such behavior breeds cynicism on
the part of the recipients of American assistance about democracy,
law, and the U.S.
The only way to cure this creeping cynicism is to hold institutions
accountable, not just people. The U.S. Congress needs to ask hard
questions of USAID. Given the debacle in Russia, what else don't