We've had recent debates in the comments of posts here at ParaPundit on the question of the quality of Vladimir Putin's rule in Russia. Stanford University political scientist Michael McFaul says Vladimir Putin's successes with Russia's economy have been exaggerated.
While Russia can claim that wages have risen, its economy is expanding and poverty rates have been cut, there have been real setbacks in health care, public safety and corruption.
The state has undergone a massive expansion under Mr. Putin, with the number of state employees doubling to 1.5 million, Prof. McFaul said. The murder rate has increased and alcoholism and mortality rates remain high. Public health spending, meanwhile, has not increased in the past decade.
He also argued that Russia was well on the road to economic recovery as early as 1998, after the crashing ruble forced federal officials to control government spending and reduce the state's role in the economy.
But since then, its growth rate has stalled; in 2000, Russia's economy was the second fastest growing among former Soviet countries. Today, it is 13th, Prof. McFaul noted in an article he co-authored in Foreign Affairs, an international relations journal.
Edward Lucas, author of The New Cold War: How The Kremlin Menaces Both Russia And The West, says the level of corruption in Russia today will prevent full economic development.
Oil-fuelled crony capitalism does not bring lasting prosperity.
The real route to lasting progress is in solid, honest public institutions: courts, efficient bureaucrats, a good education system, strong anti-monopoly laws.
Russia not only lacks these, it has the opposite. Whereas the courts used to be merely bribable, they are now a branch of government. The education system is plagued by corruption.
Meanwhile, state bureaucrats shamelessly indulge in what they call "velvet reprivatisation": a euphemism for arbitrarily bankrupting companies and buying them at bargain prices for themselves.
By far the most likely explanation for Mr Medvedev's sudden elevation to the top job is that having smeared opponents as dangerous extremists and used oil wealth to muffle public protest, Russia's rulers have snapped up the lion's share of the country's assets to the tune of tens of billions of dollars.
Their priority now is to squirrel the proceeds away abroad.
That arbitrary bankrupting of companies is especially worrisome. Capitalists can pay a predictable rate of taxes and a predictable rate of extorted bribes. But the loss of everything doesn't just deprive the capitalist of incentive to work and invest. The bureaucrats who take over companies are not likely to run them well.
The ruble is stable and even being touted as a potential reserve currency. The economy grew 8.1 percent last year, and the middle class has grown dramatically. Russia stands 79th on the World Bank's ranking by gross national income per capita at $5,780 — behind Mexico but ahead of EU members Romania and Bulgaria.
The single most important factor in this stunning transformation has been skyrocketing prices for oil and gas. Oil was about $20 a barrel when Putin took office, roughly a fifth of current prices. Russia has earned about $1 trillion in oil and gas revenues during Putin's years, according to calculations by Moscow's UralSib bank.
"There's no doubt about it, they got extremely lucky with the oil price," said UralSib research head Chris Weafer. But "they did a couple of positive things as well, such as reforming the tax system from what was a real upturned plate of spaghetti in terms of all the various options and routes and exceptions that were in the system."
The Economist does an especially good job at examining the recent economic history of Russia. Putin was lucky to come to power at a point when Russia was already on the rebound.
In fact, Mr Putin came to power at an unusually benign moment. The debt crisis and devaluation of 1998 had flushed out the financial system, removed constraints on the rouble and enforced fiscal discipline. With much of the economy in private hands and most prices liberalised, recovery inevitably took off. By the end of 1999 Russia was already growing by more than 6% a year. In 2000 growth accelerated to 10%, a rate still not matched eight years later. Symbolically, four days before Mr Putin was officially elected as president, the first IKEA store opened in Moscow.
To be fair, at first Mr Putin worked hard to consolidate growth. His government simplified and cut taxes. Budget reform brought clarity and stopped the government making unrealistic pledges on spending. Mr Putin not only chose a liberal economist, Andrei Illarionov, as his economic adviser, but also listened to him. For the most part Russia used its oil windfall prudently, repaying debt, building up reserves and filling its stabilisation fund. Many of the reforms conceived in the 1990s were passed at last, including legislation to improve the judicial system and allow a free market in land. The benefits of Mr Putin's early efforts are still felt today.
Mr. Putin didn't cause the huge run-up in oil prices that made oil and natural gas into almost a third of Russia's economy.
The share of oil and gas in Russia's GDP has increased, according to the Institute of Economic Analysis, from 12.7% in 1999 to 31.6% in 2007. Natural resources account for 80% of exports. Like a powerful drug, oil money has masked the pain caused to the Russian economy by the Kremlin. But the disease remains.
That is an astoundingly large percentage of GDP just from fossil fuels.
According to Transparency International, a watchdog group based in Berlin, corruption has increased slightly in Russia since 1999 and the country is now ranked 143rd among 179 countries profiled. Its national business environment ranking – compiled by the World Economic Forum's Global Competitiveness Report – has also fallen since 2001, from 56th to 70th, though most of that is due to the addition of new countries. In addition to corruption, the report cites tax regulations, bureaucracy, and inflation as some top concerns.
The top leaders in Russia are now former KGB. They've probably created a more orderly system of bribery. The KGB turned into the FSB and now companies all have to hire FSB agents into top positions.
Current and former FSB officers work in large private companies as well. Another former FSB official said the Kremlin wanted the officers to make sure the companies do not act against Russia's interests.
"Big companies in Russia consult with the Kremlin before striking any big deal. The officers working for those companies are there to make sure that things are done properly or the way the Kremlin wants," the official said.
The companies, who pay generous salaries to the officers, feel they get their money's worth. The officers make sure they do not have problems with the Kremlin.
"All big companies have to put people from the security services on the board of directors," said a banker with a large private bank. "Many are appointed as directors or deputy directors. They are called 'active reserve agents,' and we know that when Lubyanka calls, they have to answer them."
These arrangements place severe limits on the extent of competition based on price and quality of service. Russia can't grow up to its potential as long as companies act like extensions of the state and corruption serves as an additional tax.
|Share |||By Randall Parker at 2008 March 03 10:15 PM Russia|