Streetwise Professor

May 1, 2007

Putin=Deng? Not!

Filed under: Politics,Russia — The Professor @ 2:03 am

The usually (very) sensible Charles Krauthammer compares Putin to China’s Deng Xiaoping. This comparison is way wide of the mark. The main similarity is that Deng and Putin took a non-idealogical approach to economic issues. Perhaps both view (or viewed) a strong economy as the foundation of a muscular state able to project power and restore their respective nations to Great Power status. These similarities in objectives do not extend to means.

Although China post-Deng has hardly respected the property rights of ordinary Chinese, it has not run roughshod over the property rights of investors, especially foreign investors, in the way that has become routine in Russia. China has not engaged in widespread expropriation. It has not dismantled leading corporations on false pretexts. Moreover, even though state owned enterprises are still prominent in China, that nation has been weaning (albeit slowly) inefficient nationalized companies from state support. In contrast, Russia is engaged in an aggressive effort to restore leading firms in every sector deemed “strategic” to state ownership and/or control.

In brief, while Putin may admire Chinese success in achieving strong economic growth while retaining state control over virtually all political activity, his means on the economic side are far different than those the Chinese have employed.

Nor has Russia achieved the same economic results as the Chinese. While Putin struts and crows about 6 percent economic growth over a handful of years, China has been growing at 8 percent for far longer. And Chinese growth has not been steroid (I mean to say energy price) enhanced. Russia’s growth is largely, though not completely, attributable to high energy prices. In contrast, high energy prices (driven to no small degree by robust Chinese demand) have constrained Chinese growth. Moreover, much recent Russian growth is catch-up from the economic collapses post-USSR and post-1998. Considering the windfall arising from strong energy prices, and that much of Russian growth reflects a return to more complete utilization of its economic capacity, rather than a growth in that capacity, and Russian growth looks much less impressive. Indeed, as Andrei Illironov has written, in the past two years Russian growth has lagged behind 12 of the 14 other post-USSR countries, most notably the Baltic states, but also other nations without the same human capital and natural resource endowments as the Russian Federation.

In brief, the Chinese transformation–and the Chinese model–are much different than the Russian. I am no Sinophile, and dislike that nation’s political system and much of its economic system, but viewed objectively it has done better than Putin’s Russia hands down. There are shaky supports to the Chinese economy–most notably its banking system–but it is on a far firmer footing than Russia’s. And Putin’s Commanding Heights-state driven-siloviki managed model will not encourage future economic growth. It is probably the best model if you are a former (or current) member of the state security apparatus looking to siphon rents, but it is far inferior to the Chinese model–and miles behind that dreaded Anglo-Saxon model–when it comes to providing broad-based economic growth that redounds to the benefit of the larger population.

Insofar as redounding to the benefit of the larger population is concerned, a couple of closing comments. First, there is no doubt that most Russians have seen a marked improvement in their standard of living. In this respect, Putin is reaping the benefits of very low expectations and the horrific experiences of the 1990s, as well as the aforementioned windfall from higher energy prices.

Second, as North et al emphasize in their analysis of the “natural state” (discussed here), there is a tension between an economy built on rent seeking and rent extraction that primarily benefits the connected elite but benefits the unconnected masses far less. Economic development that benefits a wide swath of the population that is largely deprived of political voice and representation is eventually what Avner Greif describes as “self-undermining.” Thus, natural states–of which Russia is an exemplar–are threatened by broad-based economic development that encourages the growth of a middle class.

And I think this is where Putin admires the Chinese most. They have heretofore succeeded navigating this tricky transition, and if Putin is looking east for inspiration, it is in this sphere where he is looking hardest. The ruthless campaign against any political opposition, no matter how puny, and the relentless drive to extend state control over great swaths of the economy in spite of the clearly adverse implications of this for economic growth, are manifestations of his strategy to maintain the natural state that benefits him and his fellow siloviki.

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