Streetwise Professor

December 8, 2006

Several Perceptive Articles on Russia

Filed under: Russia — The Professor @ 11:32 am

I read several perceptive articles on Russia today.

From the Carnegie Endowment’s Nikolay Petrov:

In Russia, a strong, semi-military, mobilization state has traditionally dominated over a much weaker and barely consolidated society. The policy of state strengthening that has been undertaken during Putin’s presidency has largely brought back the familiar Russian pattern: the state is ubiquitous and encroaches upon public territory, pushing out the genuine public initiatives that are not controlled by the state. Having “streamlined” media, business, political parties, and other institutions, the state now attempts to expand its control over civil society.

Yes. Historically, Russian political philosophy has been diametrically opposed to the concept of government of, by, and for the people. Instead, it has been the people of and for the government. Indeed, government probably is not the right word. The ruler or the state would be more appropriate. I have seen people talk about the “rule of law” in Russia. Putin has touted the restoration of the rule of law in Russia after the lawless 90s. In a Russian sense, he is probably right. He is moving toward the restoration of the traditional absolutist concept of law, which is contrary to the classical liberal conception thereof.

Next, Anders Aslund:

At present, the oil surplus is driving economic growth, which is being generated mainly by the consumer sector, retail trade and housing construction, while industrial output has increased by just 4 percent per year over the last two years. That these are the conditions underlying growth does not bode well.

Ironically, Russia’s least dynamic sector is energy production. In 2003, oil production skyrocketed by 11 percent, thanks largely to private ownership and investment. But the confiscation of assets from Yukos led to the renationalization and disorganization of almost half the oil industry. The new state owners are less effective as managers and direct more of their efforts to purchasing further assets than developing those they already control. The remaining private oil companies are rightly afraid of investing or boosting production too much. As a consequence, oil production may rise by only 2 percent this year and stagnate in the future.

Some people do not handle luck well and end up succumbing to hubris, as is the case with Russia’s current leaders. By and large structural reforms ended in 2003, even if continued restructuring of some enterprises is driving some isolated reform, as is the case in the electricity sector. Despite declining official enthusiasm, Russia is approaching WTO accession. Yet, beside what has been responsible macroeconomic policy, the overarching actual economic policy today is that of renationalization.

The evident cause of this economic policy is the oil bonanza. Former Prime Minister Yegor Gaidar and the economists Clifford Gaddy and Barry Ickes have all discussed Russian economic policy as a product of the oil curse. They compare current policy to that of Soviet times. The oil riches of the 1970s led to the Brezhnev petrification, and even contributed to the foolhardy war in Afghanistan, while economic growth was closely correlated with international oil prices. Economics was ignored to the point that investment in the vital oil and gas sector was badly neglected in just the same way that it is today. When the oil prices finally fell in the 1980s, the Soviet economy collapsed.

The situation is much better today. The leadership has learned the importance of macroeconomic stability and is focused on growth. Fortunately, private enterprise dominates, but wherever the public sector prevails problems amass — in gas and oil production, banking, the aircraft and automotive industries and a large part of public transportation, health care, education and law enforcement. The longer oil prices remain high, the worse economic policy will become. The medium-term economic cost might not be high, but the long-term cost will be. Booms breed complacency and corruption.

Oil does not have to be such a curse. Kazakhstan’s economy is even more dominated by oil but, unlike Russia, Kazakhstan steadily increases its oil production by developing new fields. It does so successfully because a multitude of foreign and private oil companies operate there. Kazakhstan is ahead of Russia in banking, labor market, pension and government reform, as well as scholarships abroad. And its growth rate has been at almost 10 percent per year for the last seven years.

Read that last paragraph again. When Kazakhstan is a more reliable protector of property rights, and therefore attracts more foreign investment, and when a country which I am sure most Russians look down upon is ahead of Russia in economic structural reform, one cannot rate Putin’s performance that highly. (Not that Kazakhstan is a classical liberal’s idea of Nirvana.)

This paragraph is of particular interest:

From this perspective, Russia’s real average economic growth of 6.8 percent per year since 1999 does not look as impressive. Russia has also underperformed in relation to the other former Soviet republics, which have grown by an (unweighted) average of nearly 9 percent per year over the last three years. The stars have been the Baltic states, Armenia, Azerbaijan and Kazakhstan. All of these, with the exception of Azerbaijan, have undertaken more extensive structural reforms than Russia.

Putin’s popularity no doubt is largely a result of the marked improvement in the economic circumstances of most Russians. One of my Russian colleagues says that the improvement is noticeable each time he returns home. When the benchmark is absolute disaster, anything is pretty good by comparison. But the fact that other countries that have fewer inherent advantages (poorer infrastructure, less human capital, and in the case of Armenia and the Baltics, a far poorer natural resource–especially energy–endowment) are growing faster should lead to a more critical appraisal of Russian performance.

I also like Anders’ line that “some people do not handle luck well” and his warning about hubris. This echoes a point made in some of my earlier posts.

All in all, these articles–and many more like them–indicate that there is widespread recognition that (a) the current Russian government is reverting to a well-established historical type, and (b) the centralization of political and economic power is simultaneously dangerous geopolitically, but ultimately damaging to the Russian economy. Perhaps Milton Friedman’s old adage about government will be our salvation: the only thing that protects us from government is its inefficiency. The inefficiency of the Soviet economy ultimately undermined its geopolitical ambitions. Although the current Russian economic system is far less dysfunctional than its Soviet predecessor, the common tendency to overcentralization will ultimately constrain Russia’s power potential.

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