New President Needs to Offer New Reforms

Russia's official economic policy rhetoric has suddenly turned liberal again. On February 8, 2008, President Vladimir Putin delivered a speech to the State Council that resembled an annual address to the nation. Curiously, he had titled it "On Russia's Development Strategy Through 2020," as if he had no intention of leaving office. One week later, at his big news conference, he reassured us that he would go, but he threatened to stay as prime minister and remain influential for years to come.

The president bragged at length about "everything that was done during these eight years," seemingly unaware that it boiled down to one single achievement-economic growth of 7 percent per year, as Vladimir Milov and Boris Nemtsov rightly point out in their excellent report, "Putin: The Results." Understandably, Putin omitted that this record of growth puts Russia in 12th place among 15 former Soviet republics since 1999.

Putin arrived at a table that was already set. He has benefited from the market reforms in the 1990s, which he denigrates. Others argue that he has thrived on high oil prices, but they took off only in 2004. The abundant oil revenues have contributed to his authoritarianism, renationalization, rising corruption, and the absence of reforms after 2002.

Dmitry Medvedev seemed all the more aware of Putin's failures, as evidenced by his Krasnoyarsk speech on February 15, 2008. It had the same flair of Mikhail Gorbachev's radical liberalism when he delivered his famous ideological speech in December 1984, just before he assumed power. While overtly praising Putin, Medvedev in effect attacked his record.

Medvedev has even labeled Russia "a country of legal nihilism." He dared to call for "a decrease in the superfluous numbers of civil servants," and he stated in no uncertain terms that "there is no reason for the majority of state officials to sit on the boards" of state corporations. His credo appears to be: "Respect for private property must become one of the foundations of state policy." Whatever happens after Putin's second term, Russia badly needs to restart market reforms. But will Putin and his KGB entourage permit Medvedev to do so?

Surprisingly, in his big February 8, 2008 speech Putin himself switched to Medvedev's new liberal line on economic policy, and he named quite a few of his failures, though not blaming himself. With imports increasing by 35-40 percent per year and energy production stagnating, Russia's current account surplus is likely to disappear in the next year, given that oil prices can hardly continue to rise in the midst of a Western economic slowdown. Therefore, the country's next government will have to get serious about economic policy again.

Putin's most apparent failure is that life expectancy for men has stayed at 60 years, which he rightly called "a disgrace." Many young and middle-aged men simply drink themselves to death. An effective antialcohol policy is the nation's greatest need, but Putin has done nothing.

The miserable state of the public healthcare system upsets everyone. Substantial reform plans were drawn up as far back as 1996, but Putin has failed to implement them, only increasing funding in some areas. Such a wealthy country should not have a Third World healthcare system.

Russia also suffers from a stark shortage of skilled labor. According to United Nations Educational, Scientific and Cultural Organization's comparative statistics, two-thirds of Russian young people attend college-more than in Europe-but public education remains poor. As in healthcare, corruption among bureaucrats is the main cause of these ills.

Possible cures for the problem of corruption in education include compulsory standardized national tests that should be the only criteria for acceptance to higher education. All oral exams should be prohibited to limit corruption. Moreover, both universities and hospitals need substantial financial independence. They should become independent foundations that are audited and accountable to a board of trustees to provide real services.

Corruption has grown significantly during Putin's second term, according to surveys by the World Bank, the European Bank for Reconstruction and Development, and Transparency International. This is a logical result of Putin's policy of stifling nongovernmental organizations and the critical media while protecting his many corrupt KGB friends.

In his speech, Putin acknowledged that "the state apparatus is to a considerable extent a bureaucratized, corrupt system that does not support positive changes or dynamic development." How true! Medvedev called for "a national plan to fight corruption," but the best cure for corruption is democracy and a free media, as Ukraine has shown.

Putin's second term has been characterized by the renationalization of large and successful private companies. Now even Putin realizes the problem: "A private company, which is motivated by obtaining concrete results, is often better at management than a civil servant, who does not always have even a sense of what effective management-or a result- really means." Russia can be neither an efficient market economy nor a democracy as long as the state is dominated by a few state monopolies.

Sensibly, Putin called for an open competitive economy to attract investment, but Russia's delayed entry into the World Trade Organization is another of his negative legacies. At the outset of his presidency, Putin promised Russia's accession by 2003, but he has allowed bureaucratic and protectionist interests to block the country's entry.

Until recently, Putin could claim that he had pursued a responsible macroeconomic policy, but in October he jeopardized even that achievement through populist expenditures in the midst of an inflationary surge, which brought inflation to 12.6 percent in January. The government should return to its prior fiscal policies to cool the economy down.

It can and should prohibit state corporations from borrowing funds in the West, which they use for harmful renationalization. The ruble exchange rate should also be allowed to appreciate more and Russia should move to inflation targeting. This would permit the Central Bank to achieve an active monetary policy with positive real interest rates.

The proudest economic reform of Putin's first term was tax reform, which decriminalized most tax violations and reduced the arbitrary powers of the tax authorities. But with the Yukos affair, Putin annihilated much of these achievements, and now he has to emphasize "the need for a simplification of the tax system to minimize the opportunities for arbitrary interpretation of the legislation." Again, Medvedev went further in his Krasnoyarsk speech.

One of the few things the government of Prime Minister Mikhail Fradkov actually did was to plan large-scale infrastructure projects. Given the many current bottlenecks, this is vital strategy, but how will it be done? They are notorious boondoggles for corrupt bureaucrats; these projects require transparency and independent auditing.

Russia's growth in the last nine years has been substantial and beneficial, but many serious shortfalls have spoiled the picture. Too many problems have accumulated because of the near absence of structural reforms after 2002. The country badly needs a new president to carry out Russia's reforms, but the worry is that Putin will continue to block all progress.