I?ve not closely followed the past couple of years of political and economic change in Russia, so I guess I?ve been assuming that the conventional wisdom about the place ? it?s going to hell in a handbasket under the thumb of the authoritarian Vladimir Putin ? was pretty close to reality.
A fascinating new Business Week story on Putin?s Russia tells a very different story, however. For one thing, Putin?s authoritarian streak may be exaggerated. Some of the complaints are coming from corrupt bureaucrats and oligarchs who scammed the system in the 1990s to achieve great wealth during privatization (it needed to happen, of course, but the mechanism was flawed). Not everyone arrested by a government headed by a former KGB officer is innocent. Also, there is a major effort at the regional and city level to lift burdensome regulations and confiscatory taxes, which have plagued the Russian economy not just for years but for hundreds of years. This is a good idea but it generates enemies.
At the national level, Business Week reports, Putin still deserves the label of ?liberal? for his policies (it?s delightful that at least in Eastern Europe the term retains its free-market, limited-government meaning). Russia now has a flat 13 percent income-tax rate, a privatized Social Security system of personal accounts, and a new set of laws to establish a more firm system of property rights. Putin is aiming to slash the government workforce by 20 percent and has already reduced the number of ministries from 30 to 17. He?s also designing privatization plans for the electric and railroad utilities.
The results are promising. Real GDP shrank by an average of .1 percent a year in the late 1990s, but has grown 6.8 percent a year since 2000. Business invesment dropped by 7.5 percent a year before and is now growing at 10.3 percent a year. In many cities, there is a broadening sense of optimism, not just among a small elite. And get this:
[Putin]’s decision to slash the personal income tax to a flate 13 percent brought millions of citizens onto the tax rolls. With their taxes lower, many workers now are pressuring employers to report their full income. Why? Because the workers are applying for mortgages, car loans, and retail credit, and they want to prove they have the income to afford the payments. Bank lending is surging by 30 percent a year, while ruble deposits rose by 50 percent last year.
The country has a long way to go. And Putin still has a poor record in such areas as press freedom. But two things stand out: 1) a formerly totalitarian state can, albeit roughly, make the transition towards markets and democracy; and 2) markets and democracy are worth the effort.
