#11
Newsweek International
November 19, 2001
The Death of the Bad Idea
Putin’s allies are a growing economy and a new consensus on how to keep it
that way
By Rudi Dornbusch
Dornbusch is Ford Professor of Economics at Massachusetts Institute of Technology.
Few would have thought that the debacle of ’98 was the best thing that could have happened to Russia. And yet it’s so. Where once was chaos, collapse and destitution, there is now stability, reform and growth. In today’s stressed world of emerging-market finance, Russia is a remarkable exception, with both its budget and current account in healthy surplus and its people content. Putin has done it. The longer this virtuous cycle goes on, the greater will be his political power.
WHAT A CHANGE from three years ago, when the ruble tanked, Russia’s foreign debt lost most of its value and chaos ruled the day. The young reformers of postcommunist Russia were rightly determined to wipe out communism. They did away with price controls, blew up the planned economy, privatized public assets at literally any price—with scant attention to due process or sensitivity to public hardship. It could have been done better, in hindsight. So-called oligarchs rose to plunder the system. State industry collapsed. Gangsterism and corruption ran amok. There were hyperinflation, currency runs, desperate poverty, unbelievably vulgar displays of stolen wealth, vodka everywhere. The young learned English and commerce; the old were left by the wayside. Boris Yeltsin misruled; the nation suffered. But in the end it worked, whereas policies of gradualism, circumspection and a plan with rules might not have.
History is very forgiving of success, however messy the means. Russia today is an entirely different place. It is normalizing. Broad-based economic growth and financial stability are the outward signs. But the roots go much deeper. Four factors are key to Russia’s transformation—and they augur well for its future.
First: Yeltsin is out, Putin is in. The change could not be more dramatic. When not drunk, Yeltsin was redistributing state assets to his favorites and buying political support against an increasingly mobilized opposition. Putin, by contrast, understands that the public wants stability and growth and will award their votes to anyone who delivers.
Second: oil. For the past few years, prices have been high. That has boosted budget revenues and external surpluses—keys to financial stability. The high oil prices came just in time to help Putin put in place his financial-responsibility policy and his reform strategies. With prices falling off, the economy’s sheen will doubtless fade a bit. But we are miles away from printing money and a return of capital flight and currency collapse.
Third: Russia seems to have run out of bad ideas. Bad economics, populism, antimarket policies have all been tried—and all failed. And they failed at such a steep social cost as to have been utterly discredited. As in every country that has gone through hyperinflation and economic collapse, an unusual respect for sound economic conservatism has emerged. Even dyed-in-the-wool communists have learned that they can’t win support by advocating heterodox policy. It has also become clear that, cumulatively, reforms are taking hold and yielding, at last, benefits that were hitherto obscured by inflation and dislocation. The massive program of privatization and restructuring state enterprises is paying off. People could not see that, initially, because of poor productivity and galloping price hikes. But with lower levels of debt, less overstaffing and a gain in flexibility, the results are beginning to show in stronger industrial growth. Indeed, Russia’s economy expanded last year by 8 percent, and looks set to grow by 4.9 percent this year—in enviable contrast to the marginal rates expected elsewhere in the world.
Fourth, and perhaps most important: Russia’s normalization owes much to ongoing changes in the political landscape. The oligarchs, with their power and their conspiracy to steal the remaining pieces of Russia, are gone. It’s now normal for organizations such as Gazprom to pay taxes—inconceivable just a few years ago. Along the way, business has shifted from the politics of corruption to, well, real business. Today’s focus is entrepreneurship and making money in Western ways, with real budgets and real management. That in turn translates into economic growth and a wider spread of prosperity. It restores credibility to a market-based economy and an open society. And as the rest of the world learns to accept the fact of Russian normalization, direct investment will return to become an extra driver of growth.
Putin rides this wave, and he rides it well. Yet even as Russia’s prospects improve, we should not lose sight of where Russia actually is. A few years of growth are good news, but they don’t change the fact that Russia is a developing country, far behind the West—and not especially dynamic. It more closely resembles Brazil or Mexico, say, than the high-income countries of Europe. It lacks most modern institutions, starting with a banking system. Income levels (in purchasing-power dollars) rank between Mexico’s and Brazil’s, while per capita GDP is $8,030, compared with Mexico’s $8,810 and Brazil’s $7,320. Russia’s population growth is negative, and its investment rate is astoundingly low (nearly half of both Mexico’s and Brazil’s) even for an emerging economy. So while recent stability and growth are grounds for great optimism, let us not expect Russia to emerge as a new “tiger” of Eurasia. It may at last be poised to enter the economic club of nations. But it will need years of careful tending.
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