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Gazeta.Ru
March 31, 2004
Post-revolution consolidation
By Vladimir Mau

Modern Russia has entered a new revolutionary phase that is witnessing the consolidation of power, with the surviving revolutionaries and representatives of the old regime re-adjusting their positions.

In an interview with Gazeta.Ru Vladimir Mau, chairman of the Academy for National Economy under the government of the Russian Federation, shares his views on the priorities for the economic policy and dangers of the following four years.

Vladimir Alexandrovich, you have pointed out more than once that public sentiment would inevitably shift to the left.

I said that the leftward shift has a long-term outlook. In his time Burmese leader U Tan, who together with Iosif Broz Tito and Jawaharlal Nehru co-founded the non-aligned movement, pointed out a paradox: how can one explain the fact that students who study in the Sorbonne return to Burma being communists while those who studied at Moscow University are anti-communists?

As the generation of people who have never lived under communist rule grows in Russia they are likely to find leftist ideas quite appealing. In response to social injustice they will gradually grow to believe that it is possible to neutralize the horrors of capitalism by the virtue of governmental interference and will scorn their silly ancestors for their failure to implement such a wonderful and reasonable idea as market-oriented socialism.

Could today’s economic policy signify the beginning of that leftward shift?

Of course not. Today’s policy is by no means a shift towards socialism. Today’s policy is a normal tendency; it is a phase of the revolution in which the consolidation of power is taking place, with the surviving revolutionaries and representatives of the old regime re-adjusting their positions.

Introducing special economic zones and mortgage lending is seen as the locomotive of economic growth. But wouldn’t the adoption of those instruments mean a repudiation of liberal policy?

Of course, as soon as you proceed from the stage of anti-crisis reform to that of stable forward movement, you find plenty of instruments at your disposal, which do not fit into the pattern of the generally accepted ideology, be it of a rightist or a leftist nature.

As for special economic zones, this is quite a controversial instrument. The conflict between the Finance Ministry and the Ministry for Economic Development and Trade on that issue has purely objective roots.

On the one hand, the Finance Ministry quite fairly points out that such schemes are fraught with financial risks. We have a very bad record on economic zones. All the zones that have existed hitherto were breeding grounds for corruption.

Another argument put forward by the Finance Ministry is that of all the economic zones in the world, only a tiny share have proved successful, some 10 per cent or so, while the remaining 90 per cent have either proved useless, or ended in out-and-out failure.

In response to that, the Ministry for Economic Development fairly notes that, firstly, appealing to the experience of the past 10-15 is irrelevant since that was a time of revolution and the state had no administrative levers which could ensure the normal operation of that mechanism (or many others).

When there is not a strong state in place, it is no use discussing whether this or that instrument of the state’s economic policy is successful or not.

Another argument in favor of the special economic zones is as follows: yes, indeed, only a few zones have been successful, but that instrument was in use during all successful socio-economic breakthroughs.

That’s the irony, since the mechanism of special economic zones was used in the implementation of virtually all successful economic reforms. But just as not all attempts to achieve an economic breakthrough prove successful, not all attempts to introduce special economic zones give the desired results.

Indeed, now we are moving towards the implementation of schemes that evoke debates, but I would like to recall that in the early 90s the issue of a stabilizing monetary policy also caused heated debates in Russia.

Most economists then claimed that inflation should not be contained altogether. They said: why do you engage in financial policy instead of focusing on the real sector?

Today no sane person would doubt that inflation needs to be curbed. With the inflation rate exceeding 20 per cent there is no point in focusing on the real sector.

As long as the situation is unstable there will be no normal investments. Nonetheless, the early 90s saw some absurd debates on the non-monetary nature of inflation, on inflation being the consequence not of monetary policy but of some structural problems.

Indeed, we have certain structural problems that bring about “non-monetary inflation”, but only now that inflation stands at 10 per cent, and not 2,000 per cent, is there any point in trying to tackle them.

How high is the risk that the government will resort to such extraordinary measures?

There is always a risk of economic populism. When export prices are high and the economic situation is on the whole favorable, there is always a temptation to spend the available resources on some absurd project that is supposed to boost economic growth. You will always be told that economic growth can be 8 per cent, not 4 per cent.

And once you achieve growth of 8 per cent you will be asked: is that what you call growth? You can achieve 15 per cent by using currency reserves for investment or by redistributing funds from one sector to another.

All countries that have embarked on the road of populism have come to a sticky end. The experience of Latin-American countries can be cited. Actually, any instrument of economic policy can be misused.

Take, for instance, a special economic zone. Taking a case-by-case approach on this matter, with each player being granted a special regime individually, would lead to disaster.

Everyone should be offered an equal playing field that must not become a subject for bargaining between the interested region and the federal government.

Equally inadmissible is the situation with production sharing agreements, which, in essence, amounts to the introduction of individual tax regimes.

A potential party to a PSA, an oil company, agrees on the terms and conditions on which it develops a certain deposit with the government. This is a downright corrupt scheme, since it is clear that corporate lawyers will always be more “convincing” than the governmental ones both in terms of arguments and financially.

In other words, the rules must be equal for everyone, with no individual approach whatsoever. This is the primary condition.

Furthermore, it is necessary to introduce rather strict requirements the regions would have to meet to qualify for special economic zone status. A region must be ready to invest considerable funds in each square kilometer of the economic zone.

In short, the question is about equal rules of the game and the government’s ability to ensure the transparency of those rules.

Do you think the state has grown that strong?

No, but it has grown a bit stronger. It has grown strong enough for us to be able to afford to set up a couple of special economic zones. I assume that there are at least a couple of honest officials in the country who could run them. Some say there is none, but I still believe there are enough for two zones.

How timely, in your opinion, is the government’s move to revise tax legislation in what concerns the reform of the single social tax, VAT accounts and severance tax?

Generally speaking, I believe that the tax reform must be brought to completion. We have to adopt single and stable tax rules which will not be revised over a long period of time. Our main problems lie within the political sector, not in the sphere of economic legislation. Our weak point is the poor enforcement of laws.

As for the VAT account, we have had only one example in Bulgaria. That example proves that [with VAT accounts introduced], VAT collection did not increase, but dropped.

In the first six months tax collection increased, but by the year’s end it had dropped. And what was then the point of introducing it in the first place? If Bulgarians managed to adapt and find ways to evade paying, then we ­ I have faith in my people ­ will find the solution even faster.

As regards the single social tax, the main thing in reforming it is to prevent the de facto increase of the income tax rate. That would establish a very bad precedent. I believe that the flat income tax rate is an achievement of great importance, which should be preserved.

But then, at the joint session of the Finance Ministry and the Ministry for Economic Development and Trade on 19 March the president and both ministers resolutely opposed the idea of revising the 13 per cent rate of income tax.

Speaking of the modernization of severance tax rules, I would say that so far we do not have sufficient administrative procedures for differentiating the natural rent. Any calls for abandoning the mechanism of severance tax effective today are essentially corrupt.

Assuming we have to choose between new liberal tax initiatives and preserving the status quo, the latter is much more important. In my opinion, it is far more important to preserve flat tax rates for income tax, corporate tax, severance tax, than to continue improving legislation indefinitely.

What is your evaluation of the present-day situation? Is it favorable for solving the problems the country is facing?

Presently, Russia is in a stable constitutional situation. Virtually any law can be adopted. In his time President Yeltsin made an absolutely unexpected and brilliant step by converting his personal popularity into the economic reforms of late 1991.

Today there is no such challenge. It is an illusion to anticipate some unpopular reforms. Honestly, I see nothing unpopular. Regarding the housing and utilities reforms, it’s not a problem for the federal government to tackle, and as to whether that reform is popular or not depends solely on your own choice ­ either you agree to receive services at real prices or you prefer to live in an obsolete dying house. This is a task for municipal authorities to handle: if they have money, let them subsidize [their residents], if they wish.

Today there are opportunities for implementing the policies that the president and the government consider appropriate.

What are the priorities for the economic policy for the next four years, in your opinion?

First and foremost, we need political reforms, since the state of our political institutions, not our economic ones, is our weak point. It is imperative to carry out the civil service reform and this does not amount merely to revising the government structure, but to re-distributing responsibilities, functions and powers.

The top priority is reform of the judiciary and law enforcement authorities, as well as military reform, especially, that of conscription. The problem is that these reforms require a very long period of time. Unlike the economy where the necessary laws can be adopted and brought into effect, in the case of, say, the reform of the judiciary, one cannot just pass a law saying that judges cannot be corrupt.

Reforming military conscription is yet another problem. It is absolutely inadmissible for young people to opt for studies they have no interest in so as to dodge military service, instead of working and studying productively. Clearly, this cannot be tackled solely by police methods.

Police methods are effective when 5 per cent of conscripts dodge service; but when 80 per cent dodge it, that becomes the problem for the entire system.

It is brought about by the fact that in the modern post-industrial urban society the demographic situation is such that there are usually one or two children in the family, with one boy. In this case there is no price parents will not pay to save their child from the draft.

A conscription-based army is a phenomenon inherent to a society in transition from the agrarian stage of development to the industrial stage. When society is dominated by peasants’ families with many children, the army serves as a social ladder, a means of breaking out from a rural existence and making a career.

The main economic task is restructuring the budget-funded sector, first and foremost, the education system, health care and scientific research…