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Excerpts from the JRL E-Mail Community :: Founded and Edited by David Johnson

Fragile Freedoms
A New Report Says Russia's Fundamental Economic Freedoms Remain Shaky and Could Derail Government Plans to Modernize and Diversify the Nation's Economy

Kremlin and Old Saint Basil'sEconomic freedom is still severely challenged in Russia, dimming the prospect of sustained long-term growth and diversification of the country's hydrocarbons-based economy, according to the authors of the 2011 Economic Freedom Index report released Wednesday by the Heritage Foundation and The Wall Street Journal. Russia ranked 143rd ­ wedged between Seychelles and Ethiopia ­ in this year's report, which evaluated 179 countries on the basis of economic openness, competitiveness and the rule of law.

Russia scored 50.5 on the economic freedom scale of 1-100, making it one of Europe's worst performers. "Russia is ranked 41st out of 43 countries in the Europe region, and its overall score is below the world and regional averages," the authors of this year's report said. Last year, the Heritage Foundation also rated Russia 143rd out of 179 countries in its Index of Economic Freedom, citing "weak" protection of private property and a "weak" and "corrupt" judicial system as some of the reasons for the low level of economic freedom. Russia's score this year is 0.2 points better than last year, reflecting minor improvements in four of the 10 economic freedoms considered by the analysts.

Areas of notable improvement include fiscal freedom, where Russia garnered 82.7 points bettering the regional average of 76.3 points. The country also did well in the monetary freedom category, scoring 63.1 points against an average of 73.4. However, the report notes that government continues to influence prices through regulation, extensive subsidies, and numerous state-owned enterprises and utilities, which led the evaluators to deduct 15 points from Russia's monetary freedom score to account for measures that distort domestic prices. Fiscal freedom is the one area in which Russia is at the forefront, says the report. Russia's competitive flat income tax rate and low corporate tax rates support innovation, although private enterprises must also cope with "informal taxes" such as bureaucratic hassle and corruption, the author said. The report also noted some improvements in the country's labor freedom, awarding it 62.9 points against a regional average of 61.5 points, even though the authors said Russia's complicated and outmoded labor code continues to limit employment and productivity growth. They pointed out that the non-salary cost of employing a worker in Russia remains high, and dismissing an employee could still prove difficult.

Burdensome regulations continue to hinder private-sector development, while the regulatory system suffers from corruption and a lack of transparency, its editors wrote. Bureaucratic obstacles and inconsistent enforcement of regulations inject considerable uncertainty into entrepreneurial decision-making and are a particular problem for small businesses, said the report's authors. The report faulted Russia for its prohibitive tariffs, services market barriers, import and export restrictions, non-transparent regulations and standards, discriminatory licensing and complex and non-transparent customs valuation and administration, all of which it says, add to the cost of trade.

Russia's Investment, Financial and Property Freedom Indexes are 25 to 40 points negative in this year's ranking, indicating that on-going government efforts to boost the investment climate are yet to bear fruit. An increasingly statist approach to economic management adds to the cost of investment and mutes private-sector dynamism, said the report's authors. Other deterrents to investment, they said, include inconsistent and burdensome government regulation, unreliable contract enforcement, inadequate infrastructure and financial capacity, and corruption. "Pervasive corruption and limited respect for property rights hinder the development of economic activity that is free from government control or influence," the authors wrote. "Macroeconomic instability is a drag on economic growth."

As far as the Financial Freedom Index is concerned, Russia's small, undeveloped financial sector remains vulnerable to heavy government influence, the report noted. State-owned banks continue to dominate the banking sector and account for over one-third of the sector's total assets. Despite improvements to the banking regulation in 2006, bank supervision and transparency are insufficient, the report says, stressing that the more than 1,000 licensed and registered Russian banks are generally small and undercapitalized. Another drawback, according to the report, is that capital markets are relatively small and are dominated by energy companies. However, the global financial turmoil appeared to have provided an impetus for bank consolidation with more than 60 banks eliminated. But the government prevented the closure of large lenders while channeling large amounts of state funds to prop up failing financial institutions, according to the authors.

The report says that Russia's increasingly centralized government, which has tightened controls on civil society in recent years, poses serious challenges to economic freedom. "Dmitry Medvedev was elected president in March 2008, but former President Vladimir Putin remains prime minister and leader of the ruling United Russia party," the authors noted.

Medvedev's efforts to improve the rule of law have stalled. The state has reasserted its role in the extractive industries and depends heavily on exports of natural resources, especially hydrocarbons." The report also listed other negative moments that have constrained economic freedom including the global financial crisis, overregulation, pervasive corruption, and the war with Georgia which sparked capital flight in 2008, triggering GDP contraction in 2009.

Among its former Soviet peers, Russia surpassed only Belarus, Uzbekistan and Ukraine, which are placed 155, 164 and 165 respectively. Georgia, along with the Baltic States of Estonia, Lithuania and Latvia, is one of the strongest performers, placing 29 with 70.4 points. Estonia though remains the region's best performer, taking 14th place with 75.2 points, one of the highest in Europe. Russia also performed worse than its BRIC peers - Brazil, India and China. Brazil led the pack in 113, with 56.3 points, while democratic India and communist China placed 124th and 135th respectively. Soon-to-be BRIC member, South Africa outperformed the rest in the degree of its economic freedoms, placing 74 with 62.7 points.

Though Russia inched forward one point on this year's Freedom from Corruption Index compared to last year's, the authors said corruption is still pervasive in the country. Russia has remained one of the world's most corrupt countries ranking 154th out of 178 countries in Transparency International's Corruption Perceptions Index for 2010. The authors conclude that corruption is rampant, both in the number of instances and in the size of bribes sought, adding that neither president Medvedev's Council for the Fight Against Corruption, which was established in the spring of 2008, nor the anti-corruption legislation of December 2008 has been effective in reducing corruption. President Medvedev, who has made the fight against corruption one of his priority goals, will hold a meeting of the presidential Anti-Corruption Council on Thursday, RIA Novosti reported.

The 2011 Index of Economic Freedom covers 183 countries around the world, 179 of which are ranked with an economic freedom score based on 10 measures of economic openness, regulatory efficiency, the rule of law, and competitiveness. Countries that score well demonstrate a commitment to individual empowerment, non-discrimination and the promotion of competition. Their economies tend to perform better, and their populations tend to enjoy more prosperity, better health and more positive measures on a variety of quality-of-life indices, said the Index's editors.

Hong Kong and Singapore topped this year's ratings, clinching first and second positions respectively for the 17th straight year. But Singapore cut into Hong Kong's lead significantly this year, mainly on the strength of a better score in anti-corruption and a significant gain in financial freedom. Australia and New Zealand ranked third and fourth respectively, maintaining their positions from last year. War-torn Rwanda, which in recent years enacted reforms aimed at improving its competitiveness and entrepreneurial environment, is the world's most-improved country overall. The United States dropped to ninth place in the 2011 Index, with its lowest economic freedom score in a decade, and the United Kingdom fell all the way to 16th place.

Overall, the Index registered a widespread rebound for 2010, as the average score increased to 59.7 from the 59.4 registered in 2009 and over half of the 183 countries listed this year improved their scores. The good news, especially for the world's poor, is that economic freedom is rising around the world, Terry Miller, director of the Heritage Foundation's Center for International Trade and Economics, writes in The Wall Street Journal. "Countries gaining economic freedom have done a much better job over the last decade in eliminating poverty," Miller writes. "Individuals want control of their own lives. They want governments that facilitate, not tsars that coerce or command."


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