What Russia’s president Vladimir Putin, Ukraine’s new prime minister Viktor Yanukovich and Kazakhstan’s president Nursultan Nazarbayev have in common is their belief in economic growth. And their countries have delivered. The former Soviet Union has enjoyed a steady economic growth of about 9% a year since 2000. Economic growth has become a new political consensus, and it has become the dominant topic of economic discourse.
Today, the Russian financial crash of August 1998 is a distant memory. Whatever was true of the Russian economy before that date has been false ever since. Arguably, the IMF has never been more successful in any programme than in its refusal to finance Russia in August 1998. The country had blatantly violated the IMF programme, and too many in Moscow thought that Russia was too big and nuclear to be allowed to default. But the IMF called their bluff and stuck to its guns.
The Russian financial crash became the turning point for Russia and the former Soviet Union. It taught all the post-Soviet leaders the importance of macroeconomic stability and that it does not pay off to take unnecessary macroeconomic risks. Fiscal conservatism has become impeccable, with more or less balanced budgets, though Russia had a budget surplus of 7.5% of GDP last year to keep inflation down, in spite of its huge oil revenues.
Large public debt belongs to the past. Years ago, Nazarbayev paid off all Kazakhstan’s debts, and Russia has just paid the last of its old Soviet-era Paris Club debt. Ukraine’s public debt has dwindled to 15% of GDP. Russia, Ukraine and Kazakhstan have all adopted reasonably open market economies for the sake of economic growth. After years of deliberation, they are all likely to enter the WTO within the next year.
East Asian Model
By and large, the former Soviet Union has adopted the east Asian model. Their aim is economic growth, and macroeconomic policies are designed for safety. The economies are open and export-oriented. Taxes are low and falling, and labour markets are flexible with low unemployment. Both Russia and Ukraine have flat income taxes of 13%, and Kazakhstan’s superior growth is based on a very low tax burden (22% of GDP). The former Soviet Union has avoided the social welfare trap of high taxes and high social transfers, in which the new EU members Hungary and Poland have been caught.
In fact, the former Soviet Union has joined the high-growth zone that has proliferated from the Asian Tigers, via China and India to the Baltic Sea. Central Europe, by contrast, has only half that growth rate because it has adopted the low-growth bureaucratic model of the European Union. The eastern challenge drives down income taxes and corporate profit taxes as well as liberates labour markets.
Socialist ideology is so dead that it never became a threat to the new market economies in the east. Nor is the bureaucracy of social democracy a threat, because to be a social democrat you have to believe the state is good, and no former Soviet citizen would consider such a daft view. They might favour a strong state, but a good one is inconceivable.
Instead, three other threats are apparent to the new dynamism of the post-Soviet countries: populism, redistribution of property and corruption.
Perils of populism
The greatest show of populism was that of Ukraine’s prime minister Yulia Tymoshenko last year. Her public appearances abounded with personal attacks on individual businessmen. Contrary to the spirit of the time, she did not care for economic growth. Through monumental mismanagement, she slashed growth from 12% in 2004 to minus 1.5% in August 2005, the month before she was sacked. Her example should be studied and taught, but she might actually be elected president in 2009.
The worst part of Tymoshenko’s policy was massive reprivatization of property. Admittedly, she only managed to renationalize two big metallurgical factories, but big business cut down production and investment until the parliamentary elections last March. Tymoshenko greatly boosted her popularity by publicly threatening the biggest businessmen in the country by name. Meanwhile, other tycoons joined her party, hoping to receive reprivatized companies. Yanukovich’s challenge is to secure property rights, but his business followers have not been all that respectful of the property rights of others in the past.
Renationalization is the rage in Russia. Big state-dominated companies, such as Gazprom, Rosneft, Vneshtorgbank and Rosoboronexport, are buying one private company after another. Sometimes they pay high prices, arousing suspicions about paybacks to the high officials involved. On other occasions, they pay little, making evident that the transaction was not quite voluntary. Today, this is the biggest threat to Russia’s economic growth, because the state companies are invariably less efficient and more corrupt than private firms. The sooner world oil prices decline, the sooner these malpractices will stop, but as oil prices are likely to stay high, this is not going to happen soon. Instead, Putin’s announced departure in March 2008 is likely to be accompanied by massive redistribution of property.
In Kazakhstan, the ownership of big companies has always required the consent of President Nazarbayev. The stability of ownership of large corporations is in doubt when he finally departs.
The outrageous rent-seeking of the early transition that distorted the whole economic system came to an end with the Russian financial crash, but corruption persists. Increasingly, it is being rationalized and becomes less costly to society, but the total revenues from corruption increase. Nuisance corruption involving taxation, permits, licensing and inspection has declined, while the corruption of courts and law enforcement flourishes, as well as corruption in public procurement.
The greatest hope for securing property rights and control of corruption is democracy and transparency, which Russia and Kazakhstan badly need. Alas, democracy also harbours the danger of populism, as Tymoshenko so well illustrates in Ukraine. Meanwhile, the region prospers as never before. q
Anders Aslund is a senior fellow at the Institute for International Economics, Washington DC. He is the author of Building capitalism: the transformation of the former Soviet bloc