The Online Library of Liberty

A project of Liberty Fund, Inc.

• Introduction
• Part 1: Rights, Property, and Markets
• Property Or “property Rights”? *
• “design Faults” In Locke’s Theory of Property Taint Ownership With Guilt *
• Is Ownership a Myth? *
• How to Get a Free Lunch? Just Apply For It *
• The Problem of Contract Enforcement *
• The Public Goods Dilemma *
• Trying the Free Market *
• The Statist Legacy *
• Part 2: The Common Sense of Non-economics
• The Yakoubovich Syndrome, Or Lies, Damn Lies, and Economic Policy *
• Winning Policy Battles But Losing the War Against Economic Realities *
• Paying Ourselves More of Their Money *
• The Doctrine of “unequal Exchange” the Last Refuge of Modern Socialism? *
• Corporate Managers Are They Going to Kill Capitalism? *
• When the Economy Needs Morals *
• The Political Economy of Force-feeding *
• Hostile to Whom? *
• Mannesmann’s Courtesy Could Prove Rare *
• Part 3: French and Russian Tragicomedies
• Can Putin Build a Real Economy From Oil and Rigor? *
• Russia and the New Europe Growing Apart *
• Russia Hopping Along On Clay Feet *
• The French Tragicomedy *
• How the French “social Model” Could Self-destruct *
• A Little Bit of History Repeating *
• There Is No French Exception *
• The Hobbling of Private France *
• Part 4: The Capitalism They Hate
• The Capitalism They Hate *
• Striving to Get Richer and Poorer *
• “bread and Circuses” In the Modern Welfare State *
• Who Minds the Gap? *
• Float Or Sink? the Millstone of the “social Market” In Germany *
• How Germany and France, the Sick Men of Europe, Torture Themselves *
• Shall We Borrow From the Children? *
• Low Pay *
• Freedom to Strike Or Right to Strike? *
• Part 5: Creating Unemployment
• Stamp Your Feet and Demand a Fair Deal *
• Paternalism and Employment *
• The Things Labor Unions Are Up to *
• The Instability of the Welfare State *
• Some Bad News Could Be Good News *
• Built-in Unemployment Social Protection Costs More Than It Is Worth *
• Let ’s Throw This Model Away *
• How to Stifle Employment By “social Protection” *
• Workable Alternatives *
• A Tale of Two Models *
• A Vicious Circle of Social Kindness *
• Part 6: The Future of Europe
• The Economic Consequences of a United States of Europe *
• A Giant Free-trade Area Or a Political Counterweight to America? *
• European Crosscurrents and the Federalist Drift *
• How Confederacy Could Turn Into a Federal Superstate *
• Majority Rule By Any Other Name *
• What Now For “europe”? Why the People Failed Their Masters *
• Free-riding On the Euro *
• Some Democratic Economics *
• The Soviet Legacy *
• A War of Attrition Between Economic Reality and Political Dreams *
• A Brightening of the Economic Skies Over Brussels? *
• Turkey Knocking On Europe’s Door *
• Turkey and the Eu Club *
• Europe More Secular and More Islamist *
• A Bill of Rights Europe Did Not Need *
• Europe’s Social-democratic “government” *
• Power Corrupts, So Let ’s Make It Less Absolute *
• Part 7: Economics, True and False
• On the Economics of Protecting Employment *
• The Costly Mistake of Ignoring Opportunity Costs *
• “globalization” and Its Critics Mutual Gain Vs. Cloud-cuckoo Land *
• Are High Oil Prices a Form of Exploitation? *
• Immigration What Is the Liberal Stand? *
• More Nonsense On Stilts Mr. Bentham Is At It Again *
• Risk, Value, and Externality *

CAN PUTIN BUILD A REAL ECONOMY FROM OIL AND RIGOR?*

Vladimir Putin is embarking on his second presidential term with a new prime minister whose profile may be telling us something about what he means to do in the next four years for Russia—as well as to it. Mr. Fradkov looks and acts as if he were a rather ungainly and somber early-model robot programmed to perform standard tasks reliably enough but with neither capacity nor intention to pursue ideas of his own. He leaves thinking and deciding strictly to his master, whoever the master happens to be. His career of safe mediocrity included the foreign trade ministry, an economic post at the Russian embassy in New Delhi, the direction of the tax police and the post of Russian representative at the European Union’s Commission in Brussels. As an international negotiator, he distinguished himself by never answering a question of substance off the cuff, but instead searching in his files for the right cue card and reading off a prepared reply. He can be expected to carry out Mr. Putin’s every wish with exemplary loyalty and rigor.

What is Mr. Putin planning to do? He has an approval rating that is exceptional even by Russian standards, and he is riding on a tide of oil and gas revenues that make his dirt-poor country suddenly look affluent and eager to turn its back on the humiliation of the Soviet fiasco. The national mood lends itself more than it ever did to a make-or-break try to lift the Russian economy out of its old rut and make it function like the much-envied economies of the Western bourgeois world.

For the moment, the numbers say that Russia resembles an oil sheikdom rather than a developed Western economy. With a population of 142 million, it is about one-eighth the size of the German and one-fifth of the French economy, and as far as the USA is concerned, it is best to look the other way. Since the financial catastrophe of 1998, national income has admittedly grown quite briskly, the growth rate last year reaching 5.7 percent and in the latest quarter 7 percent. However, if the numbers can be trusted, more than the whole of recent growth was due to sharply higher oil prices and the 10 percent output rise these prices have called forth. Valuing their often heavy and high-sulphur oil at $20 a barrel f.o.b., one reaches the startling conclusion that as much as one-third of Russian national income is accounted for by hydro-carbons.1 (Valuing Russian hydrocarbon output, including home consumption, at world prices admittedly overstates their contribution to national income; but even a much-reduced figure should worry their economic policy-makers.)

The broad result is that Russia today is suffering from what has become known as the Dutch disease. In the 1970s, Holland was a very large exporter of natural gas. Export receipts pushed up domestic incomes and costs, and brought in a flood of imports with which Dutch industry could not compete. Likewise, today’s visitor to Moscow or Saint Petersburg sees hardly any Made in Russia goods in the shops; imports are everywhere, from cars, furniture, and clothes down to such humble items as bread and milk. Oil is generating plenty of income, while productivity is often abysmal and the quality of local products repellent. The major cities look prosperous, though the countryside is just as stagnant and miserable as it has always been; 38 percent of farmland is still state or municipal property.

Should the world price of crude slump in the near future, Russia would be in deep trouble. For the time being, she has a lease on life by courtesy of Saudi Arabia’s price leadership at the head of the oil cartel. Mr. Putin must use the good times and the easy money to re-equip industry, rebuild the railways, and renew the country’s decrepit infrastructure. Above all, he must create confidence in the rule of law, whose lack, combined with an autocratic state, has always been the fatal obstacle to organic economic development.

This will be the third attempt in Russian history to reform society and allow a real, self-equilibrating economy to grow up. The first two, that we may ascribe to Piotr Stolypin and Boris Yeltsin, have largely failed. The current Putin attempt may be a case of third time lucky, though the chances are probably no better than even.

The first attempt goes back to the liberation of the serfs in 1861, a measure that for complex reasons has generated more resentment than satisfaction. The social climate was becoming tense, the state poured resources into its repressive apparatus, but the more the political police spied on them, the more the radicals and nihilists flourished. Grudging concessions by the court were taken as signs of failing strength. After the minirevolution of 1905, Stolypin was put at the head of the government and embarked on thoroughly intelligent liberal reforms. Grass-roots development took off, an independent peasant class rose out of serfdom, and in the cities the beginnings of an entrepreneurial middle class started to show. The nihilists began to panic that the Stolypin reforms might succeed too well and make their movement irrelevant. They assassinated him in 1911. A bellicose turn in foreign policy, the outbreak of World War I, and the Bolshevik takeover in 1917 finally put Russian society back in the Stone Age.

The second great try was made under Boris Yeltsin’s presidency after 1991. Its core was the handiwork of Anatoly Chubais, who wanted to get as much state property into private hands as possible as fast as possible before either the Communists could rally and stop him or some other of those nasty turns occur that Russia specializes in. The ensuing fire sale, in which insiders, bazaar traders, and mafiosi bought up the country’s natural resources for a song, created immense fortunes of murky or worse origin, established the class of “oligarchs,” and made “privatization” and “Chubais” the bitterest hate words in the language.

The putrefying carcass of the state was the ideal food for corruption of all kinds. The regulated ruble price of oil was about $2 a barrel and an export permit turned that into $20 or so; no prizes for guessing how export permits came to be procured. Because all this was too good to last, extreme short-termism became the rule of prudence, investing in long-lived assets would have been foolhardy, and profits were simply smuggled out. In a peak year, illegal capital flight reached $30 billion, a drain Russia could not really afford. Playing at capitalism without capital, or more precisely without the least assurance of secure ownership, could not achieve the decisive transformation the liberals of the Yeltsin era were hoping for.

Putin is putting heavy reliance on the siloviki, like himself middle-level graduates of the KGB and other security services who are ruthless but not arbitrary, rigorous, rule-bound, and not corrupt. If they manage to reduce theft, graft, and tax fraud, popular hatred and rejection of property and profit might be mitigated and capitalism might gain a degree of social respectability and acceptance. Such a regime of rigor will not foster democracy; Putin’s Russia will be more like a police state than that of Yeltsin, let alone the ideal Western-style state the best intellectuals of the post-Soviet era are dreaming of. However, first things first: let capitalism truly take root, and then perhaps we shall see.

[* ]First published as “Third Time Lucky in Russia: Can Putin Build a Real Economy from Oil and Rigor?” by Liberty Fund, Inc., at www.econlib.org on April 5, 2004. Reprinted by permission.

[1. ]Oil production so far in 2004 is running at 9 million barrels a day with exports at 3.7 million barrels a day. Gas production is comparable in energy equivalent but somewhat lower in value. Oil, and in particular gas, are still underpriced on the internal market, which leads to wasteful consumption.