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RussiaRussia’’s Capitalist s Capitalist Revolution:Revolution:
Why Market Reform Succeeded and Why Market Reform Succeeded and
Democracy FailedDemocracy Failed
Anders Anders ÅÅslundslundSenior FellowSenior Fellow
Peterson Institute for International EconomicsPeterson Institute for International EconomicsWorld Bank, Washington, D.C., January 8, 2008World Bank, Washington, D.C., January 8, 2008
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ISSUESISSUES1.1. Revolution: Important for our Revolution: Important for our
understandingunderstanding2.2. Why did market reform Why did market reform
succeed?succeed?3.3. Why did democracy fail?Why did democracy fail?4.4. Who is Mr. Putin?Who is Mr. Putin?5.5. RussiaRussia’’s Future?s Future?
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1. Key to Understanding Russia1. Key to Understanding Russia’’s s Transformation: It was a Revolution.Transformation: It was a Revolution.
Literature on RussiaLiterature on Russia’’s s transformation fall into two transformation fall into two categories: Those who categories: Those who recognize it as a revolution recognize it as a revolution and the others.and the others.
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Revolutionary SituationRevolutionary Situation““communist societiescommunist societies……are in the throes of a are in the throes of a serious systemic crisis whichserious systemic crisis which…… fits very well the fits very well the concept of a concept of a ‘‘revolutionary situationrevolutionary situation’’ as defined as defined by Lenin. by Lenin. …… [a] stalemate between the ruling [a] stalemate between the ruling elite of a country and its population: the former elite of a country and its population: the former could no longer rule, and the latter would no could no longer rule, and the latter would no longer let themselves be ruled in the old way.longer let themselves be ruled in the old way.””
Richard Pipes, Richard Pipes, Foreign Affairs, Foreign Affairs, 19841984
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A Revolution MeansA Revolution MeansTemporary breakdown of all Temporary breakdown of all institutions minimizes state institutions minimizes state capacity.capacity.A few policymakers have great A few policymakers have great freedom for half a year.freedom for half a year.
Policymakers need to act fast and Policymakers need to act fast and focus on essence, but mistakes focus on essence, but mistakes are inevitable.are inevitable.
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““To wait To wait means to fail.means to fail.””
Mart Laar, former Prime Minister of Mart Laar, former Prime Minister of Estonia, 1992Estonia, 1992––94 and 199994 and 1999––20022002
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2. Why Did Market Reform 2. Why Did Market Reform Succeed? Succeed?
Enough was done in the brief window of Enough was done in the brief window of opportunity in 1991opportunity in 1991––92 to secure the 92 to secure the market economy,market economy,BUTBUTInitial economic results poor because Initial economic results poor because reforms insufficient.reforms insufficient.Financial crash cleansed the market Financial crash cleansed the market economy and completed financial economy and completed financial stabilization.stabilization.
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IDEA: Radical market reformIDEA: Radical market reformIDEA: Radical market reform
Yeltsin’s Program Speech, Oct. 1991YeltsinYeltsin’’s Program Speech, Oct. 1991s Program Speech, Oct. 1991
Parliamentary support receivedParliamentary support receivedParliamentary support received
Reform Government appointed, Nov. 1991Reform Government appointed, Nov. 1991Reform Government appointed, Nov. 1991
Policy actions elaboratedPolicy actions elaboratedPolicy actions elaborated
Implementation, Jan. 1992Implementation, Jan. 1992Implementation, Jan. 1992
2. Why Did Market Reform 2. Why Did Market Reform Succeed? Sound PolicymakingSucceed? Sound Policymaking
A Brief Window
of Opportunity of
“Extraordinary Politics”
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Substantial DeregulationSubstantial DeregulationEBRD transition index, 1990EBRD transition index, 1990––20062006
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
0 = low 1= high
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Fast PrivatizationFast Privatization
0
10
20
30
40
50
60
70
80
1991199219931994199519961997199819992000200120022003200420052006%
of
GD
P f
rom
pri
vate
sec
tor
Sources: EBRD
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Frightful Budget Deficit Led to Frightful Budget Deficit Led to Financial Crash in 1998Financial Crash in 1998
-20
-15
-10
-5
0
5
10
15
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
% o
f G
DP
Sources: EBRD
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Budget Consolidation through Sharp Budget Consolidation through Sharp Expenditure CutsExpenditure Cuts
20
25
30
35
40
45
50
55
60
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
% o
f G
DP
Expenditures Revenues
Sources: EBRD
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GDP Growth Bounced with GDP Growth Bounced with Subsidy CutsSubsidy Cuts
-15
-12
-9
-6
-3
0
3
6
9
12
15
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007est
GD
P g
row
th, %
Sources: EBRD, IMF World Economic Outlook
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A Dynamic Market Economy A Dynamic Market Economy since 1999since 1999
1.1. Critical mass of market Critical mass of market reforms and privatizationreforms and privatization
2.2. Conservative macro policyConservative macro policy3.3. But minimal reforms since But minimal reforms since
200320036.7 percent GDP growth a 6.7 percent GDP growth a
yearyear
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3. Why Did Democracy Fail?3. Why Did Democracy Fail?
No conceptNo conceptNo programNo programTherefore, no early democracy building Therefore, no early democracy building Old, unrepresentative parliament survived Old, unrepresentative parliament survived for too long and stunted party for too long and stunted party developmentdevelopmentNew constitution: Excessive presidential New constitution: Excessive presidential powerspowersPutin chose authoritarian rulePutin chose authoritarian rule
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Yeltsin’s Greatest Mistake
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RussiaRussia’’s Authoritarian s Authoritarian Reversal Was Not InevitableReversal Was Not Inevitable
0
1
2
3
4
5
61991 1993 1995 1997 1999 2001 2003 2005
From
1=
free
to
7=no
t fr
ee
Russia UkraineSource: Freedom House
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High Oil Price from 2003 Allowed High Oil Price from 2003 Allowed Putin to Indulge HimselfPutin to Indulge Himself
0
10
20
30
40
50
60
70
80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Bre
nt,
US
Dol
lars
per
Bar
re
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4. To Understand 4. To Understand PutinPutin
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Putin 2000Putin 2000––2003: 2003: Authoritarian ReformAuthoritarian ReformSecond Chechnya WarSecond Chechnya WarMedia controlMedia controlRecentralization of power from Recentralization of power from regionsregionsTax reformTax reform““Dictatorship of lawDictatorship of law””
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Putin 2004Putin 2004––07: 07: Pure AuthoritarianismPure AuthoritarianismYukos confiscation and Yukos confiscation and renationalizationrenationalizationReinforced authoritarianism Reinforced authoritarianism and deinstitutionalizationand deinstitutionalizationAcceptance of rising Acceptance of rising corruptioncorruption
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PutinPutin’’s Future: s Future: He Has to Stay in PowerHe Has to Stay in Power
1.1. Personal authoritarian rule rarely Personal authoritarian rule rarely survives a succession because no survives a succession because no real institutions are left.real institutions are left.
2.2. He is widely accused of grand He is widely accused of grand larceny and needs all immunity larceny and needs all immunity he can get.he can get.
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Political InstabilityPolitical Instability
Putin has betrayed all his KGB Putin has betrayed all his KGB friends by selecting Dmitri friends by selecting Dmitri MedvedevMedvedev..Either Putin purges them soon or Either Putin purges them soon or they are likely to instigate a coup they are likely to instigate a coup against him.against him.
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PutinPutin’’s Choice: Back to Nicholas Is Choice: Back to Nicholas I
OvercentralizationOvercentralizationof personal powerof personal powerRuling through the Ruling through the secret policesecret policeIncreasing Increasing repression as is repression as is necessarynecessaryAnachronism!Anachronism!
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5. Russia5. Russia’’s s FutureFuture
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Future OutlookFuture OutlookHigh economic growthHigh economic growthMacroeconomic policy Macroeconomic policy waveringwaveringCorruption aggravatedCorruption aggravatedPolitical uncertaintyPolitical uncertainty
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Many Growth DriversMany Growth Drivers1.1. RemonetizationRemonetization M2/GDP should doubleM2/GDP should double2.2. Huge profit in GDP: 37 percent in 2005Huge profit in GDP: 37 percent in 20053.3. 68 percent of Russian youth go to 68 percent of Russian youth go to
universityuniversity——more than in the European more than in the European Union.Union.
4.4. The number of enterprises rise by over 7 The number of enterprises rise by over 7 percent a yearpercent a year
Investment no driver, but reasonableInvestment no driver, but reasonable
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Far Too Little Money Supply Allows Far Too Little Money Supply Allows ReleveragingReleveraging, 1999 and 2006, 1999 and 2006
0102030405060708090
100
Euro area Ukraine RussiaM2
in P
erce
nt o
f GD
P, e
nd y
ear
1999 2006
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More University Education than in More University Education than in European Union, close to United States, European Union, close to United States,
1991 and 20041991 and 2004
0102030405060708090
100
Russia United States Euro area - 13
Gro
ss E
nrol
lmen
t Rat
ios,
%
1991 2004
Source: UNESCO statistical database, 2007.
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5 Million Russian Enterprises, 5 Million Russian Enterprises, Rising by 7 percent a year Rising by 7 percent a year
(in millions)(in millions)
0
1
2
3
4
5
6
1999 2000 2001 2002 2003 2004 2005 2006
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Economic WorriesEconomic WorriesRenationalization: Private share Renationalization: Private share of GDP from 70 percent of GDP of GDP from 70 percent of GDP in 2004 to 65 percent in 2007in 2004 to 65 percent in 2007TopTop--level corruption risinglevel corruption risingOverheating: Inflation risingOverheating: Inflation risingEnergy production stagnatingEnergy production stagnating
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Severe Corruption,Severe Corruption,Getting WorseGetting Worse
Source: Transparency International (2006).
0
0.5
1
1.5
2
2.5
3
2000 2001 2002 2003 2004 2005 2006 2007Cor
rupt
ion
Perc
eptio
n In
dex
(Sca
le
10=h
ighl
y cl
ean
and
0=hi
ghly
cor
rupt
)
Ukraine Russ ia
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Systematic CorruptionSystematic CorruptionCorporate raiding by law enforcementCorporate raiding by law enforcementExtortion of major private companiesExtortion of major private companiesConcentration of vast fortunes of top Concentration of vast fortunes of top KGB men from St. PetersburgKGB men from St. Petersburg
How much can they steal without How much can they steal without damaging the economy?damaging the economy?
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High Inflation Rising AgainHigh Inflation Rising Again
05
10
15202530
3540
1999 2000 2001 2002 2003 2004 2005 2006 2007
%
Inflation (CPI), % chg. over year
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Causes of Rising InflationCauses of Rising InflationLoose monetary policyLoose monetary policyDeclining fiscal surplusDeclining fiscal surplusLarge capital inflowsLarge capital inflowsCurrent account surplus Current account surplus (declining)(declining)
Politics: No tightening likely Politics: No tightening likely before Marchbefore March——inflation 15 inflation 15 percent?percent?
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Fiscal and Current Account Fiscal and Current Account Balances: Strong but DecliningBalances: Strong but Declining
-9
-6
-3
0
3
6
9
12
15
18
21
2000 2001 2002 2003 2004 2005 2006 2007F 2008F 2009F
% o
f G
DP
fiscal balance current account balance
Source: JPMorgan
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Oil and Gas Production, Oil and Gas Production, 19851985––20062006
Source: BP Statistical Review of World Energy, 2007; UBS
200
250
300
350
400
450
500
550
600
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007F
Mill
ion
tons
or e
quiv
alen
t
Oil Natural gas
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RussiaRussia’’s Future: s Future: DemocracyDemocracy
Too rich, pluralist, and educated to be so Too rich, pluralist, and educated to be so authoritarian (authoritarian (LipsetLipset))Only source of legitimacy: economic Only source of legitimacy: economic growth and stabilitygrowth and stabilityCorruption main issue in all democratic Corruption main issue in all democratic East Central European electionsEast Central European elections
Renewed democratization likelyRenewed democratization likely
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ConclusionsConclusions1.1. Too great a contradiction between Too great a contradiction between
sound economic development and sound economic development and anachronistic political systemanachronistic political system
2.2. RussiaRussia’’s market economy seems s market economy seems secure.secure.
3.3. A new wave of democratization is A new wave of democratization is likely.likely.
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What Should the West Do?What Should the West Do?
1.1. Promote economic integration: Promote economic integration: Admit Russia to the WTO and Admit Russia to the WTO and OECD!OECD!
2.2. Do not count on political Do not count on political stability!stability!
3.3. Tell the truth!Tell the truth!
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