Following Vladimir Putin’s 5,000-word treatsie on his vision for the Russian economy published in Vedomosti, we decided to give a call the venerable economist Dr. Craig Pirrong, otherwise known as the Streetwise Professor, and hear his thoughts on some of Putin’s main arguments. The following is the text of our interview.
Q: Putin has been doing a lot of writing in the run up to elections, and this latest essay on his economic vision published in Vedomosti has attracted a lot of discussion. Do you attribute any real importance or anything actionable from these documents, or is it just campaign fluff?
Well, the diagnosis of Russia’s problems in the article is quite accurate, and some of the proposals, in general terms, are reasonable. But is it actionable? Well, there are two points: none of this represents new developments, so you wonder why hasn’t anything been done in the past 12 years while Putin has been a dominant force in Russian politics. Secondly, some of the more important suggestions in there would be very difficult to implement and unlikely to be in the interest of the dominant elites to implement them. So no, unfortunately I don’t think you can take this document at face value.
Q: Do you think that if the protests continue growing, that Russia’s elites will be forced to pass some of these economic reforms in order to survive?
There is a big difference between passing a law and then actually having it result in substantive change. To me, actually the most interesting thing he wrote about in the article was the proposed changes to the legal process, reforming the courts system, excising Soviet elements, and creating a separate set of business courts. And that could actually be something potentially important, a move toward a rule of law in Russia.
Q: In his article, Putin cites the examples of South Korea and China in explaining the importance of state presence in the economy. How does an oil-and-gas powered economy face a different experience with state corporatism?
First of all, to begin with Russia had much more of the resource curse than China or South Korea had to deal with it, and that’s really one of the main things that has been so corrosive to institutions. The existence of all these rents from resources is one of the things that encourages and fuels corruption. So in that sense, making a comparison between Russia, which has a vastly different economic base than China or South Korea, is not very apt.
Q: What measures are realistically available to the Russian government to foster competition?
Making the institutional transition is always extremely difficult. Building the kinds of institutions that Russia needs takes time and is very difficult, and it is not always in the interests in the elites that are actually in charge of the project to see it through. And so that’s why I think they will fall back on the old default, relying on state corporatism in order to move forward. In my mind, the article represents a confession over the lack of new ideas among the leadership. They’re thinking, ‘This has never worked before, so let’s try it again.’
So in many respects the most telling part of the article is when he complained about the unwillingness of foreign investors to invest in the innovative sectors of the economy. That immediately begs the question as to why. And he partially answers it, when he writes about some of the institutional problems and the corruption problems and things of that nature, but that’s the key thing in my mind. It’s an accurate statement. The creation of rule of law and institutional infrastructure that would encourage private investment is most likely not going to develop, so they fall back on state corporations, which are very inefficient and particularly ill-adapted to technologically dynamic sectors of the economy.
Q: Putin describes Russia’s “macroeconomic stability” as “one of our greatest achievements in recent years.” Despite all the criticism against Putin’s handling of the economy, are there elements of the state’s economic policy that you believe have been successful?
Yes, they have had some elements that have been successful – though first of all, I would primarily give the credit for that to that to Kudrin as opposed to Putin, and you see where Kudrin is now. So maybe that might be somewhat accurate looking backward, but more problematic looking forward.
The second point is that Russia has been very fortunate in terms of macroeconomic aspects because of high oil prices. So when you look at 1996-1998, when Russia’s economy was in such desperate shape, the price of oil was $10. Given it was difficult for the country to get on firm economic footing back then, it’s a lot easier to do so when the price of oil is at $100, or $150 as in the summer of 2008. A good deal of the factors guiding Russia’s macroeconomic performance are outside their control.
Nevertheless, it’s amazing to me that it was just a few years ago, in September 2008, when Putin and Kudrin confidently described Russia an ‘island of stability’ in the stormy economic seas of the global economy. Despite how quickly that fell apart last time, it is surprising that they are going back to this same rhetoric. The fact is that the dependence on resource prices makes Russia hostage to world economic conditions that are quite dicey and out their control.
Moreover, recent policies have undone much of what Kudrin accomplished. Government spending has increased in real terms by 10 percent per year since 2006, and government spending now represents almost 40 percent of GDP, up from about 30 percent 5 years ago. As a result, the government has much less budgetary head room to deal with an economic downturn. Kudrin’s warnings on spending led to his departure, and Putin promising even more spending on both civilian and military items as part of his populist election campaign.
All of this means that the “greatest achievement” is in serious jeopardy in the future.
Q: The article contains a lot of ideas that should make sense to liberal economist. But there are also clear allusions to dirigisme. Can Russia realistically combine such opposite economic models?
I really don’t think it is sustainable to have these conflicting ideas in practice. It seems like he is speaking to two audiences simultaneously, and hoping that each audience will ignore the part directed to the other. But instead if you read it all the way through, it sort of comes off as incompatible – how do you reconcile these very different things?
Looking at words vs. deeds, he might talk about avoiding protectionism, but just the other day he was speaking before a group of farmers, promising to protect them, saying that Russia will be in the WTO but still protect industries like auto manufacturing. So Putin sees WTO and trade agreements as an a la carte menu, but he is quite willing to resort to protectionism.
So out of all of these disparate messages, I would bet on things continuing the way they were, rather than the way things could be changed in the future.
Q: There is very little attention given to rules and enforcement in Putin’s article, but rather only the strength of the state. Do you see that as a problem?
Well this goes back to my argument about the importance of rule of law in terms of encouraging investment – creating a set of independent institutions that can provide a structure that allows private individuals and entities to operate, uphold and enforce contracts, and have the security to make investments. And this is where the lack of trust in Russia comes from internationally. There appears to be zero liklihood of development institutional infrastructure, and instead the economy is going to continue to rely upon state direction, which will always be unpredictable, so Russia is still unable to provide a credible commitment to protect property and rights.
What’s interesting about Putin’s article is that there is not much to object to in terms of the diagnosis, but again, you have to question the conviction of the diagnosis given that they haven’t done anything concrete in the past few years to address those problems. The article tries to concede some acknowledgement that changes have to be made, and that’s all very interesting, but I’m skeptical anything real will ever come of it.