Foldvary on the Russian Economy
|January 5, 2002||Posted by Staff under Archive, Progress Report, The Progress Report|
Lessons from Russia
by Fred E. Foldvary, Senior Editor
The continuing deterioration of the Russian economy and the political fallout has spilled over into the global financial markets as stock markets plunged world-wide. Viktor Chernomyrdin has been appointed as the acting prime minister while the Yeltsin administration negotiates with the Duma, the lower chamber of parliament, dominated by communists who want to reinstate central controls and possibly renationalize some industries. Many banks have written off the funds they loaned to Russia as the ruble was devalued and the Russian government defaulted on its debt payments despite the billions of dollars of IMF loans to Russia. Russia has been an excellent lesson in what not to do on the economic front. Here are lessons from Russia on how to ruin an economy:
1. When you privatize industry, don’t divide them into competitive firms for sale at auctions. Give the monopolist enterprises to the ruling bureaucrats for their personal gain.
2. Impose high taxes on profits. Make them so high that no business can afford to pay them. That will guarantee a budget deficit. Also, financial capital will flee to foreign banks.
3. Don’t tax land values. Land does not flee or hide, and taxing land rent does not hurt the economy, so do the wrong thing and tax labor, sales, profits, anything but rent. Let the owners profit from rising rents and land speculation.
4. Don’t have a currency board that converts the national currency to a basket of forieign currencies and commodities. By keeping the money fiat, not based on anything, the government can inflate the money and the currency will be subject to devaluations that raise prices and hurt foreign investors.
5. Don’t pay your bills. Don’t pay government workers. With many industries still owned by the government, not paying workers or paying bills to suppliers will reduce the budget deficit. Unpaid soldiers will sell weapons and maybe some nuclear materials. The unpaid workers will block railroads and perhaps eventually revolt against the government, but we can worry about that later.
6. Centralize government. Don’t let the regions and cities have much authority over taxation and spending. If a region such as Chechen revolts, destroy it with the military. By centralizing power, the corrupt officials and gangsters can get more loot.
7. Have mass democracy, where millions of voters choose among a few political parties. That way, the authorities can stifle the minor parties and the parties with the most money can fool people with their propaganda, while millions are just disgusted and don’t vote.
8. Put in as many barriers to trade and travel as possible. Require that foreign visitors have reservations at expensive hotels or else have a letter of invitation with official approval. Remind foreigners that Russia still regards Westerners as enemies.
9. Allow gangsters to control industries and extort money with protection rackets. They will share some of their loot with the government bureaucrats and officials.
10. Don’t maintain the airplanes. Just let them crash, to make air travel unsafe. And let criminals roam through the trains, stealing from passengers. Let the roads deteriorate also. That way, all forms of transportation will be dangerous.
11. Use the banks for speculation and money laundering, not for investment. Have a few favored banks where government deposits money, while the bank owners get the interest. The rich will then keep their savings abroad, and the poor will hoard cash.
12. Keep much of the economy in government ownership. While the rest of the world moves to market economies that grow with trade and adopt modern technology, government-owned industries suffer from inflexible controls and lack of incentives. But state ownership maintains the power of the bureaucrats.
What will happen next? Political power will shift to the prime minister and the Duma. There will be greater controls over prices and the currency. This might bring some stability, but the long- run deterioration will continue so long as Russia does the wrong things. Millions of Russians have become poor and hungry. The situation is reminiscent of two previous historical cases: the Weimar republic of Germany prior to the takeover by the Nazis, and the weak Kerensky government of Russia in 1917 between the fall of the Czar and the Communist Revolution. Unless steps are taken to stop doing the wrong things, the brief Russian democracy, such as it is, will fall to authoritarian rule.
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Copyright 1998 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieveal system, without giving full credit to Fred Foldvary and The Progress Report.