Tue, Oct 04, 2005 page8

• For Russia, rapid shift in economy paying off

  • By Wu Hui-lin 吳惠林
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  On Sept. 27, Russian President Vladimir Putin participated in a call-in show on TV. In about three hours he answered 60 questions dealing with politics, the economy, housing, securities for loans, salaries, public finances, social issues and health. The live TV show was translated into 32 different languages and broadcast in over 160 countries.

  Putin offered penetrating analysis of the root causes and solutions to problems, and knew his data inside out. Thanks to his outstanding performance, the Russian people now want him to stay on for another term.

  The Russian Constitution restricts the president to two terms, but with Putin's popularity rating in the high 70s and his party holding a parliamentary majority, the Constitution could be easily amended. Putin, however, has publicly said that he will not seek a third term.

  He believes that the mission for this stage has been completed, and that he should pass the reins to someone younger who could rule the country more efficiently. He has also emphasized the importance of the rule of law.

  Today's Russia is a new country. More important, during the Asian financial crisis, Russia implemented reforms through shock therapy, and was thought to be deteriorating due to a short period of turmoil. By contrast, China was said to be doing things right with its gradual reforms and continued totalitarianism. After a decade or so, we now finally know who is stronger. Russia is sailing smoothly along, while China is trapped in a situation in which it doesn't know which way to go.

  Commentators say there were two main reasons Putin won a second term in a landslide election last year. The first was deepening reforms and the move toward democracy. He made big cuts in military spending and greatly improved education; for the first time in Russian history, educational spending outstripped military spending.

  The second reason was that the results of economic reforms could be felt. Average income per person in Russia in 2003 was US$3,200, almost three times China's US$880. In 1988, one-sixth of the population in the Soviet Union had an annual income below US$90.

  By 2003, Russia's economic growth had reached 7.3 percent, with unemployment rates falling to 6 percent -- after having been in the double digits in 2001. In the early 1990s, only 5 percent of Russian products came from private enterprise, but by 2003, that figure had increased to 70 percent. Russian land has been fully privatized, and can now be privately owned and sold. Furthermore, by 2003, income tax had dropped to 13 percent, the second lowest in Europe, while tax revenues increased by 50 percent, thus providing a model example of how to use tax reductions to stimulate the economy.

  At the time of the Asian financial crisis in 1997, formerly communist Russia and communist China initiated economic reform almost simultaneously. The focus of the debate at the time was which was better: gradual reform or rapid liberalization. China chose the former and Russia the latter, embarking on what Harvard professor Jeffrey Sachs has described as "shock therapy."

  During the early stages of reform, Russia's shock therapy was met with derision by academics around the world as a result of chaos and a lack of results. Today, the results can be seen as a stabilizing and maturing Russia rises like a phoenix from the ashes. By comparison, the negative after-effects of China's economic reforms are becoming more and more obvious, leaving us with much food for thought.

  Wu Hui-lin is a research fellow at the Chung Hua Institution for Economic Research.

  Translated by Perry Svensson
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