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Lecture 15

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Political Science
Donald Schwartz

POL354 Lecture 15 – Economic Transition/Democratization Cont’d & National Institutions Thursday, January 26, 2012 Recall  It was necessary to dismantle as rapidly and completely as possible the old Soviet command-administrative system. The conjunction of state power and economic power was inconsistent. Destatization and privatization along with the establishment of markets was essential for transition. When confronted with opposition and resistance, Gorbachev held back. Boris Yelstin then stepped in as the president of the Russian Republic and put forth a radical transformative proposal in late Fall of 1991 and was legislatively put in place beginning in January 1992. This proposal was very neo-Liberalist in its ideology. It called for some state intervention to control the currency but would involve significant dismantling of state ownership. This would create a period known as shock therapy. This was socially and economically disruptive but it was believed that the country would emerge from this in better ship and on its way to marketization and thus the democratization of the country. Argument - The privatization component of this strategy was deeply flawed. This could be because ideology doesn’t translate to application, could be the oligarchs who corrupted the process or could be due to the Soviet Union. In effect the country went through a process of demodernization/deindustrialization without accumulating the benefits of a capitalist system. As a consequence in August 1998 there was a major financial crisis and a good deal of circumstantial evidence to prove that the government of Russia had produced a massive ponze scheme. Putin steps into these circumstances in the summer of 1999 when he is appointed Prime Minister of the country. Putin is confronted with a rapidly collapsing economy, inflation, huge state debt, unpaid foreign dept. As Putin takes control (becomes president in March 2000) the country sees an economic turn around. For the first time there is a period of real economic growth in Russia.  Moderate and controlled inflation  State is able to generate surplus to pay of debts  Increase in wages  Increase in foreign investment The economy grows steadily, stability is introduced, and Putin is associated with this dramatic turn around. There are different views as to why this happened: Sceptics argue that timing was everything, the economy could not have continued to decline any further. Putin came to power at the time of energy exports. Putin also put in place a number of sensible/discrete policies aimed at improving economic performance.  Undertook tax reform – under Yelstin nobody paid taxes and tax rates were extremely high. Putin levelled out taxes and this strategy works. There was an increase in tax revenues that significantly helped the state.  Yelstin had not introduced any new labour legislation, the laws were left over from the Soviet Union. Putin introduced a new labour code, but he did so in a fashion that heavily favoured ownership and management in comparison to labour.  Introduced land legislation – land has always been a problem for Russia. Yelstin did absolutely nothing to provide a legal framework within which land could be privatized. Putin very quickly introduced a law that allowed for the privatization of urban land so that individuals could own the land on which their houses were built. Introduced legislation that allowed for private ownership of the land on which commercial enterprise operated. This has only happened theoretically and not systematically.  Legislation to theoretically provide protection for partners in a co-ownership situation. Putin did a number of specific things that can be seen as contributing towards modernization. However, there were outstanding issues relating to privatization and modernization, under Putin: 1. The issue of corruption and organized crime  through the privatization process and the absence of a legal framework within which it could take place, organized crime and corruption expanded exponentially. The evidence indicated that by the time Putin came to power, corruption and organized crime and infiltrated every aspect of Russian life. It existed at all levels of government and affected all sectors. Elected officials put themselves in positions where they could undertake criminal activities and at the same time be immune from prosecution. The former security agencies had opened up a large number of private security firms which were closely connected to the security agencies. Military, which had suffered from budget cuts, was also corrupted. Officials were selling off military equipment. Major financial institutions had been thoroughly corrupted – basically money laundering institutions. The major industrial firms (especially those involved in export) were majorly corrupted. When Putin comes to power, a study conducted in Russia found that people in Russia spend about $36 billion on bribes. In 2005 this study was replicated and it was concluded that the size of the average bribe had increased 13x reaching $316 billion USD. 80% of all firms paid bribes regularly. 2007  the market for business corruption exceeded federal revenues $2.16:1, estimates were that organized crime had its hand in a large percent of Russian GDP. What did Putin do? From 2000-2008 it was not a major item on his agenda, there was little to no legislation put in place to deal with this problem. A change in rhetoric changes in 2008 and is associated with Medvedev. Medvedev names corruption as the fundamental problem for Russian advancement. It is suspected that most of those who were the targets of legislation were the victims of those who were able to use the legal system as a means of resolving conflict with their competitors. Very little has been done by way of responding to the endemic corruption that has penetrated both the state and private sector. 2. The Oligarchs  As a class they were a group of extremely wealthy individuals who had capitalized on the modernization process for their own benefit. The Forbes listed of the riches people in the world contained 30 Russian oligarchs. Disproportionate concentration of economic wealth and power. This has obvious implications for democracy. Hinders the potential for a market and the separation of a market and the political power. In August of 2000 Putin holds a meeting with a group of the most powerful/wealthy of the oligarchs. – Sets limits on their political activity – must be approved by Putin and he must feel it to be appropriate. Putin makes the oligarchs pay taxes, and Oligarchs who hold large assets that are of importance to the Russian state (national interest/security) must be prepared to take economic actions that the state determines is essential for Russia’s national interests. Oligarchs are expected to be private entrepreneurs and agents of the state when the state calls on them. In return the Oligarchs got to keep the majority of their property. Putin never challenged the group as a whole but instead individually. Identified several sectors in which he stated that the state would reacquire control of certain industries  gas, oil, energy, electric power, machine building (related to MIC). Through a process of reacquisition and gaining and controlling shares over these companies, Putin re-establishes state control over them. Putin identified individual Oligarchs who had to be dealt with through coercion (Berezovsky and Rizinsky). Khodorkovsky  one of the wealthiest oligarchs with most of his holdings in oil. His oil empire was part of the assets that Putin wanted to reinstate state control over. Put heavy financial support into the Liberal parties who were challenging Putin. Possible presidential candidate. Given numerous warnings by the state to stop his economic activity. He was arrested, held for an extended period of time and put on a major public trial (many years in prison). Prokhorov  may run for next Russian federal election. 3. Who has taken control of many of the companies that had been turned over to the state? There have been a number of studies on this – there are a disproportionate
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