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Russia’s Chance for a Free Market Future

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Winston Churchill once described Russia as a mystery wrapped in an enigma. The election of Vladimir Putin as Russia’s new president for the next five years has in no way diminished this imagery. Groomed in the ranks of the KGB, the Soviet secret police, Putin has portrayed himself as nostalgic for the “greatness” that was once Soviet power both at home and abroad. And he has insisted that Russia once more needs a “strong state” to dig out the corruption and violence that has become the essence of daily life throughout the country.

Equally ambiguous has been Putin’s economic agenda within the Russian economy. Will he move in the direction of the free market or return to greater central control and management of Russian industry and trade?

Few things during the past 10 years have been as disappointing and frustrating than as the failure for any real, free-market reforms in postcommunist Russia. In spite of the end of the traditional socialist planned economy, the Russian government under Boris Yeltsin never succeeded in instituting full and enforced property rights.

In the countryside, for example, land is still the property of the state. The supposed denationalization of the Stalinist-era collective farms actually left them intact. And after a dash by a sizeable number of collective farmers to break away and establish their own private enterprises, the number of functioning private farms in Russia is now lower than in the mid 1990s. Moreover, these private farms actually remain under the legal ownership of the state; what the farmers have are 50-year leases, which are difficult to utilize as collateral for obtaining investment loans. The state also limits the uses to which the land can be applied.

Nor have Russian industries been fully privatized. The Russian government remains the majority or minority shareholder in most of them. Whether more or less “private,” they operate in an economic environment of government regulation, subsidy, and monopoly control that are the institutional mechanisms behind the powerful “oligarchs” who dominate and manipulate much of Russian industry and the political decision-making in Moscow and especially in the various regions of the country.

Taxes, too, are oppressively burdensome. The average Russian businessman who diligently paid all of the income, social insurance, and business taxes that the central government and the regional governments levy on him would end up owing far more than 100 percent of his annual earnings. In such a tax climate it is not surprising that tax avoidance is not only widespread, it is in fact a matter of financial survival.

An indication of Putin’s plans for the Russian economy was supplied in early April 2000 by his appointment of Andrei Illarionov as his senior economic advisor. Illarionov is the head of a radical free-market think tank in Moscow, the Institute for Economic Analysis. He has been a blistering critic of Russian government regulation, control, and bureaucratic mismanagement.

In his first interviews with the Russian and Western press, Illarionov has emphasized the need for deep cuts in government spending and taxing, deregulation of the economy, real and transparent private property rights enforced by the law, and full privatization of Russian industry and agriculture.

In August 1999 I had the opportunity to meet Illarionov in Vancouver, Canada, at a meeting of the Mont Pelerin Society, an international association of economists, businessmen, and policy analysts devoted to the principles of the free market and limited government. In perfect English he explained to me his vision of a democratic and free Russia grounded in property rights and open competition. The government, he emphasized, should be constitutionally limited to guarding people’s liberties, not violating them.

For a thousand years, Russia, both under the autocratic tzars and the communist commissars, has never known real political and economic freedom. And the country’s steps toward these freedoms during the last 10 years have been faltering and frustrating. But if Vladimir Putin follows the policy advice of people such as Andrei Illarionov, Russia may finally be on its tortured way towards real freedom and prosperity.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).