Johnson's Russia List 2011-#52
22 March 2011
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#26
Moscow Times
March 22, 2011
Learning Some Big Lessons From Little Estonia
By Anders Aslund
Anders Aslund is a senior fellow of the Peterson Institute for International
Economics and author of the book "The Last Shall Be the First: The East
European Financial Crisis, 2008-10."
Of all the post-Communist countries, none has been more successful in its
reforms than Estonia.
Today, it is difficult to imagine that only 20 years ago, Estonia and Russia were republics in the same
state. A comparison between the two shows what really matters for social and
economic development.
The least remarkable difference lies in gross domestic product. Estonia's GDP per capita is about 20 percent
higher than Russia's
at current exchange rates. This difference was about the same when both states
belonged to the Soviet Union. In these terms,
both have been successful. Estonia's
strong growth performance shows how limited Russia's advantage is from its vast
oil revenues, even when the oil price is close to an all-time high. The
predicted growth rates for the next few years are similar at about 4 percent a
year, though Estonia is more
likely to outperform than Russia.
The contrast between Estonia
and Russia
becomes all the more striking when we turn to qualitative indicators. In the
recent survey of math skills of school pupils by the Organization for Economic
Cooperation and Development, Estonia
ended up in 17th place, far higher than the Western average, while Russia
fell significantly below the average in 38th place. More obscure comparisons of
health care point in the same direction. The Estonian public sector functions
very well by the standards of the European Union, while Russia's social sector is neither
effective nor efficient.
The largest difference is corruption. Out of the 178 countries on the
Corruption Perception Index of Transparency International, Estonia ranks 26, while Russia is No. 154. Estonia
was perceived as somewhat more honest in Soviet days, but not much. This
discrepancy has largely arisen after the end of the Soviet
Union. Estonia
has grown more honest, and Russia
far more corrupt.
The direct cause of this huge chasm is the business environment. On the World
Bank index for the ease of doing business, Estonia
ranks steadily 17 out of 183 countries, while Russia is 123rd and falling. Estonia
is simply a much more livable society. Estonia
is a leader in e-government, while Russia's red tape remains
oppressive.
These few observations show two different things. On the one hand, the level of
economic development as measured in GDP is usually rather inert and economic
convergence with the West requires decades. In terms of purchasing-power
parity, Estonia
has reached about half of the GDP per capita of the original 15 members of the
European Union.
At the same time, however, in most qualitative regards, Estonia ranks higher than the
original EU members, showing that the functioning of the state and the public
sector can change much faster than people usually think.
Corruption is often blamed on ingrained traditions and institutions of the
Soviet Union or the Russian Empire, but both Estonia
and Russia
were part of those states. Arguments of religion and culture have proved wrong
so often that we may ignore them.
The rising gap between Estonia
and Russia
shows how important government policy is and how fast corruption and the state
can actually change. No government can get away with blaming history or
tradition for its failure to control corruption.
Nor is it sufficient to be a market economy or maintain good fiscal policy.
Before the global financial crisis, Russia
and Estonia
had similarly limited public expenditures as a share of GDP, and both enjoyed
persistent fiscal surpluses and had virtually no public debts. Both countries
have flat income taxes and generally low or moderate tax rates.
But business life is quite different in the two countries. Estonia has no oligarchs or even
very rich people. In the early 1990s, its business was dominated by shady metal
traders, who operated like their Russian colleagues, buying metals at low
prices fixed by the state and exporting them at a free market price. Such
business required controls over prices and exports, but as soon as both were
liberalized this business was washed away.
Russian business remains dominated by oligarchs whose very existence requires
good relations with the ruling elite one that doles out money, permits
and other assets, while limiting competition from the market. Russia's red tape gives officials
the opportunity to collect kickbacks and allows the business elite to reap
excessively large profits because of stifled competition. Much of this is being
financed with rents from oil and gas, which go to wealthy officials and favored
businessmen. Russia needs to
achieve Estonia's
degree of deregulation and transparency.
The ultimate difference is that the Estonian government is focused on the
welfare of its nation, while the Russian leaders are preoccupied with their own
welfare. That is the difference between democracy and authoritarianism.
Democracies are strong in crisis because they enjoy legitimacy in the eyes of
their citizens. On March 6, Estonia
held parliamentary elections. The current two dominant center-right coalition
partners, the Estonian Reform Party and the Pro Patria and Res Publica Union,
won an increased majority, although GDP plummeted by a total of 19 percent in
2008 and 2009, when the same government ruled.
The Estonian voters understand that this was caused by the global financial
crisis and do not blame their government for what it cannot control. Small,
open economies are vulnerable to the hazards of loose global monetary policy.
The Estonian government was compelled to carry out a fiscal adjustment of no
less than 9 percent of GDP in 2009 essentially by cutting public expenditures.
It has also managed to minimize its budget deficit.
The contrast is stark with authoritarian Russia, where the government is so
afraid of the population that it has switched to a populist policy during the
crisis, throwing money at any group that may cause unrest. Thus, Russia
maintains a significant budget deficit despite the current abundant oil
revenues.
Estonia sets a good example
for Russia
to follow. It shows what Russia
should and can do when it becomes democratic again. After all, Russia
is far too rich, educated and open to be so corrupt and authoritarian. Remember
that there is only one country that is richer and more corrupt than Russia Equatorial Guinea.
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