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DATE=3/23/2000 TYPE=BACKGROUND REPORT TITLE=RUSSIA: WHAT KIND OF ECONOMY? NUMBER=5-45993 BYLINE=BARRY WOOD DATELINE=WASHINGTON INTERNET=YES CONTENT= VOICED AT: INTRO: Nearly 10 years after Russia set out to build a market economy the job is far from complete. And judging from growth, unemployment, inflation, and poverty data, Russia's economy is in worse shape today than it was before the reforms began. V-O-A's economics correspondent Barry Wood asks what kind of economy does Russia have? TEXT: For Joseph Stiglitz, until last month the chief economist at the World Bank, the shift from central planning to the market is one of the most important developments in the history of economics. And in Russia, he says, the process went wildly wrong. /// STIGLITZ ACT ONE /// The economy today is much worse off today than it was a decade ago. Poverty is up, gross domestic product is down. One can say that the 1998 (I-M-F lending) program did not do what it was supposed to do. /// END ACT /// To stabilize Russia's finances and boost reforms, the International Monetary Fund and Western donors provided billions of dollars of new loans to Russia in July 1998. Just three weeks later, in a spectacular failure, Russia devalued its currency and defaulted on much of its official debt. Mr. Stiglitz, now a researcher at Washington's Brookings Institution, says as early as 1993 the I-M-F and Western aid consultants had it wrong when they urged Russia to quickly privatize state enterprises. Instead, says Mr. Stiglitz, the reform priorities should have been job creation, the rule of law, and competition among enterprises. Mr. Stiglitz believes one of Russia's biggest mistakes was way the way it privatized. He says the process was unfair, with the government transferring assets to the former communist nomenklatura, while most citizens received nothing. /// STIGLITZ ACT TWO /// Certainly it is the people in the country who are suffering. The 50 percent of the people who are now in poverty, those costs are enormous at the individual level. The full potential consequences (of the failure) in terms of global instability fortunately we have not yet experienced. /// END ACT /// Flawed privatization combined with free mobility of capital in Russia, says Mr. Stiglitz, became an open invitation for corrupt business owners (oligarchs) to take billions of dollars out of the country - a process known as capital flight. While 55 billion dollars of aid went into Russia since 1992, 140 billion dollars flowed out. /// OPT /// Prominent Russians are speaking out against what they believe has been a disastrous period. For novelist Alexander Solzhenitzyn the reforms are a catastrophe that have set Russia back 15 years. Presidential candidate and economist Grigory Yavlinski says instead of a market economy Russia now has a criminal-laced crony capitalism. /// END OPT /// The World Bank, like the I-M-F, has lent billions to Russia and said kind things about the reforms in the past. But the bank's lead economist for Russia, Harry Broadman, says now Russia has a long way to go before it becomes a functioning market economy. /// BROADMAN ACT /// What kind of structural reforms are needed? Clearly, restrictions must be lifted for new business entry through reduced and streamlined business license and registration requirements. [Including] the elimination of discretion in the application of such procedures-that is to say a rules-based system for business licensing, reform of land ownership, opened up access to infrastructure facilities, and combating corruption surrounding the creation of wholly new enterprises and protecting incumbent firms. And parallel, laws regarding corporate governance, bankruptcy, and competition policy among others must be scrupulously enforced and implemented. /// END ACT /// Acting-President Vladimir Putin promises to address these concerns, if, as expected, he is elected president on Sunday. Finance Minister Mikhail Kasyanov says Mr. Putin will protect investors and establish clear, enforceable rules. /// KASYANOV ACT /// Mr. Putin's view on a transparent, liberal economy is liberal to the extent that the state is very strong, but does not interfere with business relations. But it does establish clear rules. That is what consolidates the society. That is what the Russian population, I think, would like to see: a strong state, establishing clear rules and protecting investors and property. /// END ACT /// Cliff Gaddy, an American academic, says what Russia has is a virtual economy. He uses that term in part because so much of the economy is based on barter, but also because concepts such as prices, sales, wages, taxes, and budgets often have no meaning in Russia. Mr. Gaddy believes by establishing firm rules, seeking foreign investment, and reviving old industries, Mr. Putin will achieve short-term economic success. /// GADDY ACT /// I think, in short, we can expect a couple years - perhaps several years - of Putin's miracle. It will bring social stability and growth. The debt deals and the breathing space will help a lot. Is this reform? Yes, and no. It's not market reform. But it is reform of the virtual economy. Will it produce results? Yes, it will have real positive results in the short-term. /// END ACT /// Last year, for the first time since the collapse of communism, Russia registered significant economic growth. A senior Putin adviser, German Gref, says he expects the Russian economy to grow at a four to six percent rate over the next few years. He says Mr. Putin is developing a four-year economic plan and that it will be made public by May. (signed) NEB/BDW/JO 23-Mar-2000 18:54 PM EDT (23-Mar-2000 2354 UTC) NNNN Source: Voice of America .