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... an independent central bank which is not a puppet of the government and aims to maintain a stable monetary supply (as opposed to supporting state industry) as its primary goal. This action would free up many billions of dollars by giving Russians confidence in the ruble. It would also force the government to pay for state industries through taxation, not inflation. In the immediate short run, the government would be force to cut loose thousands of state enterprises which is why this policy is so difficult to implement, but in the long run Russia would benefit enormously from the increased investment. Lenin correctly pointed out that the best way to destroy the capitalist system was to debauch the currency -- and wise versa, the best way to inspire confidence in capitalism is to establish a sound and secure currency.
One way of making the ruble convertible is to make the dollarization of the currency official by creating a currency board to establish a fixed rate of conversion between rubles and dollars. 5 This board must be limited to maintaining the exchange rate it set, so it would be unable to support state firms by inflationary policy, since that would drain its reserve of dollars. Such a board would greatly reduce the size of the black market and enjoy popular support by following earlier dual currency policies employed both by the left and right, only it would be much more orthodox in its ability to control the monetary supply. 3 Whatever policy Russia employs to stabilize its currency, if it wishes to partake of the advantages of capitalism, it has to somehow let go of inefficient state enterprises which keeps millions of workers idle and sink a large chunk of the economy every years. As many as 40 % of industries in Russia are still unprofitable, a situation that could never be tolerated for long in any capitalist economy. 7 The classic argument that a maintaining a losing enterprise is for the good of the workers ignores the fact that the rest of the nation must pay for the idle workers, something nations all over the world would do well to mind. While critics argue that cutting lose millions of workers will lead to economic depression and a popular revolt, this argument ignores the fact that these industries are not producing anything worthwhile anyway, and that many of the workers already have other jobs to supplement the small and often tardy incomes they receive from the state. In addition to cutting lose failing industries, the government must stop playing favorites with business.
Both the central and regional government regularly favor certain companies for lower taxation, less regulation and outright subsidies. Oftentimes, the businesses show their appreciation by practically enrolling various bureaucrats on their payrolls. At other times, bureaucrats are owners or stockholders of the industries they regulate, as conflict-of-interest laws are practically non-existent. Additionally, much of the foreign aid that Russia receives is funneled directly to these favored businesses, which then thank the officials who provided the aid.
Obviously, this is not an especially good situation for encouraging the most efficient companies to grow, but the ones with the most pull with the government. This is also a leading cause of corruption in Russia as well as in many other developing countries that receive foreign aid. A similar problem exists with both the central and regional government using economic pressure to bend business to their will. Recently, the last independent television station in Russia was shut down when a minority shareholder (controlled almost entirely by the government) sued it and had the court declare bankruptcy and shut down the network despite the fact that in was one of the few profitable companies among a government controlled industry. 9 Not surprisingly, the station had been critical of the Putin government. Such political favoritism is common and does little to inspire investors confidence in impartial courts, further depressing both domestic and foreign investment. Despite failing to adopt an active program of reform, Russia has shown several promising signs since Putin took power.
Putin has taken actions to consolidate control and establish oversight over the regional provinces, helping him carry out policies that were previously resisted in distant provinces, some of which have remained de facto communist and ignored many of the central governments rulings. Another significant new measure to improve the economy has been a 13 percent flat tax that has helped the economy grow at 5 % last year and boosted tax revenues 28 %. (The new tax rate doesnt guarantee a responsible fiscal or monetary policy however, as Russia has used seignorage rather then taxes as the primary source of income, imposing much greater costs on the citizens in the process. ) A new generation of entrepreneurs is becoming proficient at managing private enterprises and learning the principles of individualism and self sufficiency, as well as pushing for a radical deregulation of the economy. These entrepreneurs have cooperated, with help from the government and western advisors, to establish a stock market and worked together to push for reforms. Nevertheless, Russias economy remains mired in regulation, bad monetary policy, unsound and corrupt banks, and an other vestiges of communism that drag it down.
In conclusion, despite several positive reforms under the Putin administration, Russians needs to take major steps to embrace capitalism if they want to partake in its benefits. The most important reforms are: A radical reduction in federal and local government regulation. Simple, clear, well publicized, standardized, and long term regulations and laws to establish a clear and predictable rule of law. Increased transparency on both the central and local levels, centrally published regulations, standard forms, and well published government statistics would also help in this area. A complete privatization of the banking industry.
This would stop the hidden flow of money to failing industries and increase access to credit for private entrepreneurs. Establishment of an independent central bank and a dollar convertible currency to stop inflation, allow people to invest their dollar savings, and secure confidence in the stability ruble. The IMF and other foreign lenders should exercise much more caution in the policies they promote, by focusing on funding promising private ventures, not corrupt government officials who funnel foreign aid into their own private accounts. Some of these changes will not be easy, especially in the short run, but unless and until Russia bites the bullet and jumps head first into capitalism, it will continue to experience economic instability, corruption, and mass poverty like all other socialist and pseudo-socialist regimes. References 1.
Kurt Schuler and George A. Selling, Cato Policy Analysis No. 348: Replacing Potemkin Capitalism: Russias Need for a Free-Market Financial System. June 7, 1999. 2. The Heritage Foundation: 2002 Index of Economic Freedom Russia. web 3. Steve H.
Hanke, Create a Currency-Board Law for Russia. September 14, 1998. web 4. Central Bank of Russia: web 5. Steve H. Hanke, The Case for a Russian Currency Board System.
October 14, 1998 web 6. Kurt Schuler and Robert Stein, The Mack Dollarization Plan: An Analysis Paper for the Federal Reserve Bank of Dallas conference Dollarization: A Common Currency for the Americas? March 6, 2000 web 7. Clifford G. Gay and Barry W.
Ickes, Russia's Virtual Economy, Brookings Institute, 2002. Excerpt at web 1 /russiasvirtualeconomy. pdf 8. Gary T. Dempsey, Mafia Capitalism or Red Legacy? January 7, 1998 web 9.
Dmitry Pinker, TV 6 saga nears final episode. The Russia Journal web 10. James A. Dorn and Ian Vasquez.
Ending Russia's Chaos, September 9, 1998 web 11. Daniel J. Mitchell, Tax Reform: Russia, 1; United States, 0, March 21, 2002 web 12. Rose Brady, Kapitalizm: Russia's Struggle to Free Its Economy, New Haven, Conn. Yale University Press, 1999. 13.
Martha De Melo, and Gur Ofer, Private Service Firms in a Transitional Economy: Findings of a Survey in St. Petersburg Studies of Economies in Transformation, 1014 - 997 X; Paper No. 11: 1994. 14. William C. Green, "Dollarization: The Greenback Goes Global, " Federal Reserve Bank of Dallas Expand Your Insight, March 1, 2000 web
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Research essay sample on Policy Proposal For Economic Reform In Russia