Democracy Lab

Why Putinomics Isn't Worth Emulating

Don't let the Russian economy fool you: It's still all about oil.

Vladimir Putin's claim to political legitimacy is closed tied to his record as the strongman who brought economic order and a modicum of prosperity out of the chaos of post-Soviet, post-Yeltsin Russia. And, as he once again seeks the presidency -- this time facing unexpectedly vigorous opposition -- he'll surely be playing the economic stability card whenever possible. But this time around, it's hard to make the case that his election is key to keeping Russia on a growth track. Far from it: Putin's brand of top-down rule undermines the prospects of building a productive, diversified economy.

To see why, consider the economy's roller-coaster ride over the past two decades. In its last years, the economy of the Soviet Union was a bizarre mélange of First and Third World: a military superpower, with a scientific elite to match, that sucked anything of real value from a backward industrial economy bedeviled by corruption and inefficiency. The trouble is that the economy of today's Russian Federation still more or less fits that description.

To be fair, some things have changed since the USSR was consigned to the dustbin of history. In big cities, shops are full of consumer goods that no longer look like props from Terry Gilliam's black comedy, Brazil. Government pensions get paid in a currency that actually buys something. And Moscow's streets are so clogged with private cars that the city now struggles with worse traffic than London. But the economy is still largely a Potemkin façade that depends on the sale of raw materials and weapons to keep the lights on.

Even hindsight doesn't offer much enlightenment into how the economic collapse that paralleled the Soviet Union's political collapse might have been avoided. GDP fell by more than one-third in the 1990s, as the crumbling planned economy self-destructed. Output only recovered to the 1990 level in 2004. Meanwhile, much of the country's vast natural resource wealth was sold for a song to a new class of political connected oligarchs.

The hopelessly inefficient industrial base has been partly scrapped, partly refurbished with the aid of foreign technology and management practices. And the cowboy capitalism of the transition decade gave way after the 1998 financial meltdown to a more predictable sort of monopoly-dominated crony capitalism in Putin's Russia. Growth averaged seven percent annually between 1999 and 2008. Taxes are now collected, and a modest level of public services is delivered in return.

But the key to the Russian economy's success in the last decade was the global commodity boom. As the world's largest producer of crude oil and the second largest producer of natural gas, Russia has benefitted mightily from the run-up in fossil fuel prices. Indeed, thanks to booming oil revenues, Moscow was able to muster a $200 billion bailout for its banks after the economy was slammed by the global recession in 2008.

If you don't look too closely, the economy now seems in pretty good shape. Per capita income, in terms of purchasing power, is approaching $20,000 - small potatoes compared to the United States ($47,000) or Germany ($37,000), but not far from, say, Portugal ($26,000), and probably double the output bequeathed by the Soviets. The government's fiscal house is in order. In fact, unlike virtually any other economy you can name, the budget is in surplus, and the government's financial assets actually exceed its debts. Elite education in the sciences, one of the few genuine achievements of the USSR, is still good. And one can see some payoff in the emergence of a world-class software industry.

But the view is decidedly less tidy from close up. For starters, there's the not-so-small matter of inequality. The economist's favorite yardstick of household income inequality, the GINI index, is middling by comparison with other countries in Russia's income range. But the impact of poverty is all too visible in health statistics. Life expectancy is eight years less than in China and barely above that of Papua New Guinea. Infant mortality is triple that of Spain. Arguably the most telling statistic: the total fertility rate (the number of children the average woman will have in a lifetime) is 1.4 -- a shockingly low rate that reflects, at the very least, housing scarcity and, more likely, deep pessimism about the future.

Well, at least the macroeconomic fundamentals are in decent shape, right? Yes and no. As noted above, the government budget is in surplus - but only because of copious oil and gas revenues. Without energy royalties, Moscow would be running a deficit equal to 10-11 percent of GDP!

Consider, too, that while the economy would be damned without the energy revenues, it is damned with them as well. The behemoth industrial complexes that stood as cathedrals to Stalinist faith are mostly shuttered. Yet Russia's productivity problems linger: little that Russia makes is competitive outside domestic markets.

Now, economists happily explain that international competitiveness is largely a function of exchange rates: If rubles were cheap enough to buy with dollars or euros, the cost of production at Russian factories would be sufficiently low to make Russian products competitive in global markets.

That's where the oil exports become a liability. Hefty earnings from foreign sales prevent the ruble from depreciating to the point that, say, Russian cars and farm machinery could compete with similar products made in Korea and the United States. As a result, roughly four-fifths of the country's export revenues derive from oil, gas and other natural resources. Much of the rest comes from weapons sales produced in government-owned factories at only-Putin-knows-what cost.

Actually, Russian oil exports are doubly cursed. The only time the post-Soviet Kremlin has felt compelled to listen to calls for growth-enhancing economic liberalization has been when the government needs foreign loans to contain inflation and keep the financial system afloat. So oil exports at high prices effectively insulate Putin from pressure to deregulate markets at the expense of his plutocratic allies and vast bureaucratic patronage machine.

Other economies (think India) have recovered from the hangover of central planning and long isolation from global markets. But Russia's economic malaise runs very deep.

Corruption is notorious. Transparency International ranks Russia 154th out of 176 countries on its Corruption Perceptions Index - behind Yemen and the Central African Republic. And a bureaucracy that still takes its inspiration from Leonid Brezhnev makes it exceptionally difficult for those lacking political juice to make and sell goods. Russia rates 120th on the World Bank's Ease of Doing Business Index. No wonder: on average, it takes 281 days to get an electricity hookup and 423 days to get a construction permit.

Some foreign investors have braved the hostile business climate. But most have been speculators hoping to get in and out before the next stock market bubble bursts, and such "hot money" only exacerbates economic instability. Most of the rest are multinational corporations investing in oil and hard minerals; they are only willing to take enormous business risks in return for the possibility of enormous profits. The sorts of investors Russia needs most -- long-term investors in manufacturing and services who bring advanced process technology along with management and marketing skills -- are far more likely end up in China or Brazil.

Home-grown enterprise that might help to fill the gap is sadly lacking. Perhaps that's a reaction to the barriers created by official corruption, bad regulation, inefficient capital markets and organized crime. Perhaps it's a consequence of long authoritarian rule that discouraged fresh thinking. Perhaps it's because the most entrepreneurial Russians have emigrated to the United States, Europe and Israel. Probably it's all of the above.

It's not clear how Russia could cleanse itself of the toxic economic legacy left by communist rule and further entrenched by the new plutocracy. What is clear, though, is that Vladimir Putin has been part of the problem to date, and offers no reason to believe he will be part of the solution in the future.

In emerging-market countries ranging from China to Egypt to Malaysia, apologists for autocrats have argued - sometimes plausibly -- that the uncertainty associated with the transition to political pluralism undermines growth. But in Russia, where Putin has apparently tied his fate to the status quo, real democracy just might be what it takes to bring the economy into the new century.



Mexican Standoff

Republicans have a historic chance to win the Hispanic vote. They're shooting themselves in the foot.

For all the talk in recent Republican debates about Israel and Iran, it's a third "I" that will likely have the more significant impact on the 2012 election -- immigration (particularly of the illegal variety). For conservative activists, it is one of the issues that shapes their anger toward President Barack Obama. But whatever you think of the policy, it's the politics that matter -- and immigration is one of the key reasons Obama is likely to once again decisively win the nation's Hispanic vote.

That represents an odd turn of events. Obama's track record on immigration has hardly been a boon for Hispanics. Since taking office, enforcement of immigration laws has significantly ramped up. In all, more than 1.1 million illegal residents have been deported since Obama took office, the highest level of deportations in 60 years. Last year alone, 400,000 illegal immigrants were sent home -- a record high. In fact, Obama is on pace to deport more illegal immigrants in one term than the previous president did in two.

At the same time, the undocumented population has declined dramatically -- from more than 12 million in 2007 to just over 11 million today (and it's not because the U.S. government is suddenly handing over tons of green cards). Each year, roughly 150,000 illegal immigrants enter the country from Mexico -- during the first half of the past decade it was around 500,000 a year. While this drop is largely the result of poor economic prospects in the United States and better economic opportunities in Mexico, increased deportations has certainly done its part. And don't think these developments aren't being felt within the Hispanic community.

According to the Pew Hispanic Center, one in four Hispanics either know someone who has been deported or is in removal proceedings -- and they overwhelmingly disapprove of the president's enforcement policies. So if anything, the Republican opposition to the president's immigration stance shouldn't be that he's been too soft -- but his policies are too harsh and do too little to provide illegal immigrants with a pathway to citizenship. But you're unlikely to hear very much of that message on the campaign trail this year.

While Obama recently raised the issue of immigration reform in his State of the Union address, he has had little success in crafting a legislative path to reform (like many of his first term initiatives, it crashed on the shoals of Republican obstructionism). Rather, the instrumental effect of his policies has been to make life much more difficult for illegal immigrants.

Still, none of this has stopped the remaining Republican candidates from falling over themselves to blast the president's soft stance. Each of them have pledged that if they are elected president, the border will be more secure, enforcement will be stepped up, and citizenship for illegal immigrants will not be part of the equation. The immigration issue has become such a lightning rod in the GOP that it is now practically conventional political wisdom that Texas Gov. Rick Perry's presidential campaign was short-circuited by his defense of in-state tuition rates for illegal immigrants and his charge of "heartlessness" against those opposed to such a policy.

How does one explain this divide between rhetoric and reality? In an important new book, The Tea Party and the Remaking of Republican Conservatism, Harvard political sociologists Theda Skocpol and Vanessa Williamson argue that the anti-immigrant narrative is being driven, in large measure, by the views of the Republican base -- and in particular the Tea Party wing. According to a comprehensive 2010 national poll, illegal immigration is considered a "very serious" issue for an extraordinary 82 percent of Tea Partiers.

Traditionally, concerns about immigration, particularly in times of economic distress, tend to focus on the impact of newcomers "taking jobs" from native-born residents or are oriented around racial animus. While that is certainly a factor in Tea Party attitudes, there may be other symbolic and moral factors at work. According to Skocpol and Williamson (who interviewed countless members of the Tea Party), the major concern over immigration was related less to jobs and more to the issue of fairness, particularly "the costly use of government funds and services by illegal immigrants. Tea Party members base their moral condemnation on the fact that these are ‘lawbreakers' who crossed the border without permission and thus are using American resources unfairly."

"In large immigration states versus small immigration states, the attitude was the same among Tea Partiers," said Skocpol when I spoke to her last week. This is reflected in recent tough anti-immigration measures that have been pushed by Republicans in states on the frontlines of illegal immigration, like Arizona -- as well as in places where the issue is less pressing, like South Carolina and Alabama. Even in Massachusetts, says Skocpol, the immigration issue was a top concern among the Tea Partiers -- even though the state doesn't have a serious illegal-immigrant problem.

The fear of illegal immigration, it turns out, has less to do with proximity than resource allocation. Interviewees, said Skocpol, became particularly "emotional" when they were talking about illegal immigrants using government services that "hard-working Americans" have to pay for. Many were convinced that illegal immigrants were benefiting directly from the Affordable Care Act, a.k.a. Obamacare (something that isn't true) or were receiving Social Security benefits (also untrue). In reality, illegal immigrants are actually punished by a system into which they often must pay Social Security taxes and receive nothing in return. The fears, said Skocpol, were particularly acute among older Tea Partiers -- many of whom were convinced that the money going to provide services for hordes of illegal immigrants would mean reduced Medicare benefits.

Now, one might assume that concerns over immigration are also animated by racial animus -- after all, Tea Partiers are overwhelmingly white and the movement, as a whole, tends to demonstrate more racially intolerant views than the rest of the population. But this is perhaps a bit simplistic. Indeed, their fears of immigration are influenced as much by the changing nature of American society. Over the last several decades, the populace as a whole has become far more "colorful" than any point in American history. By one estimate racial and ethnic minorities accounted for a stunning 83 percent of U.S. population growth in the 2000s. Not only are Hispanics the fastest growing population group in the United States; by 2050, an estimated 30 percent of the population will be of Hispanic origin.

While demographic change is not new, it's the nature of that change today that is so different. The United States is well on its way to being a "minority-majority" population. Illegal immigration then isn't so much problem in of itself as a synecdoche for larger changes in American society, and ones viewed with not just discomfort but horror. You have, says Skocpol, a great many Americans who "believe that their country is being taken away" and illegal immigration is simply indicative of this transformation.

Not surprisingly, much of this anxiety is further perpetuated by the presence of a black, cosmopolitan man with a foreign father and strange sounding name sitting in the Oval Office. For many Tea Partiers, says Skocpol, he is the epitome of everything they mistrust about what is happening in America today -- prima facie evidence of the social and cultural changes that concern them most. (This also explains why GOP presidential candidate Mitt Romney tends to contrast Obama's pledge to "transform" the country with his own pledge to "restore" it.)

What is perhaps most fascinating about these sentiments is that they bear striking similarity to the white backlash of the late 1960s. Then, there was a rising belief among many working-class Americans that they were being squeezed by liberal social engineers who were using their taxpayer dollars to dole out welfare benefits to poor blacks in America's inner cities. Back then, the resentment bred by such perceptions shifted the very trajectory of American politics. It provided Republicans with a boost to their anti-government, conservative, populist message -- which resonated so deeply with white working-class voters. It's a message that still colors the country's political debates today.

Today's illegal immigrant backlash may likewise reshape politics -- but in a way uniquely destructive to Republicans. The Tea Party's passion on illegal immigration is not shared by the wider electorate -- the vast majority of which is indifferent to the issue. What's more, as Republicans channel the Tea Party position on immigration, the more they risk alienating Hispanic voters, the fastest growing demographic group in the United States.

A whopping 67 percent of Hispanics identify with or lean toward the Democratic Party; a mere 20 percent self-identify as Republicans. In 2008, Obama won two-thirds of the Hispanic vote. Even with his administration's strong focus on enforcement, there is so far little reason to doubt that he won't repeat that accomplishment this November. In the past few months, however, the Obama administration has moderated its position on deportation, surely with an eye on 2012. And by even raising the possibility of a path to citizenship for illegal immigrants, Obama makes good with the larger Hispanic community, which considers this a top priority.

Ironically, it wasn't long ago that Republican elites were singing a very different tune on this issue. In the 2000s, there was a significant effort by President George W. Bush -- and his political guru, Karl Rove -- to broaden the appeal of the Republican Party and bring Hispanics into the GOP fold. In 2004, the GOP netted just over 40 percent of the Hispanic vote. They were rewarded with a comprehensive immigration reform measure proposed by Bush would have created a path to political citizenship for illegal immigrants. But conservatives killed that legislation in 2007; since then, reform has been dead in Washington.

As Angela Kelley, the vice president for immigration policy and advocacy at the Center for American Progress, said to me, at one point 23 Republican Senators voted in favor of Bush's proposed legislation "Today, it's hard to imagine 23 Republican officeholders total that would support such a bill." Mitt Romney has used the immigration issue as a cudgel by which to attack both Perry and now former Speaker of the House Newt Gingrich, who has floated the idea of allowing illegal residents who have lived in the country for 25 years to stay -- pending approval of their local community.

In Thursday's GOP debate, Romney defended his tough views on immigration and blasted Gingrich's efforts to label him as anti-immigrant. But Romney's defense was primarily focused on his support for legal immigration. When it comes to those crossing the border illegally, Romney's position remains one of enforcement-only. Throughout the presidential campaign, he has run to the right of the GOP field: decrying the possibility of amnesty and services that benefit illegal immigrants; calling for a veto of the Dream Act, a measure that would provide citizenship to illegal immigrants who have served in the military or attend college; spoken of a "high-tech fence" along the Mexican border; and now has floated unusual the proposal that illegal immigrants should "self-deport."

While such positions might appeal to some GOP voters, they won't do much to attract Hispanics. And in an effort to appeal to voters who are already likely to cast their ballot for the GOP, the Republican candidates are alienating a segment of the electorate that represents a crucial voting bloc come November in a host of battleground states-- New Mexico, Colorado, Florida, Arizona, and Nevada -- and even states where the Hispanic share of the population is smaller, like Pennsylvania and Virginia. And, as of yet, there is little evidence that the stern GOP position on immigration will sway many independents or Democratic voters to cross the aisle.

The irony of all this is that Obama should be having serious problems with Hispanic voters. His support for the Dream Act and comprehensive immigration reform might sound good, but the record increase in deportations speaks volumes. But, as Kelley says, the Republicans have "made it damn easy" for Obama to hold on to the Hispanic vote. The problem for Republicans is that their base is making it virtually impossible to take political advantage of this situation. So, in the end, the Hispanic vote could end up being decisive for Democrats -- but it might have more to do with the fact that they are seen as the lesser of two evils.

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