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Taking Russia Seriously
Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF. Kenneth Rogoff has had a number of articles on Webdiary, via Project Syndicate. The last one was Wall-to-wall Wal-Mart?.
by Kenneth Rogoff
Poor oil-rich Russia. It is trying so hard to have its turn as chair of the elite Group of Eight countries taken seriously. President Vladimir Putin, perhaps hoping to elevate the presidential summit talks in St. Petersburg in July, has laid out an ambitious agenda. He plans to lead his colleagues in erudite conversations about education, infectious diseases, and – to make sure that no one dozes off – “energy security.”
And what has Putin gotten for his efforts? Not much. The Bush administration, led by Vice President Dick Cheney (but with his boss’s explicit approval), recently accused Russia of backsliding into its old “evil empire” ways. Putin shot back, portraying the United States as “Comrade Wolf,” ready to pounce on any nation that leaves itself vulnerable. Suspense seems to be building around how Bush and Putin will greet each other when they meet in St. Petersburg.
Europeans, for their part, are still hysterical about getting caught up in the Russia-Ukraine gas dispute that left their pipelines dry for a few days at the beginning of this year. They see discussing “energy security” with Russia as akin to chatting about water safety with Comrade Crocodile.
Of course, people who really want to be unkind will point out the absurdity of Russia’s membership in a club that includes the giant economies of US, Germany, Japan, England, France, Italy, and (less so) Canada. Why wasn’t Chinese president Hu Jintao, whose country’s economy is the world’s second largest (when measured at world prices), given a seat at the table instead of Putin? After all, even with all its energy resources, and even with today’s sky-high oil and gas prices, Russia’s national income is only about the size of Greater Los Angeles.
Perhaps what Putin needs to do is stop suffering all the criticisms and go on the offensive. He could start by pointing out to his smugly democratic counterparts that he is probably more popular in Russia today than any of them are in their own countries. He might actually win a fair election tomorrow (not that he would ever risk finding out). Few of the others could make the same claim with a straight face.
Of course, Putin’s success over the past few years in killing off any semblance of a free press – and when an ex-KGB man “kills off” a free press, it is not just a figure of speech – has helped mute open opposition. Even so, Putin does seem genuinely popular among a public longing for a leader who can anchor their country without sinking it.
Putin might also argue that Russia’s fiscal position is far stronger that of the other G8 members. Yes, it helps that Siberia turned out to be a giant oil well, with the government sucking up much of the money. Venezuelan President Hugo Chavez is balancing his country’s books, too, for now.
But, to be fair, oil is not the whole story. Most economists advocate rich countries’ replacing their complex and antiquated tax codes with a simple low flat tax, and they bemoan the fact that so few countries have tried it. Putin, however, implemented such a policy a few years ago, and the results have been nothing short of miraculous.
Of course, the other G8 leaders might be less enamored of some of Russia’s other approaches to addressing budget problems. Most G8 countries seem incapable of achieving the political consensus required to take necessary steps such as raising the retirement age or significantly cutting the indexation of benefits to inflation. Russia, by contrast, has essentially abandoned its pensioners by inflating away the value of their incomes.
Indeed, many of the elderly in rural Russia are forced to sustain themselves by growing potatoes on the tiny plots of land that the government allows them to till. That is, assuming they survive at all: since the fall of the Berlin Wall, Russian male life expectancy has plummeted from 65 years to around 55 years. There is growing evidence that the stress of transition is the leading cause of death, even above big killers in postcommunist Russia such as alcohol, murder, and AIDS. Should Putin tell his colleagues that they, too, could balance their countries’ intergenerational accounts by starving the elderly?
So perhaps Putin had better not try to push his country’s accomplishments too far. Maybe the best plan is simply to let the vodka flow and hope for a round of smiles in the photo ops. In any case, when Putin tells his guests how they can pay Russia more to improve their own “energy security,” he may finally get the respect that he craves.
Copyright: Project Syndicate, 2006.
www.project-syndicate.org
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Apples to oranges
While comparisons of Russia's flat tax with developed Western income systems may suit various ideological bows there is little of substance to be gained, apart from point scorning with the intellectual equivalent of nerf arrows. Russia moved to its flat tax because it made sense in a flat-lining economy riddled with corruption, capital flight and a two currency cash economy. Compliance was so bad, and the state so weak, that a flat tax of very little was all could be extracted. There was more compliance, and as other parts of the state staged a recovery this has grown.
But we are talking about a country where the average wage has just reached US$300 a month, and most are lucky to see much more than $200. A small percentage earns sums comparable to the poorest sections of the Western middle class (say 5,000 a month) and there is a tiny group of super millionaires. The black economy is huge; I've seen estimates higher than 40%, though the degree to which energy sales by state owned companies now contribute to economy and budget mean this may be an understatement of how important it is to ordinary Russians.
Despite various right wing wet dreams this state of affairs is not comparable to Australia, where the state, while more politically corrupted than it used to be, is still a modern effective mechanism capable of basing itself on taxation. It can enforce laws and there is a culture of compliance among ordinary people. While arguments for simplifying the tax system in Australia that can be made on grounds of equity and efficiency the success(?) of Russia is not a good place to look. Overall flat tax systems are usually responses to social, political and economic failure, or a sign of moral degeneracy where the rich have grabbed even more than they usually do. Russia is an example of 1, Hong Kong of 2.
G8,g stands for guns
Just back to the article if I may, here is something interesting that may explain why this is the A Team:
".... According to SIPRI, the first five positions of the list of world’s largest exporters of arms (with up to 81 percent of deliveries) are distributed between: Russia ($26.9 billion), the USA ($25.9 billion), France ($6.3 billion), Germany ($4.8 billion) and Great Britain ($4.4 billion). The research shows that Russia has considerably increased the sales of its weaponry abroad and even managed to leave the USA behind (the USA was taking the leading position in the field before 2000). The gross arms sales profit of the USA reached $53.4 billion dollars at the end of the 90s, whereas Russia could boast of only $16.4 billion. SIPRI’s statistics is based on a special method of calculation. The rating was made on the ‘military value’ of the delivered arms, but not on their actual cost. An expert with SIPRI said that the estimates of the institute based on the number of delivered planes, tanks, missile systems, etc, did not reflect exporters’ financial results. The Swedish experts have not used the cost of the delivered arms because it is very hard to receive the comparable data on account of different national calculation systems. Russian weapons are usually cheaper than their Western analogues. Therefore, the financial outcome of a deal is a lot lower than the ‘military value’ of the sold military items. For example, in 2002 Russia sold about 60 Su aircraft and 25 MiG planes. SIPRI proceeded from the cost of each Su-30 plane equating it with the price of the US-made F-15 ($50 million), although the real price of a Russian pursuit plane can be under $35 million. ......"
http://english.pravda.ru/russia/economics/29-05-2006/81158-arms-0
USA, Russia, Germany, France, Britain... perhaps that is more the criteria for the G8 - G stands for guns.
Australia way behind on tax reform.
"The success of Russia's flat tax shouldn't surprise anyone. Hong Kong has had a flat tax for a long time, and it's been the world's fastest-growing economy over some 50 years. Indeed, there are growing signs that China may implement a flat tax in the near future. Talk about a man-bites-dog story! One of the few remaining communist nations may get a flat tax before America. At this rate, the United States may wind up in the same category as France, Cuba and North Korea." Here.
What Most Economists Know
Russia has ICBMs, perhaps?
Roger Fedyk: "Perhaps, the best interpretation to be out on Russia's G8 membership is twofold. Firstly, Russians are Caucasians and that is an asset for at least six other member states."
The Japanese used once to be honorary Aryans, I suppose.
That They Do!
C Parsons, yes Russia has a nuclear arsenal and little incentive to point it at Europe or the US.
China, on the other hand, is a logical target, something the Americans can leverage.
Reverse mortgages
Angela Ryan, re: “Did you know there is now a policy to encourage retirees to dig into their assets/borrow against their equity? I know this from a bank employee.” I assume you’re referring to reverse mortgages. From the Infochoice website.
A number of lenders now offer "reverse mortgage" loans for retired people who own their own home but have little cash to live on. They are termed "reverse mortgages" because instead of borrowing money to buy a home, borrowers are using the home that they already own to secure borrowing to spend elsewhere.
This style of loan allows the 'cash poor, asset rich' to create a cash flow out of the equity built up in their home, without having to sell it. The beauty of the arrangement is that you can generate money to live on and still remain in your house.
No repayments are required during the loan term with the total interest, fees and charges being taken out of the estate on the borrower's death or sale of the home when they decide to move.
Being able to tap into the equity in your home allows you to purchase goods you may have had to do without through lack of funds. For example, a new car, holiday or even to pay for house repairs. This is especially beneficial if you do not have many assets outside the family home to draw on to pay for these. However, there are plenty of issues to consider before you decide to sign up.
Another view from the SMH:
Victoria's Minister for Consumer Affairs, Marsha Thomson, says a reverse mortgage may be appropriate for asset-rich but cash-poor retirees. "I can see some real benefits," Thomson told Money. "But you have to look at how these things are taken to the market."
Angela, I am also a “bank employee” and I can assure you there is nothing suss about reverse mortgages. They are just another product in the market, aimed at meeting customer needs.
Hi Gareth ,interesting,salve my conscience with economic ration
Hi Gareth, I would love a system that increases the threshold (ie lessens burden upon low income and encourages movement into fulltime work and off black money), increases GST (while calculating a possible pension increase to cover the increase there, but with their buying power it should be less than others) and a flat tax with say a health card benefit for the lower end and a flat medicare levy. Is Russia really 13%? Amazing.
As the Federal Government is ditting on such a high excess and the states are struggling with the high bills for the basics like education and health, to increase money to the states via inc GST and lower general income tax (leave company tax, despite dear Morgan's demands) would benefit all, especially moi. I just have to admit a huge personal selfishness in this issue, so please find some altruistic good economical sense justification for such. Then I can support giving myself an effective/income pay rise as directors are so happy to all the time.
I think it would remove the incentive for offshore tax schemes,which by every standard should be hunted and stop dear people like Mr Packer, RIP/RII, from boasting that they haven't paid tax, or whatever he is famous for claiming. Dearest big-end-of-town may be more interested in paying 13% to pay for the essentials of Australian life rather than such as commission to tax wiz-kids to nest it else where.
As to retirees, if they dig into their capital especially to pay interest or repayments on a mortgage for lifestyle, their income falls as does their chance to cope with economic hardship, when there is no hope ever of salary anymore. More into harship and more onto pensions and the public purse financially and medically and residentially. In that dark world there is no room already. The government should take notice now.
Russia flat tax and Australia
Re “Most economists advocate rich countries’ replacing their complex and antiquated tax codes with a simple low flat tax, and they bemoan the fact that so few countries have tried it. Putin, however, implemented such a policy a few years ago, and the results have been nothing short of miraculous.”
The more I read about Russia’s (and others like Hong Kong) flat tax, the more I think elements of it would benefit Australia. The Russian system includes flat rates of 13% for income tax (there is a tax free threshold), 24% for company tax and an 18% GST (10% on some items).
My own preference would include expanding GST to all goods & services and then increasing the rate by a few points. Only one income tax bracket (i.e. a flat tax), not sure what rate, and finally a significant increase in the tax free threshold. Any issues relating to income distribution would be managed by balancing the flat rate against the tax free threshold (i.e. if low income earners suffer, increase rate and threshold until an acceptable/reasonable balance is restored). Ideally the company tax rate would be the same as the personal income tax rate.
Here’s a selection of commentary on Russia’s flat tax.
The Economist
Russia's experience, however, suggests that the principal virtue of the flat tax is its simplicity. The government's revenues did not surge because Russians suddenly squared their shoulders and straightened their backs. Rather, Russia's tax system became easier to administer and easier to comply with.”
Australian Treasury
"After winning the Presidential election in 2000, Russian President Vladimir Putin introduced wide ranging tax reforms, which included the introduction of a flat personal income tax rate of 13 per cent in 2001. The objectives were generally to make the tax system fairer, simpler, more stable, more predictable and more efficient. Prior to the reforms, tax evasion was widespread, particularly amongst high income earners, and hence improvements in compliance were a critical element of the reform."
"The single 13 per cent rate replaced a progressive schedule with rates of 12, 20 and 30 per cent, various exemptions from tax were eliminated, social security contribution rates were reduced, and the maximum tax free threshold was increased. Subsequently, personal income tax revenue increased, which led to suggestions that the lower rate had resulted in increased revenue. However, it has been estimated that the average effective tax rate (inclusive of social security contributions) only fell by 2.5 per cent; from 34.6 per cent down to 32.1 per cent, and hence the average tax cut was quite modest. An alternative view is that the growth in personal income tax revenue was largely driven by increases in real wages, which were unrelated to the tax reforms."
"Employers currently pay social security contributions on payments made to their employees at marginal rates of between 26 per cent and 2 per cent (lower marginal rates apply at higher levels of payment). Russia’s VAT rate is generally 18 per cent."
"Personal income tax makes up around 9.6 per cent of total tax revenue, being exceeded by the share of social security contributions at 15.9 per cent and VAT at 15.4 per cent. Customs tariffs amount to 20.1 per cent of total tax revenue, and resource extraction tax amounts to 10.5 per cent of total tax revenue.”
Dr Daniel Mitchell, Heritage Foundation
“The Russian flat tax has been so successful that even American politicians might learn the right lessons. Let’s look at the evidence: Russia’s economy has expanded by about 10 percent since it adopted a flat tax.” “It also appears, conventional wisdom aside, that a low tax rate doesn’t mean less money for government. Over the last two years, inflation-adjusted income tax revenue in Russia has grown 50 percent. Why? Because people are willing to produce more and pay their taxes when the system if fair and tax rates are low -- exactly what Ronald Reagan predicted when he triggered America’s economic boom with lower tax rates 20 years ago.”
Tax-free threshold
Gareth Eastwood writes, "My own preference would include expanding GST to all goods & services and then increasing the rate by a few points. Only one income tax bracket (ie. a flat tax), not sure what rate, and finally a significant increase in the tax free threshold. Any issues relating to income distribution would be managed by balancing the flat rate against the tax free threshold (ie. if low income earners suffer, increase rate and threshold until an acceptable/reasonable balance is restored). Ideally the company tax rate would be the same as the personal income tax rate."
I don't know about going to a totally flat tax, but I certainly agree that "flattening" the bracket progression would be an advance as it would lessen the inherent penalty imposed by bracket creep.
I completely agree about raising the tax-free threshold. This would give a tax break to everyone, but especially low-income earners. If the government is serious about getting people off welfare and into the workforce, bringing up the threshold is one mechanism they should consider. I know some economists have been talking about it.
There are other impediments to joining the workforce they need to address as well, like shortage of child-care and after-school care places.
Want a future in Australia? try the Putin methods of economy
Does anyone know where the life expectancy data is quoted from? It seems to be the same as the WHO predicted healthy life expectancy for 1995-97.
"Press Release WHO Released in Washington, D.C. and Geneva, Switzerland 4 June 2000. WHO Issues New Healthy Life Expectancy Rankings"
But the 2005 numbers are a little brigther which is nice for Russia, so somthing must be working. Males being 60.55 and females being 74.04 yrs life expectancy at birth in 2005.
Interestingly the male infant mortality is comparitively high, nearly 3 times that of Italy. I have no access to age deaths from violence but would expect that to also be higher for Russia, especially as Chechyna is included in the stats. Lucky Afghanistan isn't as that country has abysmal stats despite liberation from the Taliban for 5 years.
So one must consider that, with such an apparent improvement in stats in such a short time under Putin, that something is being done right. If the alcohol and tabacco issues can be improved this may improve both ends of the stats.
Reading the statistics in a regional sense, one is appalled by the surrounding poor life expectancy of our neighbours. And before we get too upitty about our wonderful stats (Australia performs brilliantly overall in all stats including Literacy) we shoud remember the black hole of shame in our society - our appalling indigneous statistics - are well below Russia's and we haven't the excuse of being through the crises they have.
Mr Rogoff also questions Russia's standing internationally form an economic point of view. No doubt the economists here at Webdiary can further discuss this with their learned abilities, but me I look at the full picture of a country just as I would at a company or home domestic economy. Certainly in GDP Italy is ahead but considering account balance, foreign reserves, growth rate, industrial production, importing of machinery and energy sources one might wonder at Italy especially if tourism bottoms. The recent merger of Severtal steel with Acular (the Euporean) beating the well backed ,ouch, Mittal bid may further Russian industrial growth and links with Putin at the helm a bit longer. There were plenty of sour grapes when Putin exploded the happy little Oligarch world and they scattered. It has been hard for Russia since but in the long run, unlike us, they will be owned by Russian firsters. We will be owned - food production, resources, services, banking, media, health and higher education, by overseas to control at will, crash or buy out or lay off at will for THEIR bottom dollar. Which policies would you prefer? The Bethlehem Steel model or the Severtal Steel model. Sack and cash out or build up the hard way and then grow.
Simplified, but I am just a simple observer of what really happens out there and to our country soon. We can sell out in the name of economic rationalism, but don't then be surprised when we are "rationalised." The privatiseation of public assets is one of the main methods used by oligarch and such backed institutions to pillage. It is lucky we have the slight safety net of our superfunds and a relatively aware population. Did you know there is now a policy to encounrage retirees to dig into their assets/borrow against their equity? I know this from a bank employee. This, I suspect is because with wages falling in the near future and house equity already down, the borrowings of workers will rapidly hit the wall and spending will drop even further than already. It is time we had more regulation in the banking and lending and much more aggressive oversight by (an industry independent) ACCC, who is happy to catch windmills but not oil companies no big fliers (although Citibank was impressive).
We can tsk tsk about Russia, but in perspective they have done very well coming out of a revolution and being pillaged by unscrupuoous western backed oligarchs, now strong leadership and with that growth and secure energy. Italy would be jealous. Maybe Italy 's time in the G8 is over. Maybe the G8, if the US crashes, has a shortening lifespan, let us hope not. Check out some of the stats, they are fascinating for those who are interested in debt/servic ratios, reserves, and who the US hopes won't be selling greenbacks suddenly. The Shanghai economic co-op would become a greater consideration if agressive policies continue to strenghten it. Maybe we need a Australian Putin in the economic sense (we already have one in the political/liberties sense) for a more secure future.
The Russian Counter-Balance
Perhaps, the best interpretation to be out on Russia's G8 membership is twofold. Firstly, Russians are Caucasians and that is an asset for at least six other member states.
Second, the biggest battles, financial and otherwise, to be played out in the next 50 years will be between China and the US. The US will find itself in need of Russian support because the Russians share a border with China and therefore can be a useful proxy.