"Despite predictions of doom, the devaluation of the Russian ruble and favorable conditions on the world market have stimulated Russian production. These are temporary phenomena, however, and the immense challenges of recovery, transition, and development remain. We, Russian and American economists, agree with Russia’s new President, Vladimir Putin, that the state must be strengthened in order to play a more active role in the economy. We would also emphasize that not only the quality of Russian life but also the prospects for economic recovery and growth depend on ensuring civil liberties, a free press, and a democratic system of government.

Economic reforms in Russia need a fresh start to create a more favorable environment both for entrepreneurs and employed labor, as well as for consolidating society and unleashing its energy. That is why we wish to propose a five-point economic reform agenda for the consideration of President Putin, the Russian government, the Federation Council, the State Duma, and the Central Bank:

1. Institutional Infrastructure.

The government has a responsibility to eliminate deep distortions in the market mechanism and to establish and maintain the institutional infrastructure of a genuine market economy. It is imperative that the federal government, along with local governments in the 89 regions of Russia, rationalize property rights, reorienting large- and medium-size enterprises from asset stripping to net worth maximization, and introduce modern systems of accounting, finance, insurance, and other needed market functions. It should create conditions for banks that serve the role of channeling savings into investment and oversee private financial institutions in conjunction with the central bank.

Doing away with the overdue mutual debts of all economic agents (including the government) is also of utmost importance for the proper functioning of the market mechanism.

2. Fight against Crime.

Criminals have filled the institutional vacuum with corrupt officials and Mafia control. As President Putin has emphasized, the rule of law must be solidified in order to increase allegiance to standards of ethical behavior and to provide a stable business climate that would stimulate investment and production. Extortion and bribery should be rigorously prosecuted, irrespective of the position or political views of the officials involved.

Penalties for extortion and bribery should be severe, and government policies should be tailored to mitigate economic causes of corruption, such as extremely low pay for public officials, a tremendous increase in transaction costs, and a Byzantine tax system, which deprives the production sphere of the stimuli for growth. It is urgent to upgrade the ability of the Russian government to fashion and implement economic policy. Measures should be taken to ensure proper standards of recruitment of government officials, as well to insulate government hiring and promotion from politics.

3. Growth-oriented Policy.

Growth of production and investment should be the primary goal of the government, rather than bringing inflation to near zero levels. Overly zealous monetary and fiscal restrictions are counterproductive. Concerted action should be taken against illegal capital flight. Within economically justified limits, the government should bolster purchasing power through payment of increased pensions and restoration of a portion of the savings that were lost as a result of sustained inflation and the financial collapse of 1998. It should pay more attention to rebuilding social overhead capital.

A substantial program to upgrade roads and other physical infrastructure would boost demand for Russian goods while enhancing the private sector’s competitive potential. Cleaning balance sheets of mutual overdue debts would greatly improve the financial position of the real sector. To increase investment in new facilities and technologies the government must help develop mortgages and create conditions for industrial firms to pursue the policy of accelerated depreciation. Judicious subsidizing of interest payments to help finance private investment would also increase the rate of growth.

4. Restructuring and Competition.

It is important not to interfere unduly with market discipline. Economic policy should encourage the growth of new competing enterprises, including those with local government participation and joint ventures drawing on foreign capital. However, government leadership is needed for Russia to realize its potential in the information economy, biotechnology, and some other high-tech spheres due to its scientists, research institutes, and some productive capacities. This implies careful elaboration and firm implementation of a realistic industrial policy. Until steady growth resumes, selected temporary import tariffs conditional on industrial performance could be introduced.

The government has to regulate the prices of basic commodities supplied under monopolistic conditions and ensure that regulated prices are market clearing. It is important prior to conducting privatization auctions to restructure enterprises and overhaul their finances. Privatizations that have been carried out in violation of the law should be reconsidered.

5. Social Contract.

Only the government can ensure that the benefits of the new economic order are shared. It is vital to improve the moral climate and to fortify respect for democracy and social justice. Among the expected steps in this direction could be implementation of a law on minimum subsistence, providing low-income households with necessary guarantees (including housing rent subsidies), while at the same time imposing substantial real estate taxes on personal residencies with high market value. Pensions for the elderly are meager and must not be allowed to lag behind inflation. Health care, education, and public services should be allocated more resources. In order to reduce income differentiation and mitigate social tension, a well-enforced system of progressive taxation is needed. High taxes on extractive industries would ensure that the Russian people are the main beneficiaries of the export of natural resources.

Leonid I. Abalkin

Gyorgy A. Arbatov

Oleg T. Bogomolov

Victor V. Ivanter

Dmitri S. Lvov

Valery L. Makarov

Alexandr D. Nekipelov

Nikolai Ja. Petrakov

Natalia M. Rimashevskaya

Stepan A. Sytarian

Irma Adelman

Marshall I. Goldman

Michael D. Intriligator

Lawrence R. Klein

Franco Modigliani

Douglass North

Marshall Pomer

Lance Taylor