World's Reformers Pay Putin a Visit

By Catherine Belton
[The Moscow April 12, 2004]

Staff Writer NOVO-OGARYOVO, Moscow Region -- President Vladimir Putin brainstormed with some of the world's leading practitioners of liberal economic reform late into the evening Friday as he steps up his drive to meet his pledge of doubling GDP within 10 years.

Among those gathered round an oval table for nearly four hours of discussion at Putin's tree-surrounded Novo-Ogaryovo residence were economists whose implementation of liberal reforms in their countries fueled the rapid growth Putin has been seeking to achieve here.

Calling on Putin to take more radical action were Jose Pinera, the former labor and social minister of Chile, often dubbed the "Father of Pension Reform" for pioneering private pension reforms that sparked rapid economic growth; and Ruth Richardson, New Zealand's former finance minister whose tough stance on curbing inflation and bureaucracy helped prompt an economic boom.

"To have high economic growth you must make complete free-market economic reform, without halfway measures," Pinera said during the meeting. He said full-fledged private pension reform had been a key element in fueling economic growth to double GDP in Chile and once that had started "then over 20 years you can quadruple GDP."

"If you do that you have created a new country," Pinera told Putin.

Also talking the nuts and bolts of economic change with Putin were Mart Laar, Estonia's former prime minister who helped forge liberal change there, and Grigory Marchenko, Kazakhstan's first deputy prime minister whose efforts to free the economy via administrative and Chile-style pension reform in the late 1990s have helped his country overtake Russia and become the fastest- growing in former Soviet space.

But even though Putin made clear his commitment to pursuing a liberal path of reform, he also underlined his concern about the damage that could be caused by too-rapid moves, especially after the turmoil of the 1990s, participants said.

"The politics of execution can be extremely damaging for the government's political reputation if it does not manage change in a high quality fashion," Richardson told reporters after the meeting, which ended shortly after 11 p.m. The meeting, in a second-floor hall of Putin's columned mansion, was only open to the press for the first hour in which Pinera spoke on pension reform.

Presidential economic adviser Andrei Illarionov brought the eclectic line-up of economists to meet Putin from a two-day conference in Moscow called "A Liberal Agenda for the New Century: A Global Perspective" in which they had all participated. The conference was organized by the Cato Institute in Washington together with Illarionov's Institute of Economic Analysis.

Richardson said she had called on Putin to use the huge popular mandate he received in last month's presidential elections for taking rapid action on curbing the chokehold of bureaucracy over business in the next six weeks. But, she said, Putin made "a significant response" indicating he was not ready to make risky moves. "Everyone wants to go to heaven, but nobody wants to die," she quoted him as saying.

Fellow participant Daniel Yergin, the chairman of Cambridge Energy Research Associates and author of "The Prize" and "The Commanding Heights," also noted that Putin made clear he wanted to make sure reforms were fully planned before he unleashed change.

"There was a strong sense of taking into account where Russia has been over the last 10 to 12 years ... the helter skelter of what happened," Yergin said, referring to the rapid reforms of the 1990s that swiftly brought capitalism but sent millions of Russians into poverty. "Putin is focused on maintaining the trust of the public in conducting reform."

Putin swept into his second term with a pledge to double GDP over the next 10 years. High oil prices have already helped fuel annual growth of over 6 percent over the last few years, but Putin has said that is not enough if the country is to overcome poverty and lose its dependency on oil.

Already, Putin has announced the start of administrative reform to reduce bureaucracy by slimming down the top layer of his government. His government on Thursday announced plans to slash the payroll tax from 35.6 percent to 26 percent in a bid to help spark growth in manufacturing.

But big business leaders, including Kakha Bendukidze, who also attended Friday's meeting as head of the Russian Union of Industrialists and Entrepreneurs' tax committee, have criticized these moves as not going far enough. Interros chief Vladimir Potanin has said that instead of lowering the burden of bureaucracy on business, the Putin government has raised it.

Chile's Pinera told Putin his government's caution on pension reform was dimming the potential for growth. "Russia is moving in the right direction, but the steps are too small and they are not decisive enough," he said. 

He said pension reform here was "too complicated" for the people to understand.

Pinera first came to Moscow four years ago shortly before Putin was inaugurated. Back then, also at the invitation of Illarionov, he met with scores of economic officials in the new government to impress on them how pension reform could be a key engine for doubling GDP.

Pinera stunned the world back in 1980 by launching a groundbreaking new pension law in Chile that allowed every worker to opt out of the state's pay-as-you-go system and put individual contributions into a privately managed fund. Under that scheme, 10 percent of workers' wages were put into the private funds by employers instead of paying a payroll tax. Other contributions could be made by workers on a voluntary basis. The economy soon began to soar as the addition of private pension fund money helped drive investment.

Pinera said Pinochet singled him out for the job of labor minister at the age of just 30 because he was the only economist declaring that doubling GDP could be achieved.

"He told me if you make mistakes you take the blame. But if you make it, it is your success," Pinera said in a later interview.

Since his reform in Chile, dozens of countries, including Kazakhstan, have followed his example.

Illarionov told Putin that more than 95 percent of the Chilean population had opted for private pension funds, which has given them returns of 10 percent over inflation for the last 20 years.

Russia, however, amid concerns over the stability of private pension funds in the country's notoriously opaque financial system, in January launched a complicated and multilayered scheme.

Here, half of the payroll tax is to be saved by the state to provide a basic pension, while the other half is split between a pay-as-you-go insurance pension and a funded pension to be invested by the state in assets such as government treasury bills. Workers can also choose to have that portion of their pension money to be managed by a private fund.

Pinera said the scheme was so complicated that most Russians did not understand what was happening. According to press reports, only 700,000 Russians out of 38 million have opted for private pension funds.

Further muddying the waters is the government's sudden decision Thursday to cancel the savings part of the scheme for workers aged over 38. Leading businessmen, such as Alexander Shokhin, have slammed that move as undermining trust in the reform entirely.

"The state has shown that by canceling this system it can just as easily cancel something else," Shokhin said in an interview during the conference.

Russia could face a pension payment's crisis as its population ages rapidly if it does not take further steps to change the pay-as-you-go system that offers little return. Experts say that in 20 years time there will be only one tax-paying worker per pensioner.

Putin seemed to appreciate Pinera's comments. "It is clear we should do everything to use all the positive experience of the world in this sphere," he said.

Putin's meeting with the foreign economists set something of a precedent for a president that has largely shunned the advice of outsiders following intense criticism of the role of foreign advisers in conducting Yeltsin-era reform.

Even though participants said Putin received them enthusiastically, his press service made sure a statement was issued saying "Putin listened to all the advice with thanks and attention, but underlined that responsibility for reforms lay with Russians who would make their own decisions."

Also attending were Edward Crane, the president of the Cato Institute; Yelena Leontyeva, an economic adviser to the Lithuanian government; and Arnold Harberger, who has been a professor to many economic leaders at the University of California.

Underlining the fallout from a chaotic decade of reform that was crafted with the help of foreign liberal economists was Nobel Prize-winning economist Milton Friedman's video address to the conference.

Friedman said that in the early 1990s his mantra for Russia had been "privatization, privatization, privatization." Experience, however, has shown that this was too simplistic and other things also were necessary, such as protecting property rights, he said.



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