A Tried and True Diversion Tactic
- By Konstantin Sonin
- Aug. 19 2008 00:00
During the Soviet period, the Communist leadership liked to stress global issues, such as freedom for Africa or the Palestinians. The people were constantly told about the Soviet Union's noble support of these movements on the news and at mandatory monthly Party meetings at the workplace. This was done, in part, to try to mask the serious economic problems facing the country.
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With all due respect to geopolitical issues, Russia's current government clearly has more pressing issues that they need to focus on. In the short term, the main challenge is to curb inflation without stunting economic growth. It also has to prepare for the economic consequences should there be a sharp increase in consumer loan defaults. The most pressing long-term issues include low labor productivity and the country's technological backwardness.
The conflict with Georgia over the fate of South Ossetia will exacerbate these short- and long-term problems. This will surely result in an increase in military spending, and this will divert government budget allocations from other badly needed sectors, such as infrastructure development and technology modernization. It will also add fuel to the already burning inflation fire.
But an even greater concern is the increasing exodus of foreign investors and the sharp decline of the stock market. After panicking this summer over the showdown with TNK-BP, when the government and the president were conspicuously absent from the scene, and over Prime Minister Vladimir Putin's televised threat to Mechel, which had dangerous echoes of the Yukos affair, investors are becoming increasingly pessimistic about doing business in the country. Last week, the stock market plunged to the the level it was in 2006.
Russia needs foreign investors much more than investors need Russia. It is no longer an issue of Russia's desperate need for money, which was the case in the 1990s. Today, the more important benefit of foreign investments is that it is often accompanied by technology transfer, a key element in the economic success of all developing countries.
Yet Putin is borrowing a page from the Soviet era, trying to divert Russians' attention away from the most serious economic problems facing the country. With inflation running at 15 percent per year, it is difficult for Russians to avoid confronting the issue every time they buy food. Even the most slick public relations campaign or the most upbeat news program on government-controlled television can't make Russians forget about how runaway inflation is lowering their take-home pay.
Of course, Russia had no other choice than to protect its citizens and the civilians of South Ossetia from Georgia's aggression. But in this conflict, we have wasted too much time and energy focusing on the good-versus-evil aspect of Russia's battle against the West. We must return to the serious economic problems threatening our country -- inflation, low labor productivity and technology transfer.
Konstantin Sonin, a professor at the New Economic School/CEFIR, is a columnist for Vedomosti.