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. Last Updated: 07/27/2016

Good Sense, Not Surgery

There is a children's joke about how to treat a sick python. The "doctors" decided to operate. The monkey suggested that they cut off the python's head; the elephant said they should amputate his tail, while the parrot suggested a compromise: They should cut off the tail all the way up to the head.

The parrot in this story is a deft politician, reconciling two seemingly irreconcilable opinions. But for the python, any solution means death.

Russia's economy has long been compared to a sick person who needs treatment. A year ago the surgical analogy was popular in economic circles. Practically all of the leading government advisers said the same thing: The economy is ill; it needs either a quick and radical operation with a chance of recovery, or a long course of treatment which will lead to death.

But the discussion of radical intervention in Russia's economy left the main thing out -- the instruments of the operation in question, and the organ of the economic body that would be operated upon.

When I hear calls for compromise in economic programs, I remember the joke about the python. If we go back about a year we can see how contradictory were the compromises of the "simply brilliant" people, who headed the Russian government.

Gaidar as a professional economist should have understood that the economy can only be reformed in two ways: either by stimulating the supply of goods and services, or by stimulating demand. If you go with supply, then you have to lower taxes on income, stimulate the growth of the banking system, raise interest rates, which attracts new investment. If you stimulate demand, then you have to increase taxes, raise salaries, fight unemployment even to the extent of creating new jobs in the government sector. The first road can lead to social difficulties and unemployment, and, possibly, to social unrest; in that case a strong government is necessary to restrain mass uprisings. The second road leads to inflation, but it is more flexible in the short term.

Gaidar's government tried to compromise, combining both paths in the worst possible way. On the one hand, a strict financial policy was announced, which provided for a cut in budget expenditures. On the other hand, the president himself with his own decree raised the wages of the miners, and strikes began in Russia -- doctors, bus drivers, teachers all demanded salary raises. Concession followed concession, and the budget deficit grew.

Prices rose and a consumer market stabilized for a time, but given the monopolistic economy, producers began to lower production, and price increases led to enterprises demanding credits from the government.

New concessions led to a complete collapse of the policy of financial stabilization in Russia, inflation climbed out of sight, and the ruble fell sharply. High taxes, which were introduced to lower the budget deficit and inflation, led to a complete halt in long-term investment. Today the economy is just surviving day to day -- there is no basis for economic growth in the future.

Russia's economy does not need radical measures now. The only thing it needs is common sense and an understanding that there is no way back to a centralized economy.

Gaidar's role in the economic life of the country was not to show the way out of the crisis, but, by his professionalism, to demand from his opponents a similarly professional approach to formulating their own variants of reform. In discussions with Gaidar, in arguments with him, the intellectual level of the opposition should have risen, and common sense along with it.

Compromise is necessary not for the reforms themselves, but so that neither the deputies nor the government will get in the way of the growth of new commercial structures, the free development of the market, the rise in the numbers of wealthy people in the country.

I will cite an example. At the present time, interest on deposits in commercial banks is reaching 100 percent per year. There are cases where, on a deposit of 700 million rubles for two months, banks are ready to pay up to 200 percent interest. For the foreign investor, 700 million rubles is the equivalent of 1. 5 million dollars. In transferring such a sum to Russia, converting dollars to rubles, depositing the rubles in a bank for two months, a foreign investor will receive a 30 percent return. Such profit is practically impossible to get in the West in such a short time period. But only the most desperate gambler would do such a thing. The risk is too great.

The government could simplify such operations, it could allow free import and export of hard currency into and out of Russia.

A society on the path to progress, growing and developing, is interested in the enrichment of people, while a stagnant and dying society is based on poverty and accepts poverty.

It is historically and economically unimportant where the poverty comes from: whether from the outside, like barbarians invading a decaying Rome, or from the inside, due to conditions artificially created by someone's whim or according to someone's idea of utopia. It is also unimportant where wealth comes from.

A developing society needs the wealthy foreign investor and its own wealthy citizens. Rationalism forces wise politicians to create conditions to attract foreign capital, as well as to encourage the accumulation of capital by its own citizens. These are the compromises needed. But the argument now is simply about how best to kill the python.

Vladimir Milovidov is a professor of economics at Moscow Finance and Banking School.