Chicago goes to Moscow

Amity Shlaes uncovers an unexpected interest in free market economics in the Russian presidency

One of the biggest mysteries about Vladimir Putin is his view of economics. His past as a Kremlin enforcer, after all, hardly prepares him for the nuances of leading the Russian economy. And while he has said, in a speech earlier this year, that he would "fight poverty" and that "the stronger state, the freer the individual," he has yet to lay out the minutiae of his positions on pension privatisation, the price-rule in monetary discussions, or the importance of marginal tax rates.

So it is interesting to learn that the Kremlin recently played host to not one but two sets of the most eminent economists from the supply-side, free market school.

Plans for the visit were reportedly laid by Andre Illarionov, a pro-market Western style economist who has spent time at Harvard and is now Mr Putin's economic adviser. Mr Illarionov approached the US embassy in Moscow, which in turn contacted the US economists. So it came to pass that the economists were able to make the pitch for classic supply-side measures - radical tax cuts, and personal savings accounts for pensions - over a sturgeon lunch on Good Friday with the President.

The five guests dining at the Kremlin were Richard K. Vedder, an expert on employment, growth and school vouchers at the University of Ohio; James Gwartney, a leader in the school of economics known as public choice theory and chief economist at Congress's Joint Economic Committee; Arnold Harberger, one of the famous "Chicago Boys" who convinced Augusto Pinochet to radically restructure the Chilean economy and open Chile's markets; James Carter, Joint Economic Committee staff economist; and Carlos Bologna, former finance minister of Peru.

"We made the case for marginal tax cuts," says Mr Gwartney. The economists report they also discussed the heavy burden of Russia's 41 per cent payroll taxes (social insurance taxes), which they told the Russians were "way too high". Another hot topic was depreciation: "In Russia, it takes 250 years to write off a building; a computer is depreciated over ten," says Mr Carter. "We said we saw this as a problem." Chile was among the models much discussed by the lunchtime group, as was Mr Bologna's slashing of taxes in Peru.

The guests report that Mr Putin seemed receptive. "He seemed very sincere in his desire to move in this direction. It's just a matter of what he can do politically," reports Mr Carter.

The following week a second round of free marketeers travelled to Russia, meeting Mr Illarionov at the Gref Centre for Economic and Strategic Studies, a think tank that has been asked to research and plan economic reform. This time the experts included Sir Roger Douglas, New Zealand's legendary free market finance minister, as well as Graham Scott, his fellow countryman and reformer; and Jose Pinera, the father of Social Security privatisation in Chile. Also travelling was Laurence Kotlikoff, a pension reform specialist from Boston University and scholar of the Russian economy. Invited, but unable to attend, was Prof. Robert Barro of Harvard and Stanford's Hoover Institution.

Before the trip all the arrivals were told not to report their trip to the media; afterwards two of the scholars, Mr Kotlikoff and Mr Gwartney, wrote pieces in the Financial Times, but neither laid out the details of their voyage.

There remains the question of what impact, if any, all the distinguished tutelage will yield. A round of reform plans is expected come June.

© Copyright 2000 Financial Times

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