The Myth of the Authoritarian Model

How Putin's Crackdown Holds Russia Back

Michael McFaul and Kathryn Stoner-Weiss

From Foreign Affairs, January/February 2008

Summary:  A growing conventional wisdom holds that Vladimir Putin's attack on democracy has brought Russia stability and prosperity -- providing a new model of successful market authoritarianism. But the correlation between autocracy and economic growth is spurious. Autocracy's effects in Russia have in fact been negative. Whatever the gains under Putin, they would have been greater under a democratic regime.

MICHAEL MCFAUL is a Hoover Fellow, Professor of Political Science, and Director of the Center on Democracy, Development, and the Rule of Law at Stanford University. KATHRYN STONER-WEISS is Associate Director for Research and Senior Research Scholar at the Center on Democracy, Development, and the Rule of Law at Stanford University

The 1990s were indeed a time of incredible economic hardship. After Russia's formal independence in December 1991, GDP contracted over seven years. There is some evidence that the formal measures of this contraction overstated the extent of actual economic depression: for instance, purchases of automobiles and household appliances rose dramatically, electricity use increased, and all of Russia's major cities experienced housing booms during this depression. At the same time, however, investment remained flat, unemployment ballooned, disposable incomes dropped, and poverty levels jumped to more than 40 percent after the August 1998 financial meltdown.

Democracy, however, had only a marginal effect on these economic outcomes and may have helped turn the situation around in 1998. For one thing, the economic decline preceded Russian independence. Indeed, it was a key cause of the Soviet collapse. With the Soviet collapse, the drawing of new borders to create 15 new states in 1991 triggered massive trade disruptions. And for several months after independence, Russia did not even control the printing and distribution of its own currency. Neither a more democratic polity nor a robust dictatorship would have altered the negative economic consequences of these structural forces in any appreciable way.

Economic decline after the end of communism was hardly confined to Russia. It followed communism's collapse in every country throughout the region, no matter what the regime type. In the case of Russia, Yeltsin inherited an economy that was already in the worst nonwartime economic depression ever. Given the dreadful economic conditions, every postcommunist government was compelled to pursue some degree of price and trade liberalization, macroeconomic stabilization, and, eventually, privatization. The speed and comprehensiveness of economic reform varied, but even those leaders most resistant to capitalism implemented some market reforms. During this transition, the entire region experienced economic recession and then began to recover several years after the adoption of reforms. Russia's economy followed this same general trajectory -- and would have done so under dictatorship or democracy. Russia's economic depression in the 1990s was deeper than the region's average, but that was largely because the socialist economic legacy was worse in Russia than elsewhere.

After the Soviet collapse, Russian leaders did have serious policy choices to make regarding the nature and speed of price and trade liberalization, privatization, and monetary and fiscal reforms. This complex web of policy decisions was subsequently oversimplified as a choice between "shock therapy" (doing all of these things quickly and simultaneously) and "gradual reform" (implementing the same basic menu of policies slowly and in sequence). Between 1992 and 1998, Russian economic policy zigzagged between these two extremes, in large part because Russian elites and Russian society did not share a common view about how to reform the economy.

Because Russia's democratic institutions allowed these ideological debates to play out politically, economic reform was halting, which in turn slowed growth for a time. During Russia's first two years of independence, for example, the constitution gave the Supreme Soviet authority over the Central Bank, an institutional arrangement that produced inflationary monetary policy. The new 1993 constitution fixed this problem by making the bank a more autonomous institution, but the new constitution reaffirmed the parliament's pivotal role in approving the budget, which led to massive budget deficits throughout the 1990s. The Russian government covered these deficits through government bonds and foreign borrowing, which worked while oil prices were high. But when oil prices collapsed in 1997-98, so, too, did Russia's financial system. In August 1998, the government essentially went bankrupt. It first radically devalued the ruble as a way to reduce domestic debt and then simply defaulted on billions of outstanding loans to both domestic and foreign lenders.

This financial meltdown finally put an end to major debate over economic policy in Russia. Because democratic institutions still mattered, the liberal government responsible for the financial crash had to resign, and the parliament compelled Yeltsin to appoint a left-of-center government headed by Prime Minister Yevgeny Primakov. The deputy prime minister in charge of the economy in Primakov's government was a Communist Party leader. Now that they were in power, Primakov and his government had to pursue fiscally responsible policies, especially as no one would lend to the Russian government. So these "socialists" slashed government spending and reduced the state's role in the economy. In combination with currency devaluation, which reduced imports and spurred Russian exports, Russia's new fiscal austerity created the permissive conditions for real economic growth starting in 1999. And so began Russia's economic turnaround -- before Putin came to power and well before autocracy began to take root.

First as prime minister and then as president, Putin stuck to the sound fiscal policies that Primakov had put in place. After competitive elections in December 1999, pro-reform forces in parliament even managed to pass the first balanced budget in post-Soviet Russian history. In cooperation with parliament, Putin's first government dusted off and put into place several liberal reforms drafted years earlier under Yeltsin, including a flat income tax of 13 percent, a new land code (making it possible to own commercial and residential land), a new legal code, a new regime to prevent money laundering, a new regime for currency liberalization, and a reduced tax on profits (from 35 percent to 24 percent).

Putin's real stroke of luck came in the form of rising world oil prices. Worldwide, prices began to climb in 1998, dipped again slightly from 2000 to 2002, and have continued to increase ever since, approaching $100 a barrel. Economists debate what fraction of Russia's economic growth is directly attributable to rising commodity prices, but all agree that the effect is extremely large. Growing autocracy inside Russia obviously did not cause the rise in oil and gas prices. If anything, the causality runs in the opposite direction: increased energy revenues allowed for the return to autocracy. With so much money from oil windfalls in the Kremlin's coffers, Putin could crack down on or co-opt independent sources of political power; the Kremlin had less reason to fear the negative economic consequences of seizing a company like Yukos and had ample resources to buy off or repress opponents in the media and civil society.

If there is any causal relationship between authoritarianism and economic growth in Russia, it is negative. Russia's more autocratic system in the last several years has produced more corruption and less secure property rights -- which, as studies by the World Bank and the European Bank for Reconstruction and Development demonstrate, tend to hinder growth in the long run. Asset transfers have transformed a thriving private energy sector into one that is effectively state-dominated (private firms accounted for 90 percent of Russian oil production in 2004; they account for around 60 percent today) and less efficient. Renationalization has caused declines in the performance of formerly private companies, destroyed value in Russia's most profitable companies, and slowed investment, both foreign and domestic. Before Khodorkovsky's arrest, Yukos was Russia's most successful and transparent company, with a market value of $100 billion in today's terms. The redistribution of Yukos' properties not only reduced the value of these assets by billions of dollars but also dramatically slowed the company's oil production. Sibneft's value and production levels have experienced similar falls since the company became part of Gazprom. Meanwhile, companies, such as Gazprom, that have remained under state control since independence continue to perform below market expectations, with their management driven as much by political objectives as by profit maximization.

Perhaps the most telling evidence that Putin's autocracy has hurt rather than helped Russia's economy is provided by regional comparisons. Strikingly, even with Russia's tremendous energy resources, growth rates under Putin have been below the post-Soviet average. In 2000, the year Putin was elected president, Russia had the second-fastest-growing economy in the post-Soviet region, behind only gas-rich Turkmenistan. By 2005, however, Russia had fallen to 13th in the region, outpacing only Ukraine and Kyrgyzstan, both of which were recovering from "color revolutions." Between 1999 and 2006, Russia ranked ninth out of the 15 post-Soviet countries in terms of average growth. Similarly, investment in Russia, at 18 percent of GDP, although stronger today than ever before, is well below the average for democracies in the region.