Putin's copycats

Whether in pro-western or pro-Moscow states, repression and corruption are flourishing among Russia'

A post-Soviet president makes a highly publicised visit to a patriotic youth camp where he denounces the international community for being "amoral" in its stance towards his fight with separatists. Later he moves to clamp down on the opposition and has its main television station pulled off the air. He blames most of his troubles on a London-based oligarch. The president behaves in this slightly paranoid and aggressive manner even though his party dominates parliament and he has marginalised his critics.

This is not Vladimir Putin, but the Georgian president for almost four years who was until recently a darling of the west - Mikhail Saakashvili.

Call it the Putin effect. The three Baltic states long ago moved out of the Soviet shadow and are now members of the EU. Elsewhere, with the partial exception of Ukraine - which though poor and deeply corrupt has at least learned the habit of free elections - the 12 post-Soviet members of the Commonwealth of Independent States are mired in a condition that ranges from outright dictatorship to semi-democracy.

Sixteen years after the end of perestroika, this is a depressing picture. In 1991 western opinion was much too utopian about these newly independent states. The favoured image used to be one of "transition" and even the smallest Anglo-Saxon news story used to refer to countries from Armenia to Tajikistan as being "in transition to democracy and a market economy".

This deterministic image assumed that once the Soviet Union withered away, these societies would naturally blossom into democracies. A very different, quasi-feudal dynamic was actually at play. The nomenklatura, the self-sustaining bureaucratic class that ran the Soviet Union, was very much alive and old party bosses smoothly made the transition to being elected nationalist politicians. Nursultan Nazarbayev, once regarded as a reformist ally of Mikhail Gorbachev, has slowly transformed himself into president-for-life in Kazakhstan, with his family installed in key positions. In Azerbaijan, the communist-era boss Heydar Aliyev became leader and then handed over the presidency to his son.

The first priority was to retain power. When the Armenian opposition tried to dispute the outcome of the 1996 election, the then defence minister, Vazgen Sarkisian, famously put them in their place, saying: "Even if they win 100 per cent of the votes, neither the army nor the National Security Service, nor the ministry of the interior, would recognise these leaders." In the South Caucasus and central Asia, no presidential candidate from the ruling elite has lost an election since 1991. Increasingly, parliaments are stuffed with loyal servants or friendly businessmen.

If in the past it was done rather furtively, Putin has given this novel brand of pseudo-democracy respectability. Two of his advisers have even baptised the new style of government, Gleb Pavlov sky coining the term "managed democracy" and Vladislav Surkov talking about "sovereign democracy".

Putin's genius has been to hollow out the substance of democracy while keeping the shell intact. Russia still has elections, courts, a parliament, a few critical newspapers and a semblance of debate, but in fact the governing regime has established itself in perpetuity. And why give up power and all its benefits? As Stalin's foreign minister Vyacheslav Molotov remarked, the trouble with free elections is that you stand a chance of losing them.

At the same time the Russian president has neutralised international criticism by proving a master of what Orhan Pamuk, referring to Turkish politicians' conversations about Europe, has called the "also" line of defence. If Russia's democratic record is criticised, some piece of evidence can always be adduced that western governments "also" do bad things. German police beat some demonstrators, the British police investigated Lord Levy for party donations, the French used to behave badly in Algeria.

Wishful thinking

Geography matters here. In the central Asian republics, where the EU exerts no pull and international condemnation means little, governments can get away with abominations such as the 2005 massacre of hundreds of civilians in the Uzbek town of Andijan. In the western and southern states, "the idea of Europe" means something. In the South Caucasian states of Armenia and Azerbaijan, the governments worry about their status in the Council of Europe and Nato, and behave better, but sharing power is not an option.

Georgia has followed this pattern while being the subject of too much western wishful thinking. Ironically, Saakashvili got into deep trouble because he spent too much time on foreign trips proselytising the successes of the Rose Revolution - many Georgians were growing angry with the cronyism and arrogance of the government that he was praising in foreign capitals.

It worked for a time. It sometimes seemed as though if the new Georgia - pro-western, anti-Russian, economically reformist, with a government of thirty-odd ministers - did not exist it would have to be invented. Saakashvili was received at the Oval Office by George W Bush, who two months earlier had paid a special visit to Tbilisi and made a speech eulogising the Rose Revolution on Freedom Square. This April Saakashvili was received in high style in London by both Tony Blair and Gordon Brown, who called Georgia "a beacon of democracy". Nicolas Sarkozy has declared himself a fan.

A year ago I heard a British MP defend Saa kashvili's increasingly undemocratic behaviour by saying: "We must give him time. He is still dealing with the legacy of his authoritarian predecessor." And recall conversations in the mid-1990s about the need to support that predecessor, Eduard Shevardnadze, who still enjoyed being given many benefits of the doubt he had earned as Mikhail Gorbachev's foreign minister.

In reality, Saakashvili is a reformer, but no democrat. Georgia's state budget has quadrupled, corruption in the security forces has been reduced, government has been restructured. But the judiciary, media and regional governors are all weaker and more subservient than they were under Shevardnadze. Saakashvili's critics call his style of government "democracy for export".

On 7 November, the other Saakashvili revealed himself when he sent in riot police with truncheons, tear gas and water cannon to break up opposition rallies in the centre of Tbilisi. Georgia's human rights ombudsman, Sozar Subari, was one of those beaten up. Imedi Tele vision, now co-managed by Rupert Murdoch, which is the main mouthpiece for the opposition, was pulled off air.

The Georgian crisis has at least opened some eyes in Europe. The issue of how to deal with its eastern neighbourhood is surely becoming the EU's biggest foreign policy challenge. How do you exert positive influence in countries where a progressive minority still has an "idea of Europe" when you are unable to offer the one prospect with the power to transform - the hope of eventual EU membership?

Where Georgia leads, others may follow. Weak states with self-serving elites are prone to in stability. We can be certain of two things: that Putin's copycats will not give up power easily; and that if events do force them to come tumbling down, the collapse will bring an awful lot of rubble and chaos with it.

Thomas de Waal is Caucasus editor at the Institute for War and Peace Reporting in London

This article first appeared in the 03 December 2007 issue of the New Statesman, Russia’s fragile future

MILES COLE
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The new Brexit economics

George Osborne’s austerity plan – now abandoned by the Tories – was the most costly macroeconomic policy mistake since the 1930s.

George Osborne is no longer chancellor, sacked by the post-Brexit Prime Minister, Theresa May. Philip Hammond, the new Chancellor, has yet to announce detailed plans but he has indicated that the real economy rather than the deficit is his priority. The senior Conservatives Sajid Javid and Stephen Crabb have advocated substantial increases in public-sector infrastructure investment, noting how cheap it is for the government to borrow. The argument that Osborne and the Conservatives had been making since 2010 – that the priority for macroeconomic policy had to be to reduce the government’s budget deficit – seems to have been brushed aside.

Is there a good economic reason why Brexit in particular should require abandoning austerity economics? I would argue that the Tory obsession with the budget deficit has had very little to do with economics for the past four or five years. Instead, it has been a political ruse with two intentions: to help win elections and to reduce the size of the state. That Britain’s macroeconomic policy was dictated by politics rather than economics was a precursor for the Brexit vote. However, austerity had already begun to reach its political sell-by date, and Brexit marks its end.

To understand why austerity today is opposed by nearly all economists, and to grasp the partial nature of any Conservative rethink, it is important to know why it began and how it evolved. By 2010 the biggest recession since the Second World War had led to rapid increases in government budget deficits around the world. It is inevitable that deficits (the difference between government spending and tax receipts) increase in a recession, because taxes fall as incomes fall, but government spending rises further because benefit payments increase with rising unemployment. We experienced record deficits in 2010 simply because the recession was unusually severe.

In 2009 governments had raised spending and cut taxes in an effort to moderate the recession. This was done because the macroeconomic stabilisation tool of choice, nominal short-term interest rates, had become impotent once these rates hit their lower bound near zero. Keynes described the same situation in the 1930s as a liquidity trap, but most economists today use a more straightforward description: the problem of the zero lower bound (ZLB). Cutting rates below this lower bound might not stimulate demand because people could avoid them by holding cash. The textbook response to the problem is to use fiscal policy to stimulate the economy, which involves raising spending and cutting taxes. Most studies suggest that the recession would have been even worse without this expansionary fiscal policy in 2009.

Fiscal stimulus changed to fiscal contraction, more popularly known as austerity, in most of the major economies in 2010, but the reasons for this change varied from country to country. George Osborne used three different arguments to justify substantial spending cuts and tax increases before and after the coalition government was formed. The first was that unconventional monetary policy (quantitative easing, or QE) could replace the role of lower interest rates in stimulating the economy. As QE was completely untested, this was wishful thinking: the Bank of England was bound to act cautiously, because it had no idea what impact QE would have. The second was that a fiscal policy contraction would in fact expand the economy because it would inspire consumer and business confidence. This idea, disputed by most economists at the time, has now lost all credibility.

***

The third reason for trying to cut the deficit was that the financial markets would not buy government debt without it. At first, this rationale seemed to be confirmed by events as the eurozone crisis developed, and so it became the main justification for the policy. However, by 2012 it was becoming clear to many economists that the debt crisis in Ireland, Portugal and Spain was peculiar to the eurozone, and in particular to the failure of the European Central Bank (ECB) to act as a lender of last resort, buying government debt when the market failed to.

In September 2012 the ECB changed its policy and the eurozone crisis beyond Greece came to an end. This was the main reason why renewed problems in Greece last year did not lead to any contagion in the markets. Yet it is not something that the ECB will admit, because it places responsibility for the crisis at its door.

By 2012 two other things had also become clear to economists. First, governments outside the eurozone were having no problems selling their debt, as interest rates on this reached record lows. There was an obvious reason why this should be so: with central banks buying large quantities of government debt as a result of QE, there was absolutely no chance that governments would default. Nor have I ever seen any evidence that there was any likelihood of a UK debt funding crisis in 2010, beyond the irrelevant warnings of those “close to the markets”. Second, the austerity policy had done considerable harm. In macroeconomic terms the recovery from recession had been derailed. With the help of analysis from the Office for Budget Responsibility, I calculated that the GDP lost as a result of austerity implied an average cost for each UK household of at least £4,000.

Following these events, the number of academic economists who supported austerity became very small (they had always been a minority). How much of the UK deficit was cyclical or structural was irrelevant: at the ZLB, fiscal policy should stimulate, and the deficit should be dealt with once the recession was over.

Yet you would not know this from the public debate. Osborne continued to insist that deficit reduction be a priority, and his belief seemed to have become hard-wired into nearly all media discussion. So perverse was this for standard macroeconomics that I christened it “mediamacro”: the reduction of macroeconomics to the logic of household finance. Even parts of the Labour Party seemed to be succumbing to a mediamacro view, until the fiscal credibility rule introduced in March by the shadow chancellor, John McDonnell. (This included an explicit knockout from the deficit target if interest rates hit the ZLB, allowing fiscal policy to focus on recovering from recession.)

It is obvious why a focus on the deficit was politically attractive for Osborne. After 2010 the coalition government adopted the mantra that the deficit had been caused by the previous Labour government’s profligacy, even though it was almost entirely a consequence of the recession. The Tories were “clearing up the mess Labour left”, and so austerity could be blamed on their predecessors. Labour foolishly decided not to challenge this myth, and so it became what could be termed a “politicised truth”. It allowed the media to say that Osborne was more competent at running the economy than his predecessors. Much of the public, hearing only mediamacro, agreed.

An obsession with cutting the deficit was attractive to the Tories, as it helped them to appear competent. It also enabled them to achieve their ideological goal of shrinking the state. I have described this elsewhere as “deficit deceit”: using manufactured fear about the deficit to achieve otherwise unpopular reductions in public spending.

The UK recovery from the 2008/2009 recession was the weakest on record. Although employment showed strong growth from 2013, this may have owed much to an unprecedented decline in real wages and stagnant productivity growth. By the main metrics by which economists judge the success of an economy, the period of the coalition government looked very poor. Many economists tried to point this out during the 2015 election but they were largely ignored. When a survey of macroeconomists showed that most thought austerity had been harmful, the broadcast media found letters from business leaders supporting the Conservative position more newsworthy.

***

In my view, mediamacro and its focus on the deficit played an important role in winning the Conservatives the 2015 general election. I believe Osborne thought so, too, and so he ­decided to try to repeat his success. Although the level of government debt was close to being stabilised, he decided to embark on a further period of fiscal consolidation so that he could achieve a budget surplus.

Osborne’s austerity plans after 2015 were different from what happened in 2010 for a number of reasons. First, while 2010 austerity also occurred in the US and the eurozone, 2015 austerity was largely a UK affair. Second, by 2015 the Bank of England had decided that interest rates could go lower than their current level if need be. We are therefore no longer at the ZLB and, in theory, the impact of fiscal consolidation on demand could be offset by reducing interest rates, as long as no adverse shocks hit the economy. The argument against fiscal consolidation was rather that it increased the vulnerability of the economy if a negative shock occurred. As we have seen, Brexit is just this kind of shock.

In this respect, abandoning Osborne’s surplus target makes sense. However, there were many other strong arguments against going for surplus. The strongest of these was the case for additional public-sector investment at a time when interest rates were extremely low. Osborne loved appearing in the media wearing a hard hat and talked the talk on investment, but in reality his fiscal plans involved a steadily decreasing share of public investment in GDP. Labour’s fiscal rules, like those of the coalition government, have targeted the deficit excluding public investment, precisely so that investment could increase when the circumstances were right. In 2015 the circumstances were as right as they can be. The Organisation for Economic Co-operation and Development, the International Monetary Fund and pretty well every economist agreed.

Brexit only reinforces this argument. Yet Brexit will also almost certainly worsen the deficit. This is why the recent acceptance by the Tories that public-sector investment should rise is significant. They may have ­decided that they have got all they could hope to achieve from deficit deceit, and that now is the time to focus on the real needs of the economy, given the short- and medium-term drag on growth caused by Brexit.

It is also worth noting that although the Conservatives have, in effect, disowned Osborne’s 2015 austerity, they still insist their 2010 policy was correct. This partial change of heart is little comfort to those of us who have been arguing against austerity for the past six years. In 2015 the Conservatives persuaded voters that electing Ed Miliband as prime minister and Ed Balls as chancellor was taking a big risk with the economy. What it would have meant, in fact, is that we would already be getting the public investment the Conservatives are now calling for, and we would have avoided both the uncertainty before the EU referendum and Brexit itself.

Many economists before the 2015 election said the same thing, but they made no impact on mediamacro. The number of economists who supported Osborne’s new fiscal charter was vanishingly small but it seemed to matter not one bit. This suggests that if a leading political party wants to ignore mainstream economics and academic economists in favour of simplistic ideas, it can get away with doing so.

As I wrote in March, the failure of debate made me very concerned about the outcome of the EU referendum. Economists were as united as they ever are that Brexit would involve significant economic costs, and the scale of these costs is probably greater than the average loss due to austerity, simply because they are repeated year after year. Yet our warnings were easily deflected with the slogan “Project Fear”, borrowed from the SNP’s nickname for the No campaign in the 2014 Scottish referendum.

It remains unclear whether economists’ warnings were ignored because they were never heard fully or because they were not trusted, but in either case economics as a profession needs to think seriously about what it can do to make itself more relevant. We do not want economics in the UK to change from being called the dismal science to becoming the “I told you so” science.

Some things will not change following the Brexit vote. Mediamacro will go on obsessing about the deficit, and the Conservatives will go on wanting to cut many parts of government expenditure so that they can cut taxes. But the signs are that deficit deceit, creating an imperative that budget deficits must be cut as a pretext for reducing the size of the state, has come to an end in the UK. It will go down in history as probably the most costly macroeconomic policy mistake since the 1930s, causing a great deal of misery to many people’s lives.

Simon Wren-Lewis is a professor of economic policy at the Blavatnik School of Government, University of Oxford. He blogs at: mainlymacro.blogspot.com

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt