Accessibility links

Breaking News

Russia: Economic Crisis Centers On Role Of The State

Washington, 3 April 1997 (RFE/RL) - International Monetary Fund Managing Director Michel Camdessus says Russia has made "tremendous economic progress" in the last few years, but is now threatened by a "crisis" over the role of the state.

Speaking at the Moscow Institute of International Affairs Wednesday, Camdessus said that President Boris Yeltsin was right when he said in his recent state of the nation address that "the state interferes in the economy where it shouldn't, while where it should, it does nothing."

"Unless there is a very clear understanding about what the proper role of the state is, it will not be able to discharge its proper functions, and Russia risks being mired in this economic no-man's-land between a centrally planned system and a fully functioning market economy," said Camdessus.

The text of Camdessus speech was made available to our economics correspondent in Washington.

Camdessus is today wrapping up a three-day visit to Moscow that was intended to signal the fund's support for the new team of economic reformers at the top of the government as well as to participate in the broad IMF-Russian discussions on the targets for the 1997 reform program for Russia's three-year, $10.1 million loan.

The loan is disbursed in monthly drawings of around $340 million, but several tranches were delayed last year when structural reforms stalled and tax collections faltered to nearly 50 percent of budgeted amounts.

Camdessus and others have been telling Russian officials for some time that immediate reform of the tax system is essential if the country is to continue on the road to a market economy.

But the IMF leader chose the institute venue to point out that while problems with the tax system are major, it is also important to focus on the broader crisis that is exacerbating the tax situation, promoting corruption and stalling economic growth.

"A thriving market economy requires a level playing field on which the private sector can operate," said Camdessus. He said one of the "most fundamental" responsibilities of government in a market economy is to ensure that the playing field is indeed level.

To do that, he said, governments must establish a set of fair and transparent rules that apply equally to one and all, and ensure that these rules are "fully enforced." Within that framework, private investment can flourish, new business can spring up and enterprises have strong incentives to operate fully within the law.

Regrettably, said Camdessus, Russia's declining rate of domestic investment, sluggish pace of foreign investment and rising "gray" economy are clear signs the framework is not yet in place.

That all leads to slowed economic growth, corruption, and rampant tax avoidance or non-payment -- the three largest problems plaguing Russia right now.

Camdessus said Russia must get the role of government straightened out quickly.

First, he said, a simple and transparent regulatory system needs to be completed so that business doesn't "waste precious time and resources" trying to find out what the rules are and how to comply with them.

Secondly, he said, an effective legal and judiciary system that protects property rights and helps create an atmosphere of law, order and personal security is badly needed.

Third, said Camdessus, Russia needs a tax system that is simple and broad-based, with limited exemptions and fairly low and uniform rates so that no one will be discouraged from trying to fulfill their tax obligations. He quoted an old Russian proverb as particularly appropriate for all Russian citizens now: "Collect one thread from everyone and you will have a shirt for a naked person."

The non-payment of taxes is a particularly serious part of the crisis because it undercuts the governments ability to pay wages and pensions and provide basic services like police and fire.

"It is the closest thing to the crisis of democracy," Camdessus said, because democracy includes in its base the consent of citizens to submit to taxes and accept the state's role to collect them.

Tax avoidance also fuels corruption, said Camdessus, which is "not the inevitable consequence of economic liberalization." After all, noted the IMF chief, the old planned economy had its hidden share of corruption despite powerful law enforcement mechanisms.

Corruption reflects attitudes, he said, but it is also a "yellow flashing light" that the government is interfering in the economy in inappropriate ways. Where government regulations are "endless and endlessly complex" and where tax exceptions are only for a chosen few, corruption flourishes.

Camdessus said Russian leaders have made a strong commitment to deal with this crisis of the state and the need for renewed reforms, but that in the end the "crucial part remains in the hands of the Russian people." And it is their representatives in the Duma who must pass the laws for the market economy and to ensure the government's role is appropriate.