Russian Economy

.. inflate? Currency appreciation continues to be a reward that investors expect to receive from dollar assets at low interest rates. Does Russia have the courage to join the group of market economy nations. Do its leaders have the vision to take the people there by refusing to finance through printing money and rising inflation? That only Russia can answer. Thus far the answer has been wrong.

The ruble has dropped to 5747 = $1.00 from R40 =$1.00 on 1990. The availability of overseas financing has altered the character of Russia’s fiscal policy options. Budget-making is no longer simple. International flows of capital respond to changes in monetary policy and complicate the task of economic management by effecting the exchange rate. International flows of capital also respond to fiscal policy.

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The more open the Russian economy becomes, the more sensitive it will be to changes in interest and exchange rates. Unsurprisingly the result depends upon the government attitude towards exchange rates. Russian policy makers have to choose between monetary policy (strong under floating rates, ineffective under fixed) or fiscal policy (weak under floating rates, strong under fixed). Preferred monetary policy, chosen with domestic inflation in mind, most likely will not conform to the preferred exchange rate, chosen with international competitiveness in mind. Often the two will conflict and one will have to go. Frequently the exchange rate must go to where the interest rate sends it. The notion that the exchange rate can be used to preserve competitiveness, even as monetary policy is fighting inflation, belongs to an earlier era.

– to a time when current account imbalances, not interest-rate differentials, drove currencies . The expansion of global finance has tied money policy and exchange-rate policy inextricably together. So much so that shifts in competitiveness (as expressed in changes in current account balances) now have no detectable effect on exchange rates at at all. It will be some time before economic policy and the new global market for capital learn to get along. A drive towards more tightly regulated domestic markets, if attempted, would fail because financial markets have knitted themselves together and it will take more than the wit of governments to separate them. The country that tries to regulate more tightly will find that it has delivered its financial industry into the hands of foreign competition.

Governments must not themselves become a source of financial instability. Budget deficits must be kept small. Central banks must be allowed to go about their work unmolested. * If you give complete freedom to business managers to produce goods and sell them to anyone they will produce more. * If you make the tax only one single income tax ON PROFITS AFTER EXPENSES NOT GROSS REVENUES FROM SALES a company can survive and be profitable. That level is about 12% of GDP (Gross Domestic Product) * The lower this tax is (not more than 30%) the more taxes in the aggregate the government will actually receive.

* The normal world standard is that industry supports the government not that government supports industry. * No one can be supported, if nothing is produced. * If the government takes money from the people who earn no profit, to support the government, then the government will exhaust the people and the government will go bankrupt. * Everything that is not specifically prohibited should be permitted without asking for permission. Everything that is legal can be done by anyone at any time without any restriction or permission.

* the purpose of the government is not to give permission but only to prevent actions which are not morally legal. * The market economy cannot be regulated. A market cannot be defined, it can only be measured. If you have rules about the market there is no market. A market has no rules.

* The freer the market the more taxes the government will receive. * To attract investment you must be willing to export profits. * The market does not stop at the borders to Russia. The world is not part of Russia. Russia is part of the world.

Free trade on a global basis is economic development. Economic activity within Russian borders is impossible without economic activity outside Russian borders. * Mechanisms must be created to assure the government that it will receive its fair share of profits in the form of a reasonable tax. Russian industry must have complete freedom to use its profits to invest in machinery and production and grow, or to become bankrupt if it cannot earn a profit. So far Russia has never tried a radical reform.

It has not even tried a reform. What government has done is try to support its existence by taxing assets rather than income and by redistributing (transferring) money from the poor to the rich and powerful. Government is suffocating Russian business before it can even get started. The result will be the death of the goose that could lay the golden egg. The existing production of Russia is simply inadequate to give the total population a decent living.

Production must be increased. Nothing can be gained by sharing what is left. Industry must be left sufficient capital to support itself. If it is not, Government will drag down industry and they will sink together. For production to occur, investment is required.

For investment to occur, economic freedom to produce and retain a fair portion of the results of labour is necessary. There is no other way. Government investments are not investments. They are subsidies, obtained from producers and given to non-producers. Such government transfer cannot last. Such rules will keep capital far away from Russia.

Look at Taiwan and what it has accomplished in 40 years without any natural resources. The greatest resource of Russia is not what is in the ground but what is in its people. The people will rescue the government if the government has the good sense to permit it. * Industry must make its own decisions on a completely free basis. Government does not have competence in Economic affairs other than to collect a fair tax. * In exchange for freedom, industry must guarantee the government a fair amount of taxes on its profits.

The government must guarantee to live within the budget allocated by GDP producers. * Ownership of profits belongs to it producers, not to government. Industry has sovereign rights of private property over its profits and capital. Government rights are only for the fair amount of tax on such profits. * Industries which earn no profits should not have to pay any taxes.

Until such civilized norms are observed export license auctions will remain bribes to government for exporting flight capital, decent housing will be provided only to foreigners, and international investors will include in their expectation of return an assessment of risks, the cost of arbitrary blocks on their bank accounts, fixed currency exchange rates, printing press inflation, withdrawal of work permits, sudden legislated increases in their costs, retroactive cancellation of tax moratoriums and incentives and potential imposition of back taxes. Such risks will be added to the cost of their contracts during negotiations. Why is Russian labour worth more money outside Russia’s borders then inside Russia? Why are Russians successful, optimistic, positive, creative, competitive, and even joyous outside their borders, where they miss their home land. They are the same people in both places. Why can’t their energies be freed where they are, without a brain drain of the motherland? Why do Westerners, who are successful outside Russia fail inside Russia. They are the same.

Could it be that at something within the borders is the problem? If it is not the Russian people, then what and who is it that is causing so much difficulty? Economics Essays.