- The Washington Times - Friday, June 2, 2000

When President Clinton meets with Russian President Vladimir Putin at their forthcoming summit, he may be surprised to learn Russia has sworn off IMF austerity policies on the economy and is instead turning to a free market reform plan developed by an international advisory panel that has consulted with Mr. Putin in recent months.
Mr. Putin's apparent bias toward economic liberalization is one reason for the excellent performance of the Russian stock market. Since last December, when rumors rippled through Moscow that the former KGB head would replace the ailing Boris Yeltsin, the Russian bourse has been one of the best performing stock market indexes in the world, rising 134 percent by late March. The Russian bear has turned into a bull.
Since then Russian stocks have given back 23 percent of their gain, largely in response to aggressive liquidity tightening moves and interest rate increases by the U.S. Federal Reserve. It is widely reported that more U.S. dollars circulate in Moscow than Russian rubles. So Fed policies rule the monetary roost in Russia as well as elsewhere around the globe.
Still, the 79 percent net Russian market gain shows confidence in the recently elected Mr. Putin. This is in part because as a former deputy mayor of St. Petersburg the new Russian president has a track record of pro-market reforms. There is more substance to this guy than Western reporters recognize.
So it is not surprising that Mr. Putin and his staff invited a group of free market types to consult on the economy. U.S. congressional staff economists Jim Carter and James Gwartney, along with Ohio University professor Richard Vedder, a Joint Economic Committee consultant, were part of the group.
Additionally, the advisory panel included University of Chicago professor Arnold Harberger (one of the original "Chicago boys" who reformed Chile in the 1980s), Chilean Social Security reformer Jose Pinera and former New Zealand deregulatory Prime Minister Sir Roger Douglas ("Rogernomics").
Meeting with Mr. Putin and his top economic deputies, the panel hammered out a pro-growth reform plan that features a 13 percent flat income tax-rate and significant payroll tax cuts (below the current astronomical 41 percent rate).
None other than the New York Times has endorsed these supply-side reforms, editorializing that "Russia has created the worst of all tax worlds: high rates and little revenue." Ah, the Laffer Curve is alive and well in Russia.
Mr. Putin's reform plan is also expected to include personal investment accounts for pension reform, a currency board to prevent inflation, abolition of customs duties for freer trade, additional privatization of state-owned industries, private property rights protection and major openings for foreign investment. Much of this was first reported a week ago by former Wall Street Journal editorialist Amity Shlaes in her new Financial Times column a must read by the way.
The Putin plan is expected to be unveiled in June. The ambitious and strong-willed president believes a Russian growth strategy of 8 percent to 10 percent yearly over the next decade will enable Mother Russia to surpass the economies of Spain and Portugal and equal the size of Britain's gross domestic product.
The jury is still out as to whether Mr. Putin will respect press freedoms and human rights, end the hostilities in Chechnya and negotiate in good faith on arms control and foreign relations. But economic liberalization would surely be a step in the right direction. Come to think of it, perhaps Mr. Putin will counsel Bill Clinton on the merits of a flat tax for the United States.


Lawrence Kudlow is chief economist of CNBC.com and Schroder & Co. Inc.

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