Democracy. Russia. CIS.

Modernization, Property Rights and the Russian Middle Class

Posted by democratist on June 20, 2010

20th June 2010

Last Friday (June 18th) President Medvedev used the annual St. Petersburg Economic Forum as a platform for the official launch of his much-anticipated reform programme, which has been designed to attract foreign investment as a basis for the modernization and diversification of the domestic economy.

As such the following reforms have been unveiled; capital gains tax is to be abolished for FDI from 2011; tax breaks will be introduced for innovative companies and educational institutions; the number of firms deemed “strategic” will be cut five-fold (to allow for greater foreign participation); a more relaxed visa policy will be introduced for foreign businesses; and finally assurances have been made that the legal basis needed to fight corruption will be strengthened.

While this is all fine liberal stuff – as far as it goes – those already familiar with this column will not be surprised to hear that Democratist remains profoundly sceptical about the long-term viability of Medvedev’s project. The dominant barrier Russia faces in attracting foreign investment is its extraordinary record on corruption; in 2009 it ranked at 146th (out of 180) in Transparency International’s Corruption Perceptions Index – putting it on a par with Zimbabwe or Sierra Leone, and the idea that the current government is about to seriously tighten up the legal basis for combatting this problem is questionable, to say the very least.

As Sergey Mitrokhin, leader of the marginalized extraparliamentary liberal Yabloko Party recently noted his article Modernization or Stagnation? (June 15th – any measures taken under the current regime are likely to remain superficial and short-lived; firstly because a large part of the Russian elite is afraid of change because of the threat of losing property and income accumulated over the last 20 years, and more fundamentally because Russia has not yet managed to develop the kind of politically mature middle class needed to drive any modernization programme forward over the longer-term.

As Mitrokhin states; “The structure of property rights in Russia is reminiscent of an upside-down pyramid; the higher up one is on the social hierarchy, the more property, and the rights to guarantee it one has. The lower one is, the less one has of both…with such an upside-down pyramid, there is no niche for the development of a full-fledged middle class in the country, which in most of the transformed countries was the main social bearer of the modernization project… the elite must give the first impetus, but if this impetus does not have a strong social bearer, then modernization will prove to be “elite-oriented,” and will quickly die out.”

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