Democracy, Governance and Growth:Theoretical Prospective and Russian Experience Kartik C. RoySchool of Economics,The University of QueenslandBrisbane Qld 4072AUSTRALIAemail: k.roy@economics.uq.edu.au and Anatoly V. SidenkoDepartment of Statistics,Plekhanov Russian Economic Academy PO Box 45, Moscow-516RUSSIA 115516email: oknedis@aha.ru ______________________________________________A paper presented at the^ Fifth IIDS International ConferenceonDevelopment and GovernanceUniversity of South PacificSuva, FijiDecember 1-4, 2005Democracy, Governance and Growth:Theoretical Prospective and Russian Experience ^ Kartik C. RoySchool of Economics,The University of QueenslandBrisbane Qld 4072AUSTRALIAemail: k.roy@economics.uq.edu.au and Anatoly V. SidenkoDepartment of Statistics,Russian Economic Academy named after Georgy PlekhanovPO Box 45, Moscow-516RUSSIA 115516email: oknedis@aha.ru Abstract The breakdown of the former Soviet Union in 1991 transformed the former Soviet Republics into independent countries and allowed them to pursue their political and economic development goals independent of the directions from Moscow and also heralded the beginning as a separate country, of Russia’s transition from a totalitarian to a democratic policy. While appropriate institutions are crucial to realizing economic and social developmental goals for any country, the state is the most important of all institutions in a country. After living under a totalitarian state since 1917, Russians opted for a democratic state in 1991. However, when one analyses the role of a state, the distinction between the state and the government gets blurred because the policies of a state are formulated and implemented by its government. Hence the success of a democratic state in realizing its governance and developmental goals would depend greatly on how close the structure of a government comes to the ideal structure of a democratic government.In Russia’s transitional democracy we find that the structure of the government differs greatly from the ideal structure. As a result the capability of the Russian state as the foremost political institution to deliver good governance to its citizens is being significantly undermined by vested interest groups which the state, through both its formal and informal agents, has created. Progress on democratic reform is incomplete, and democratic institutions remain fragile. While the judicial administration continues to improve, charges of corruption and threats to judicial independence persist.In this paper, therefore, we will first, in Section I, present a theoretical discussion of:(a) Why democracy has been chosen as a preferred form of government in most newly emerging countries; (b) What is the structure of an ideal democracy? (c) What are the fundamental requirements for such a democracy to succeed in realizing its developmental goals; and (d) Why autocracy has been able to achieve better economic and social development outcomes.In the light of the theoretical discussion on different forms of the polity and democratic governance in Sections II and III, we will examine the structure and performance of the democratic state in Russia in Section IV.In the end, we will conclude that the fundamental requirements for the creation of a West Minister system of democratic government were not met in Russia and consequently the Russian democracy contributed to a significant rise in rent seeking activities in the country, the rise in income disparities between high and low income groups of population, rise in poverty level and to low social development outcomes, although the establishment of a democratic state granted the population freedom of speech and of assembly and released human energy for entrepreneurial activities to flourish.^ Democracy, Governance and Growth:Theoretical Prospective and Russian ExperienceKartik C. Roy and Anatoly V. SidenkoIntroduction Mancur Olson (1996) once said that Economic Performance is determined by the structure of incentives. However, the structure of incentives is governed by the institutions which are formal laws enacted by the state, informal rules such as social customs, traditions and religious beliefs and other rules of behavior established through decades of observance by the people and accepted by the society and the state. While the informal rules cannot be altered easily even if the country’s development needs demand such alterations, the state can, nevertheless, alter its existing or create new formal rules to provide incentive to the society favoring alterations of certain social norms and practices. Hence, the most important prerequisite for a country’s development is the presence of a developmental state. As Clark and Roy commented (1997), the main tasks of a developmental state which have been accepted by neo-classical economists involve the creation and maintenance of a sound political and economic environment without which a market economy could not operate. Such state and governmental functions include maintaining political order which includes holding political corruption and “squeeze” on businesses to an acceptable minimum, creating a stable legal order for market relationships, using macroeconomic (fixed and monetary) policy to curb inflation and dampen the business cycle fluctuations, and financing expensive physical infrastructure projects such as highways, rail roads, harbors and airports, and so on that are vital for economic and business expansion. Another function of the state would be to minimize the government’s direct involvement in economic activities by privatizing public enterprises and by implementing market liberalization rules to increase the degree of outward orientation of the economy. But for a developmental state to be able to perform such tasks as outlined above, it should possess coercive authority which would enable the state to implement policies formulated by competent, highly efficient and honest bureaucracy. The state also should not engage itself in predation, bureaucratic and patronage politics and rent seeking behavior but ought to be able to act in a unitary fashion. Its autonomy needs to be protected by a strong leader who would be independent from both dominant and subordinate classes, would reign rather than rule and take a long term view of national interest.Such structural characteristics of a developmental state can mostly be found in a unitary state but not in a federal state. But the unitary state can be governed by a totalitarian regime, autocratic regime or a democratic regime. Also, an examination of the history of East and South East Asian economies shows that the high growth and development outcomes recorded by those countries were made possible in unitary states under autocratic regimes. Even China which still is, by and large, a totalitarian state, have achieved phenomenal growth under autocratic regimes. Hence, why do the newly emerging countries choose democracy as the preferred form of government? In the following section, we present our comments on this issue.Totalitarianism and Autocracy vs Democracy The main elements of autocracy are also present in totalitarian states. Nevertheless there are significant differences between the totalitarian states of People’s Republic of China and the former Soviet Union and the autocratic states of East and South East Asian countries. Modern totalitarianism is a system of government and ideology that seeks to subordinate all social, political, economic, intellectual, cultural and spiritual activities of human beings to the purposes of the rulers of a state and make them utterly dependent on the wishes and whims of a political party and its leaders. The state therefore is governed by the leader of a political party who becomes a dictator and also controls the party, the members of which become the elites of the society. The whole society is subjected to hierarchical organization wherein each individual, with the single exception of the supreme leader, who is answerable to no one, is responsible to another person in a position of higher authority. All non-governmental social groupings are either totally destroyed or coordinated to serve the purposes of the party and the state. The total subjugation of the individual to the state is secured by bringing under the state’s control, the country’s mass communication system, a terrorist secret-police apparatus, all effective weapons of destruction, and the governance of the economy through central planning. In pursuance of this above noted objective, a totalitarian state transforms itself also to an unitary state because it is easier under an unitary system of state and government to impose the totalitarian governments’ total control over the whole economy through the ownership or management of its agricultural and industrial sectors by determining the type and quantity of goods to be produced, by determining the methods by which they are to be produced, the quantity that will be made available to the consumers in different regimes of the country and the prices to be paid by consumers for the consumption of these goods – than under a federal system of state and government.However, for a totalitarian government to be able to effectively control all human activities within the country, it needs to transform the country to a “fortress economy” by cutting off all communications with the outside world. This was the case in Maoist China, Pre-Gorbachev Soviet Union, currently in North Korea and in Cuba. The regime enslaves the workers, who cannot work without a work permit which can be withdrawn even for raising objectives to extremely adverse working conditions. The withdrawal of the work permit means a virtual death sentence for the worker and his family. Obviously when the state imposes its pervasive control over all economic activities, it also stymies the growth of entrepreneurial dynamism which has been the crucial factor in East Asian countries’ success in achieving high growth and development outcomes.It should, however, be noted that while the supreme leader acts as an autocrat, the members surrounding the leaders form the elite group which run the administration under what we call “collective autocracy”. Hence, elements of autocracy are present in a totalitarian state and government. The PRC since 1980 is still a totalitarian state but governed by a collective autocracy.In what respects, do the autocratic states differ from totalitarian states? The major difference lies in the degree of suppression of human freedom in both political and economic spheres.In autocracy, the state and the government suppress political activities which are likely to disrupt economic activities, which can adversely affect economic growth and development, but generally encourages the entrepreneurial dynamism to flourish by allowing the international price to be the bench mark for resource allocation and price setting in the domestic market.The autocratic state, by generating high economic growth and greater human development can secure the support of the society to the suppression of political freedom and its economic agenda. Hence, the state market and society cooperation for economic development which has been the hall mark of the success of East and South East Asian autocratic states (Clark and Roy 1997) is virtually absent in totalitarian state and government.In China too, while the totalitarian government continues to suppress political freedom of people to express opinion, to form political groups such as unions, it continues to achieve high economic growth and human development by allowing the entrepreneurial dynamism to flourish and by opening up the virtually closed economy to international competition since 1980. Such phenomenal achievement in economic sphere has enabled the government to secure the support of the society to the perusal of its political and economic agenda.However, in other countries in Asia, in Africa and Latin America, the autocratic governments have not achieved similar success in economic and human development as those in East and South East Asia. Therefore, what is the other distinguishing feature which separates the East and South East Asian autocratic governments from autocratic governments in other countries?The presence of effective leadership and its single minded attention to economic growth is the other distinguishing feature of East and South East Asian autocracies, not found in other autocracies in the world today. This leadership is a product of East Asian culture which has inculcated in the mind of leaders and bureaucrats a sense of fairness and Douglas North’s (1987) fourth variable to keep transaction costs low: some conviction about the justice and appropriateness of the society and the economic system within which they are acting as well as a belief in an ideology.The suppression of political freedom and not so genuine democratic institutions has removed the fear of losing power through democratic elections and the cultural conditioning has enabled the leaders to secure the cooperation of the market and society to formulate and implement economic and social policies for long term gains for their countries.On the other hand, economists and theoreticians writing on democratic governments, argue that merits of democracy over other forms of government lie in its ability to grant the individuals, living within the country, the freedom to pursue their political, social and economic goals, provided of course, the democratic government is properly constituted and upholds the basic principles of democracy along the lines of the ideal West Minister system of democratic government.Thus, the capacity of a democratic government to achieve better results in economic governance and consequently better growth and development outcome than an autocratic government, seems to rest mainly on the presence, in the country, of political freedom which enables the spirit of individualism to flourish and drives individuals and businesses to pursue their entrepreneurial goals.The question that arises then is whether the unfettered freedom enjoyed by the people can allow the sanctity of formal institutions to be maintained and the state to enforce these institutional rules to deliver high growth for the country. For an answer to this question, we need to examine the structure of democratic government prevailing in developing and transitional economies.Democracy and Governance: Theory and Practice Rule by the people played an important part in the democracies of the pre-Christian era. But the democracies of the city-states of classical Greece and Rome were direct democracies in which all citizens could speak and vote in assemblies that resembled New England Town Meetings. However, these ancient democracies of Europe did not pre-suppose equality of all individuals, the majority of the populace, notably slaves and women had no political rights. Athens limited the Franchise to native born citizens. Interestingly, the existence of some form of democracy in ancient India can be found in the Rig Veda, the first of the four Vedas. Although it is impossible to assign a specific date to the origin of the Rig-Vedic period, some scholars place date of the Rig-Veda to a period before 3000 B.C. (Majumdar, Raychandhuri and Datta, 1991). While the Vedic state was ruled by a monarch (Rājan) who was the lord of the people, he did not govern without their consent. The business of the tribe was carried out in a popular assembly called ‘Samiti’, at which the princes and people were present. The Rig-Veda refers to another body termed ‘Sabhā’ or the Council of Elders’ which consisted of men of wealth, opulence and goodly form and which performed the role of executive and judiciary as in a modern day representative democracy. Also women were excluded from the Sabhā. Hence we find a fascinating similarity between the ancient Athenian democracy and Indian democracy during the Vedic period.Merits of DemocracyAs mentioned earlier in this paper, the greatest merit of a democratic government over other forms of government is that it attempts to preserve individual freedom in political, social and economic spheres and to promote equality of opportunity for all citizens so that each can pursue one’s goal in a spirit of Adam Smith’s enlightened self interest. Since the greatest obstacle to individual freedom and equality were considered in the past to be political, democracy in political governance became the cherished goal in England where the evolution of democracy began in 1628 during the reign of Charles the First, and was completed in 1928 when adult franchise was extended to women. Many former colonies of European powers began to embrace democracy since the late 1940s. However, the traditional view of an ideal democratic government that the government that governs least governs best (a laissez faire philosophy) has been replaced by the view of an activist democratic government that plays an active role in the country’s economic and social affairs. These governments do not aim to achieve perfect equality because they accept that people differ in ability and some work harder than others. Hence their goal is equality of opportunity. But is it not also the goal of capitalism? Prolonged periods of steady economic growth laid the basis for welfare states in western capitalist economies which were democracies. Also economic wealth helps ease both intra-elite and elite-mass political strains. Hence capitalism and democracy tend to feed each other (Kohli, 1988).Here the following three questions need to be raised:(a) Can democratic political governance ensure sound economic governance and high economic growth? (b) Can there be a genuine political democracy in third world countries? (c) Does an uncontrolled freedom promote or hamper growth and development?We will try to answer these questions in the following paragraphs.For a democratic government to be able to provide sound economic governance and promote growth, it must create appropriate formal institutions for political and economic governance and be capable of enforcing them.How a democratic government is constituted will determine how it will function. An ideal representative of democracy as John Stewart Mill (1947) observed, should be based on a two political party system and the government should be formed by the party which wins the majority of parliamentary seats in a free and fair election. The members of the majority party in the Parliament elect one of them as their leader who becomes the Prime Minister and forms his cabinet (executive) with ministers appointed by the Prime Minister from his parliamentary colleagues. The powers of the Parliament, executive and judiciary are laid down in a constitution and the separation of powers between legislature, executive and judiciary are strictly maintained. The independence of judiciary must not be curbed by the executive, so that the judiciary and the police force can uphold the rule of law. The most fundamental requirements for such a government to be elected fairly and to be able to function successfully, in Mill’s view, is adequate education of ‘voters to ensure that no unfair means are adopted by political parties to get their representatives elected and that the members of the government fulfill their promise of implementing the economic and social development programs for which they were elected. A two party democratic government also needs to be supported by a highly efficient, scrupulously honest and apolitical bureaucracy which cannot be corrupted by majority political party leaders in the cabinet or in the party. Also a two party democratic government is better able than a multi-party democratic government to minimize the level of corruption in the country and to make government accountable to the people. However, the majority political party, once in power, may not want to give up power easily and can stay in power by controlling the police force by threat, power and bribe, by destroying the independence of judiciary; taking away the freedom of press and media, and by massive vote rigging, ballot box capture, booth capture, booth jamming (methods known to be used by several provincial governments in India) with the help of state sponsored informal agents (mafia) and, by allowing these agents to collect rent on behalf of the political party for every social and economic transaction in the country. If the state is unitary, with one central government, then the rest of the world can put some pressure on the so called democratic government to curve its rent seeking activities. As a result, the level of corruption, rent seeking activities, the size of black money and the overall institutional failure are likely to be lower than those in a federal, multi-party democratic state mainly because, the multi-party federal, democratic state power is decentralized from the central government to the provincial governments and from provincial governments to local governments within each province. As the centre of power spreads throughout the length and breadth of the country, so do, corruption, rent seeking activities and institutional failures. Thus the party in power and its informal agents develop an unholy nexus – each needing the other for one’s survival and growth throughout the country.Hence it would appear that in developing countries and in transitional economies, the democratic governance does seem to deliver better results than autocratic governance. The difference seems to lie in the relative magnitude of rent and corruption under these two types of governance. With greater political freedom, the chances of institutional failure are far greater in a democracy than in an autocracy. In a federal multi-party democratic state, the level of corruption, rent seeking and of institutional breakdown are likely to be far greater at the provincial level than at the centre as the actions of the provincial governments usually go unnoticed by the world community. Therefore a democratic government, also like an autocratic government, is run by a powerful group of so called elites.Note the following comments of North and Olsen:“The state becomes its own vested interest group creating a trade off between economic efficiency and state powers” (North, 1981).“The rise of impersonal rules and contracts means the rise of the state and with it an unequal distribution of power. This provides the opportunity for individuals with superior coercive power to enforce the rules to their advantage, regardless of their effects on efficiency. That is, rules will be devised and enforced on behalf of the interests of the politically advantaged, but they will not necessarily lower the costs of transaction in total. In fact one of the most evident lessons from history is that political systems have an inherent tendency to produce inefficient property rights which result in stagnation or decline” (North 1987). North’s primary concern was that the state’s vested interest group, through its rent seeking activities will increase the transaction cost in all economic activities which in turn will contribute to decline in economic growth. However, in a modern democratic state, the rent seeking activities of the agents of the political party in power spread to transactions in economic as well as in social and political spheres. Thus the concept of Northian ‘property rights’ has to be broadened to include even a person’s own life as his or her ‘private property’. An entrepreneur, even to be able to survive may have to pay rent to the informal agents (Mafias) of the state to protect his or her own life, then has to pay rents for all other economic and social transactions in a democratic state in most developing and transitional countries. Hence the total cost for any transaction becomes significantly higher than just the total cost of land, labor, capital and organization thereby virtually destroying the incentive which drives all Schumpiterian entrepreneurial activities. Olson’s (1982) argument that due to bargaining cost and the problem of free riders, the individuals are unlikely to organize in their collective interest unless they are in small groups and/or can impose selective incentives on groups is applicable to the political party in power in a multi-party unitary or federal democratic state. The party in power excludes all other non party groups of people from the list of beneficiaries of state largesse and rent. Such coalitions of self-interested persons are likely to try to redistribute income toward themselves instead of working to raise efficiency and national income, the full benefit of which will flow also to those who are not members and supporters of the political party in power. Thus, in a democracy which theoretically can create a more stable society than other forms of state and government, politics will increasingly be organized to cater to these interests. Of course the rent seeking is a rational behavior of individuals reacting to the incentives provided by faulty institutions. But these faulty institutions are created by the actors within the government either directly or by making the good institutions ineffective indirectly through the activities of the government sponsored informal agents.In Bardhan’s (1984) Indian state, the conflict arises between the bureaucrats and industrialists over the appropriation of rent and this interacts with India’s traditional rural-urban disparities to perpetuate stagnation. However, Bardhan’s comments are only partially correct for the following reasons:(i) The Indian state came out of the period of perpetual stagnation in the 1980s.(ii) The bureaucrats including the heavyweights of the political party in power and the industrialists were the major players in directly unproductive profit seeking activities (DUP) in early 1980s as the growth of the state sponsored mafia group (informal agents) was at its nascent stage. By 2005, these informal agents have become more powerful players than even the bureaucrats and industrialists in DUP activities in India – at the provincial level. The informal agents of the political party in power even control the police, to ensure that their DUP activities continue undisturbed.(iii) The DUP activities by informal agents of the political party in power has now spread to the rural sector as well. Thus the rent collection is not confined to the urban sector in India. The divide in India today is no longer between urban and rural or between rich and poor; it is rather between rent seekers and non-rent seekers in both urban and rural areas. We are not in complete agreement with Bardhan’s (1997) views that corruption, over centralization are systemic instances of institutional failure and that decentralization and incentive structure can reduce corruption, correct institutional failures and improve governance. Our view is that in a democracy, the bureaucracy, guided by the leaders of the party in power, formulates economic and social policies which lead to centralization – (e.g. India’s centralized planning) which in turn enables the state’s formal apparatus to tamper with the state’s formal institution to engage in DUP activities. On the other hand, in his home province, Bardhan would have observed, how decentralization of democracy in the rural sector has led to the alarming rise in institutional failures, DUP activities and failure of governance. If an incentive structure is constructed, it is more likely than not that the state’s formal and informal agents may collect the incentives and as well continue to engage in DUP activities to collect bribes, both under centralization and decentralization of power in the absence of Northian ideology and convictions among these agents.The neo-classical theory assumed that markets function, presupposing a minimal ‘night watch man’ role for the government as the traditional separation of powers among the legislature, executives and judiciary as well as the separation of economic from political spheres were expected to be maintained in a neo-classical state. However, in democracies in LDCs the party machine, with the primary objective of staying in power, virtually incapacitates all formal institutional arrangements for good governance (Mitra and Singh, 1999). Thus Lal (1983) therefore argues that a courageous ruthless and perhaps undemocratic government is required to ride roughshod over these newly created special interest groups.The neo-classical suspicion that democracy is not compatible with economic growth echoes some Marxists theories of the state.Democratic Governance and GrowthEven if a government of a country does not implement any growth promoting economic policies, the country can achieve some growth, provided normal economic activities are not disrupted by some unforeseen violent disturbances. A neutral rate of growth of about 3 percent is easily achievable by any government. So the question that needs to be asked is whether a country with a democratic government can grow faster than a country with an autocratic government.It can reasonably be argued that because, the guarantee of individual freedom is a fundamental trait of a democracy, obviously excessive freedom granted to citizens by the democratic state, can hamper economic growth. There is no clear evidence to state that democracy is correlated with a poor growth record. Kormendi and Philip (1985) found a positive effect of political freedom (which we consider as a proxy for democracy) on a country’s rate of economic growth.Dawson’s (1998) study which supports Friedman’s (1962) study found that the presence of economic freedom in a country can lead to political freedom, but it found no statistically significant relationship between political freedom and economic growth. So the results of these studies including that of Barro (1997), suggest that free market economic environments leads to economic prosperity which in turn promotes democracy.But we still cannot say definitely that democracy (political freedom) promotes prosperity which promotes economic freedom in the country. While Barro’s view is that the overall effect of democracy on growth is weakly negative, there is also a suggestion in his analysis that more democracy enhances growth at low levels of political freedom but depresses growth when a moderate level of freedom has already been attained.Finally Romer (1998) comments that members of a government with discretionary powers over economic affairs can easily divert that discretionary power from its intended public purpose and put it to private use. Thus, a government which acquires enormous power by subjugating the police force often furthers its own vested interest but harms the national interest.Comments of Barro and Romer are almost universally applicable to all developing countries which have embraced democracy. This situation is more widely prevalent in multi-party federal democratic states than in unitary two-party democratic states.In the light of the theoretical discussion presented above on autocratic and democratic governance and growth, we now examine the structure and performance of Russia’s transitional democracy termed “Managed Democracy” in terms of enhancing political and economic freedom, preservation of institutions being built and of achieving higher growth and development outcomes.Russia’s DemocracySoviet people had started to feel the taste of genuine democratic freedom since 1985, when 54-years politician Michael Gorbachev became the general secretary of the Central Committee of the Communist party, and later - the first and the only president of the USSR. It turned out to be that a new general secretary was an extra ordinarily reasonable person who could step down from Soviet political Olympus or television screens to a square, where freely, without cribs he talked to soviet citizens. That came as a shock to the population as that changed the perception in the minds of them that the leaders who were likened to gods in the USSR were in fact, human. The taste of newly found freedom made representatives of Baltic republics at the Supreme Council to demand independence for Latvia, Lithuania and Estonia. They called for a termination of their occupation by Soviet troops. On the 8th of December, 1991 the heads of Russia, Ukraine, Belarus union republics (Yeltsin, Kravchuk and Shushkevich) at a meeting in Belovezhskaya Pushcha declared: "The USSR as the subject of international law and the geopolitical reality stops its existence ". They signed the agreement for the creation of the Commonwealth of Independent States. Signing Belovezhskaya agreements in 1991 designed the breakdown of the largest state in the world into 15 small principalities. However among former union republics only the Ukraine and Russia, and partly Belarus were able to flounder in the world ocean of economics and politics. Naturally, the largest republic called the Russian Federation became the assignee of the USSR. Russia burdened itself with the USSR external debts. Russians received in exchange, a place of a permanent member in the UN Security Council and the property rights for the buildings of Soviet Embassies outside Russia. The first president of Russia, Boris Yeltsin is a professional party worker with no economic education. He invited Egor Gaidar as an economic adviser and the chairman of Russian government. Gaidar became famous for price liberalization. Liberalization of prices, or "shock therapy", as it was earlier called in Poland, created a balance between supply and demand in the Russian market by means of a galloping inflation. As a result one could buy any good in shops by paying high prices. For many years, goods shortage, which was a hard problem of the Soviet economy, was finally eliminated. All savings in Rubles were devalued in successive stages. During all their lives pensioners were saving a part of their income for comfortable existence after retiring on pension and for cost of funeral, but as a result of the massive devaluation of the Ruble, they became beggars in the end. Collapse of centralized planned system took place. Almost everything was planned in Soviet Union on the basis of balance schemes and on the decisions of the Party and the Government (which sometimes appeared far-fetched and rather pretentious). The State plan and State Logistics Committee, all divisions of these planning system and distributing institutions were abolished in the Russian Federation. Manufacturing activities were determined by consumers’ demand. Processes of privatization of the state property began. As a result two new social groups appeared in Russia. Using state bodies inexperience in privatization procedures as well as with their direct connivance and partnership, the first group of top proprietors appeared who are called oligarchs. The second group is rather vast. Energetic young persons who have begun operating business with small start-up capital, turned into solvent business people after finding a profitable niche in the sphere of manufacturing or services. They are called “new Russians” with a shade of humorous mockery.Redivision of Russian property continues. It is evident, that the property brings power with it. If one has power but no property this contradiction will eventually lead to harmony. If one’s power is weak a change of ownership of power occurs or this power goes under the control of proprietors. If one’s power is strong, that person takes hold of another's property. Quite often as a result of similar metamorphosis the property is even deprivatizated. The world experience shows, that a privatization process leaves untouched only low-income earning state enterprises without which the society cannot exist in a state ownership, and the private capital is interested in using similar state enterprises, rather than owning them. And if the state takes control of (or retrieves) highly profitable actives, then a certain group of persons trusted by the government to oversee this process to obtain a profit. Such transformation has occurred to activities of the largest oil-extracting companies "Yukos" and "Sibneft". It is not secret that the major part of property in Russia is under the control of criminal, military structures and persons trusted by the government. In regional areas of Russia the property is controlled by local elite. Russian president now has started to appoint governors to strengthen the control over the regional property. President Putin has juridical education and an experience of work in a secret service. He headed Federal Security Service and had an experience of confrontation to oligarchs, particularly to Boris Berezovsky before he was elected as a president. Military and oligarchs opposition is the regime’ striving to form partnership between the state and successful businessmen with political power in a way suitable for authorities.Thanks to his many policy successes, Putin became genuinely popular, which allowed him to reinforce personal power. In the December 2003 parliamentary elections, his United Russia Party won a majority of two thirds of the seats. He won the presidential contest in March 2004 with 71 percent of the votes. The Russian economy is doing very well, with a growth rate of 7 percent in 2004, and the standard of living is rising even faster. This growth is being driven not only by high oil prices but also by the extensive market reforms of Putin’s first term. Admittedly, no new reforms are in the offing, but the petrification of decision making also safeguards most of the reforms already adopted, even if the Yukos affair has undermined much of the tax and judicial reforms. However, neighboring Ukraine has just gone through a popular revolution, although its economy grew by 12 percent in 2004, and real wages increased twice as fast, showing that a rising standard of living is no guarantee of stability. Unfortunately, since he consolidated his power, President Putin has done little good. His failures have not been incidental but reflect the inadequacy of his new system. Two disasters stand out: the Yukos affair, and social benefits reform. Yukos On October 25, 2003, Mikhail Khodorkovsky, the richest man in Russia and chief executive of the Yukos Oil Company was arrested and recently sentenced to 8 years in labour camps. Though denying that he had instigated this arrest, Putin explained that it had to occur because Khodorkovsky was buying up Russian political power. Putin’s key motive was to enhance his political control by arresting the most politically active oligarch, while some of his aides wanted to seize Yukos assets. Khodorkovsky’s arrest changed Russian political system. Other oligarchs heeded Putin’s warning and withdrew from politics. Hence, the balance between oligarchs and KGB officers ceased. Putin can no longer claim to represent the population at large, because his power base has shrunk to a small group of KGB officers from St. Petersburg. In the Yukos case, Russia’s legal authorities have persistently violated every rule in the book, jeopardizing Putin’s ambitious judicial reform. Yukos appears to have utilized tax loopholes aggressively, but possibly in line with the law. Even so, biased tax authorities and courts have imposed an incredible total of $28 billion in additional taxes and penalties on the company, forcing it into bankruptcy. As a result, the once-promising tax reform has become a joke. Contrary to repeated public promises, Putin has allowed Yukos to be confiscated through arbitrary taxation and kangaroo courts. With characteristic stubbornness, he has made no concessions whatsoever. Negative consequences of the state attack on Yukos have been more limited than expected. Currently, its impact on the business climate is virtually zero. Foreign investors flock back, stock market performs well, the level of FDI grows and Russian credit rating is improving. On the positive side, the Yukos affair has sent an effective signal to businesspeople - pay taxes and do not bribe. Tax collection has picked up and the level of tax avoidance by firms has been reduced since 2003. The level of corruption has fallen by 20 percent while the risk premium associated with bribing has grown. 2. 2. Social benefits reform The recent reform of social benefits has been the second big policy failure. Russia has a myriad of old social benefits, primarily for the privileged, many of which have never been paid out. This system needs to be sorted out, to target those, truly in need, but the execution of the reform was remarkably inept. The reform was presented as the monetization of in-kind benefits, when in fact many were simply abolished. Full compensation was promised for the actual in-kind benefits, but initially only about one-third of them were compensated for. Proper calculations were not done, and the federal and regional governments did not agree on who should pay for what. Although the benefit reform affected about 40 million people, it was not explained. To add insult to injury, the 35,000 highest officials, including the president, had their salaries quintupled at the same time, and none of their substantial in-kind benefits were taken away.The social benefit reform seemed directed against the poor, and it was undertaken in the midst of Russia’s oil boom, as the budget surplus attained 5 percent of gross domestic product. To great surprise, widespread spontaneous popular protests erupted against this reform, and for the first time Putin himself was the center of public scorn. To cool down the protests, the government was forced to reverse most of its actions and raise pensions substantially. Cutting social benefits is unpopular in every country to say the least. This measure is often a necessity driven by budget failures. The Russian situation differs in this respect because Russia has money. Actually, the fact that the Putin Administration has initiated social reform is indicative of its strength and not weakness. The reform's policy objectives go beyond budgetary savings - it is aimed primarily at enhancing productivity of service sectors (public transportation, utilities, and residential services). However painful and inept was handling of the initial stage of reform, it is slowly recognized as being essential. A new idea in social reforms is to change the retirement age.3. Corruption Corruption is an acute Russian problem. It has stricken all the state structures. Michael Kasyanov, an ex-prime minister of Russia who is planning to enter presidential elections of 2008 was named “Michael two percent” by the national rumor: Kasyanov received a commission fee at a rate of 2% for helping out with “problems” in bargains. The State Duma is considering a proposal to implement a law that would allow property expropriation from persons exposed as inveterate bribe-takers. The expropriation was expelled from the measures of punishment of criminal code in 2003.Executive power is weak because there is no effective execution of verdicts on civil cases. The “telephone justice” is still in charge and a legal process win even more money to bribe judges. Thus supervising instances which are responsible for tendency of appeal against the decision of court of the lowest instance ignore the heart of the problem to support their colleagues, and, as a rule, confirm their decision. Even if the decision of colleagues is considered to be incompetent this appeal comes back to the same court for revision. At each new reference to court the claimant is obliged to pay the state duty of the established size. If in court or in service of judicial executors the document presented by one of the parties is lost then the parties are obliged to present this document repeatedly at their own expense. Notes above are based on personal experience and impressions of a Russian supplementary author who had an acquaintance with judicial instances.Arbitration court decision can also be financed according to illegally operating tariffs and has been repeatedly mentioned in Russian newspapers. It is commonly known, for example, that the owner of company "Yukos" condemned in 2005 paid hundred millions dollars to members of the State Duma so that they have adopted the Tax code which would be favorable to the businessman. Traditional Russian entertainments are embezzlement of public funds and pilferers. The main motto of these outlaw games is “steal and do not get caught”. There is a malicious joke that is prevalent in Russia: Where can one buy goods at a lower price - from the manufacturer or from the dealer? - From the watchman in a warehouse. The state policy is conducted under the banner of larceny. The higher a position, the more an official can steal, and easier to avoid a punishment. Well-known public figure Boris Berezovsky used to earn money on re-export of the Russian cars during a period of total shortage of goods, and he hooked his biggest fish after gathering money from the population and the various organizations for creation of the new Russian car (so-called project AVVA). It continues to function on the territory of Tolyatti (Russian biggest car producing region) with billions of rubles from the fooled shareholders and without paying any dividends to them. The stabilization fund formed from the unexpected rise of world oil prices is disturbing. It is anticipated that it will be plundered in such a way that any guilty party will not be identifiable. It is put forward now to invest funds in exploration works and to support the agriculture and infrastructure, particularly roads which, as one famous writer mentioned, are one of two troubles of Russia. ConclusionFundamental demands for the creation of the western style of democratic control were not accepted in Russia. As a result, leaders of Russian democracy made its contribution in the considerable acceleration of the search of personal enrichment in the country; a gap between the groups of population with the high and low level of income increased; share of poor also increased; social expenses of the state were relatively reduced, though the creation of democratic state guaranteed to nation the disengagement of word and associations, the golden age of business initiative. In a smoke screen of freedom of expression and speech during the second term of president Putin, in fact the opposite has been observed under Putin’s “Managed Democracy”. There is direct evidence of nation’s will being overridden by a president who appoints his “successor” in a fraudulent democratic appointment process and appoints his own supporters as “governors”. 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