Piketty ze­roes in on Putin's pain point

The Baltic Times - - COMMENTARY - Leonid Ber­shid­sky

Af­ter alert­ing the Western world to the alarm­ing rise of in­equal­ity, Thomas Piketty, a French pro­fes­sor (di­recteur d'etudes) at the Ecole des Hautes Etudes en Sci­ences So­ciales (EHESS), As­so­ciate Chair at the Paris School of Eco­nom­ics and Centennial Pro­fes­sor at the In­ter­na­tional In­equal­i­ties In­sti­tute, has turned his at­ten­tion to Rus­sia. To some­one who has lived through Rus­sia's tran­si­tion from com­mu­nism to crony cap­i­tal­ism, his take on that tran­si­tion re­veals deep flaws in his over­all method­ol­ogy -but some of his con­clu­sions should have im­por­tant im­pli­ca­tions for Western pol­icy to­ward Rus­sia.

In a fresh work­ing pa­per, Piketty, his Paris School of Eco­nom­ics col­league Filip No­vok­met, and Gabriel Zuc­man of Univer­sity of Cal­i­for­nia at Berke­ley set out to show that of­fi­cial mea­sures vastly un­der­es­ti­mate in­equal­ity in Rus­sia, and the ex­tent to which it has been robbed by its oli­garchy. Un­for­tu­nately, some of the anal­y­sis is based on data so un­re­li­able, that the re­searchers should have minded the old com­put­ing prin­ci­ple: Garbage in, garbage out.

Piketty works with datasets that go back cen­turies. His Rus­sian one starts with 1905. But the Bolshevik rev­o­lu­tion in 1917 made a mock­ery of of­fi­cial sta­tis­tics. In a planned econ­omy, apart from serv­ing a pro­pa­ganda pur­pose, they were also meant to back up in­flu­en­tial groups' and in­dus­tries' fund­ing ap­petites and cover up in­ef­fi­cien­cies. Us­ing these num­bers, Piketty and col­lab­o­ra­tors reach the con­clu­sion that "Rus­sian liv­ing stan­dards were about 60-65 per cent of the Western Euro­pean av­er­age in 1989-1990, and reached about 70-75 per cent by the mid-2010’s."

That's a laugh­able state­ment to any­one who ac­tu­ally lived in the Soviet Union in 1989 and 1990 -- and to those who re­mem­ber the grim bread lines that dom­i­nated me­dia re­ports on the coun­try. Ev­ery­thing from toi­let pa­per to run­ning shoes was in short sup­ply. Af­ter draw­ing my salary, I'd go into a store and see noth­ing but rows of three-liter jars of sweet­ened birch sap. 60 per cent of the Western Euro­pean av­er­age? That's the cur­rent gap in pur­chas­ing power par­ityad­justed per capita eco­nomic out­put be­tween Poland and Ger­many. The Soviet-era gap with Western Europe felt, and was in prac­tice, con­sid­er­ably wider. When I first went to a Western Euro­pean coun­try, Greece, in 1992, I was struck by how much wealth­ier the lo­cals were; it looked like a gap that could never be bridged.

Of­fi­cial sta­tis­tics in the Soviet Union's fi­nal years weren't even close to de­scrib­ing the eco­nomic hard­ship we ex­pe­ri­enced or the true in­equal­ity level. The late Soviet so­ci­ety was highly un­equal, but that was mea­sured in ac­cess to a va­ri­ety of goods and ex­pe­ri­ences, not in as­sets or in­comes that could be de­scribed by eco­nomic sta­tis­tics. In the 1990’s, the switch to cap­i­tal­ism con­verted this in­equal­ity to the type that is bet­ter un­der­stood in the West, but data on Rus­sians' in­comes were worth­less, any­way: The gov­ern­ment sta­tis­ti­cal sys­tem was un­der­go­ing a pain­ful tran­si­tion with in­ad­e­quate re­sources, and, for a decade, barely any­one paid taxes, and the gov­ern­ment didn't have much of an idea of how much peo­ple earned. Nei­ther, as a re­sult, do the re­searchers -- which un­der­mines their con­clu­sion that the bot­tom 50 per cent of Rus­sians have seen very small or neg­a­tive in­come growth since 1989, and the mid­dle 40 per cent saw only mod­est growth. The leap to the cur­rent 70 per cent of the Western Euro­pean level -- which in­tu­itively feels high, but pos­si­ble, and which is based on much bet­ter data -- was much steeper than Piketty and col­lab­o­ra­tors would have it.

No­vok­met, Piketty and Zuc­man ac­knowl­edge the lim­i­ta­tions of their data and the im­por­tance of non-mon­e­tary in­equal­ity in Soviet times -- but they still plow ahead with as­sess­ments of how in­equal­ity evolved in Rus­sia since 1905. Given the avail­able data, it would have made more sense to scut­tle the task as hope­less.

The re­searchers' work be­comes in­ter­est­ing and valu­able when the data suf­fi­ciently im­proves in qual­ity, start­ing in the early 2000’s, with the in­tro­duc­tion of, in the re­searchers' words, "a 13 per cent flat rate on top in­comes which Rea­gan, Thatcher and Trump com­bined could not have dreamed of." That de­vel­op­ment, no mat­ter how ab­hor­rent from a leftist point of view, made the mean­ing­ful study of gov­ern­ment data pos­si­ble be­cause it ended the mass tax eva­sion.

For the first time in a Western study, the re­searchers used na­tional in­come tax data, as well as sur­vey data to es­ti­mate in­comes; that drives up the Gini co­ef­fi­cient, used to mea­sure in­equal­ity, and in­creases the share of in­come ac­cru­ing to the top 10 per cent. But, per­haps even more in­ter­est­ingly, the re­searchers con­cerned them­selves with the con­trast be­tween Rus­sia's large trade sur­pluses and the small net for­eign as­sets Rus­sia man­aged to ac­cu­mu­late -- only 25 per cent of na­tional in­come by 2015.

In part, this dis­crep­ancy is ex­plained by for­eign in­vestors' enor­mous wind­fall from buy­ing up Rus­sian as­sets in the mid-1990s, when they were sold at rock-bot­tom prices. But capital flight is a more rel­e­vant ex­pla­na­tion. No­vok­met, Piketty and Zuc­man cal­cu­late that by 2015, off­shore wealth ac­cu­mu­lated by wealthy Rus­sians reached 75 per cent of na­tional in­come, or about as much as the en­tire do­mes­tic wealth held by all Rus­sian cit­i­zens, and three times Rus­sia's of­fi­cial net for­eign re­serves. That's not a pre­cise cal­cu­la­tion -but, un­like the re­searchers' in­come equiv­a­len­cies for the late 1980’s and early 1990’s, it's in­tu­itively plau­si­ble given the off­shore-based own­er­ship struc­tures of large and even medium-sized Rus­sian com­pa­nies and the anec­do­tal ev­i­dence of Rus­sian money flow­ing through Western fi­nan­cial cen­ters.

There's noth­ing par­tic­u­larly sur­pris­ing about the con­clu­sion that as much Rus­sian wealth is held off­shore as do­mes­ti­cally. Sergei Glazyev, an eco­nomic ad­viser to Pres­i­dent Vladimir Putin, has es­ti­mated the Rus­sian off­shore wealth at 1 tril­lion dol­lars, with half never ex­pected to re­turn. 1 tril­lion dol­lars is about 78 per cent of last year's eco­nomic out­put, and it's roughly in line with No­vok­met, Piketty and Zuc­man's es­ti­mate. Glazyev, how­ever, holds views that are so far from the mod­ern eco­nomic main­stream, that few in the West pay any at­ten­tion to him. The names of Piketty and his col­lab­o­ra­tors lend a dif­fer­ent level of cred­i­bil­ity to the as­sess­ment.

The pic­ture No­vok­met, Piketty and Zuc­man paint is of a coun­try plun­dered by an oli­garchy that has achieved an ex­tra­or­di­nary wealth con­cen­tra­tion. "Ex­treme in­equal­ity seems ac­cept­able in Rus­sia, as long as bil­lion­aires and oli­garchs ap­pear to be loyal to the Rus­sian State and per­ceived na­tional in­ter­est," they write.

This raises the ques­tion of whether the cur­rent Western sanc­tions against Rus­sia strike at the heart of the Rus­sian sys­tem or merely pre­tend to do so. Since the sanc­tions were in­tro­duced, no Western gov­ern­ment has made a mean­ing­ful ef­fort to in­ves­ti­gate the prove­nance of hun­dreds of bil­lions of dol­lars in Rus­sian off­shore as­sets. No sig­nif­i­cant as­set freezes have taken place. The money is still out there, to be in­vested in­side or out­side Rus­sia, in the ser­vice of its "per­ceived na­tional in­ter­est" or oth­er­wise (Putin would like to get his hands on some of it, too, but it doesn't be­long to his cronies).

A Western ef­fort to track down that money and make it avail­able to a post-putin, demo­cratic Rus­sia could po­ten­tially be a game-changer. But it would re­quire far more work, and prob­a­bly a lot of un­com­fort­able rev­e­la­tions about Western busi­ness and pol­i­tics. The cur­rent sanc­tions regime is sim­ply not in­tended to open that can of worms.

The ar­ti­cle is reprinted from www.bloomberg.com This col­umn does not nec­es­sar­ily re­flect the opin­ion of the ed­i­to­rial board or Bloomberg LP and its own­ers.

Leonid Ber­shid­sky

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