I was surprised by the media reaction to president Putin’s announcement of his political agenda for the last two years of his presidency. This was a bold announcement, the outlining of around $4 billion in spending on health, education and infrastructure projects.

The foreign press, however, ignored the announcement. Not an article, not a word. I pitched the story to a foreign newspaper I occasionally write for. “Putin’s raised salaries for teachers and nurses”, I said to the news desk in London. “It’s a good thing.”“Yeah… anything else?” they replied. “Er… some fascists are organizing an anti-Orange front.”“Great, we’ll take it.”

None of the foreign press cared about the pay-rise for nurses and teachers, because Russian nurses and teachers don’t really interest people in the US or UK. They want to hear about spies, dissidents, oligarchs, movie stars.

I was more surprised by the Russian media’s reaction, which often seemed to be one of cynicism. While some papers congratulated Putin on not resting on his laurels in his last two years in power, others said this was purely a cynical political move, designed to head off the threat from the Left in the 2008 elections.

So what if it was? A sign of a good government is its flexibility, its ability to adjust according to public pressure. It’s clear that, in a period of record oil prices and large government surpluses, when 25 million Russians still live below the poverty line, many of the public want the wealth to be shared, and to be given to the people on whom society really depends – teachers and healthcare workers.

The government has shown its ability to listen to that demand. So when a foreign commentator like Anders Aslund accuses the Putin regime of inertia, paralysis and inability to react to public pressure, you can point to this agenda and say, on the contrary.

You can also applaud the decision from the point of view of helping the growth of the middle class. Teachers, nurses etc. are the backbone of the social democratic electorate – they are the people who will be voting for Yabloko in ten years time.

The bigger worry, of course, is what the effect of this wage hike will be on inflation, which is already above the government’s target at around 10%. I’m not an economist. However, the spending increases were already included in the 2006 budget. And I don’t think inflation of around the 10% level is necessarily unacceptable.

At a recent presentation, Uralsib’s capital research team pointed out that investment in Russia is only at around 15% of GDP. They say: “You can’t hope to really encourage the growth of new markets, such as IT, without investing at least 30% of GDP.”

Uralsib suggest the government’s priorities – lowering inflation, reforming natural monopoly tariffs, and encouraging GDP growth, are self-contradictory. You can’t encourage GDP growth while lowering inflation; and you can’t reform monopoly tariffs while lowering inflation. They suggest focusing on the main goal of encouraging GDP growth and diversification, while putting tariff reform on hold and containing inflation at the 10-12% level.

The ‘Washington Consensus’ argument against raising government spending is that you will scare off the international debt markets, meaning you have to borrow at higher and higher costs, until you could face a bankruptcy situation, as Argentina did in 2001, and the UK did in 1976.

But the Russian government has an impeccable foreign debt profile, thanks to its Stabilization Fund. And it is set to increase domestic borrowing, as opposed to foreign borrowing. This will also help it to mop up extra liquidity in the domestic system, which could also ease inflation.

There are several international precedents for increasing government spending without scaring off the markets. Norway has managed it successfully for a number of years – it has high levels of government spending, but its government still manages to borrow cheaply on the debt markets, simply because it balances its books.

The advantage of the Norwegian model is you have a highly educated and well-looked after population, with a lot in common because they all share the same high-quality public services. I once spent two weeks in a Norwegian hospital, and it put English hospitals to shame.

Norway has been able to follow this great social market model because of its North Sea oil and gas, which state oil company Statoil has very prudently managed. The oil is now running out, and Norway is facing a serious crisis in a few years, but that’s another story.

The UK has, in some ways, followed a similar economic model under chancellor Gordon Brown. He is an avowed ‘social market democrat’, meaning he believes in liberalizing some markets, while increasing government spending in other areas. Brown has liberalized the capital markets in London, giving control of rates to the Bank of England and reducing capital gains tax.

At the same time, he has raised government borrowing and increased spending on health, education and infrastructure. He claims investment on infrastructure is non-inflationary, non-cyclical and helps pave the way for future growth. It is not boom and bust spending, he says. So far, he has managed to convince the global markets, and the UK’s debt profile remains good. However, sceptics claim he has only balanced the books through hidden taxes and off-balance sheet accounting schemes.

Russia, of course, is not Norway or the UK. These countries are uptight, Protestant countries with a free media and some of the lowest tolerance levels of corruption in the world. Russia, by contrast, is an easy-going Slavic Byzantine country without much of a free press, where government spending is highly inefficient and billions of dollars of public money occasionally disappear into private pockets. Will Putin’s best laid plans go awry, will the extra $4 billion simply dribble out into private pockets, once it is distributed into the regions?

Yes, millions will go missing. There are ways the government could try and minimize this. It could work with the World Bank and EBRD, for example, on its infrastructure projects of national importance, to try and raise the level of transparency and efficiency in these projects. The EBRD worked very successfully with the St Petersburg government on its billion-dollar dam project in 2003, for example.

But, as far as the education and healthcare sectors go, at some point, you have to go beyond the market rhetoric of ‘efficiency’ and ‘shareholder value’ and simply raise teachers’ and doctors’ salaries, and reward these people for the work they do. The Russian government has the cash, and this is exactly the area where it should spend it.

Julian Evans is a British freelance journalist based in Moscow. The article is written specially for "Eurasian Home".

September 14, 2005