The following Monday, on the front page of The Moscow Times, under the headline “World’s Reformers Pay Putin a Visit,” journalist Catherine Belton summarized the meeting as follows:

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“President Vladimir Putin held a late-night idea-exchange session on Friday with some of the world’s leading liberal reformers, as he steps up his effort to fulfill his promise to double GDP in ten years. Among those who gathered around an oval table for nearly four hours at Putin’s tree-surrounded residence in Novo-Ogaryovo were economists whose liberal reforms in their respective countries spurred the rapid growth that Putin seeks to achieve in Russia.

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Among those who called on the President to take more radical measures was José Piñera, former Chilean Minister of Labor and Social Security, known as the ‘Father of Pension Reform’ for having promoted the individual capitalization system that unleashed rapid economic growth. Piñera had visited Moscow for the first time four years earlier, shortly before Putin’s inauguration. Piñera stunned the world in 1980 by enacting an innovative pension law in Chile that allowed each worker to leave the state pay-as-you-go system and deposit their individual contributions into a privately managed fund. Since then, dozens of countries—including Kazakhstan—have followed his example.

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Also participating in the conversation about the gears of economic change were Ruth Richardson, former New Zealand Finance Minister, whose firm stance against inflation and bureaucracy helped spark an economic boom; Mart Laar, former Estonian Prime Minister, architect of liberal transformations in his country; and Grigory Marchenko, Deputy Prime Minister of Kazakhstan, whose efforts to free the economy through administrative reforms and a pension system inspired by the Chilean model in the late 1990s allowed his nation to surpass Russia and become the fastest-growing in the entire post-Soviet space. Also in attendance were Edward Crane, president of the Cato Institute; Yelena Leontyeva, economic advisor to the Lithuanian government; and Arnold Harberger, who has been a professor to numerous economic leaders at the University of California.

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The meeting, held in the second-floor salon of Putin’s columned mansion, was open to the press only during the first hour, in which Piñera spoke about pension reform. Piñera emphasized to Putin that ‘to achieve high growth, a complete free-market reform must be carried out, without half-measures.’ He explained that full pension reform was key to doubling GDP in Chile, and that ‘once that process is started, in twenty years GDP can be quadrupled. If you do that, you will create a new country.’ And he added that ‘Russia is moving in the right direction, but the steps are too small and not decisive enough.’ Putin seemed to appreciate Piñera’s comments.”

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At the Bolshoi

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At the end of the meeting, President Putin asked me if he could do anything to improve my stay in Russia. I confessed that I knew the Bolshoi Theater would present a special performance of George Balanchine’s ballets the next day, on the centenary of the great Russian choreographer, and that I hadn’t been able to get tickets, since all of Moscow seemed eager to attend. He said he would see what he could do.

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Andrei Illarionov woke me the next day with a phone call. The president was making me an offer I couldn’t refuse: to use the presidential box, since he would stay at his dacha and not go to the theater.

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Thus I witnessed the most wonderful ballet performance. From the old imperial box I enjoyed six Balanchine ballets performed by Russia’s best dancers: “Concerto Barocco” by Bach, “Symphony in C” by Bizet, “Pas de deux” by Delibes, “Agon” by Stravinsky, “Pas de deux” by Tchaikovsky, and “Tarantella” by Gottschalk.

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In the Moscow Times

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Back in Chile, The Moscow Times asked me to write a column about Putin’s upcoming State of the Nation address. I accepted immediately, as it offered the opportunity to reiterate the central themes I had emphasized at the dacha and underline the need for a transition plan toward full democracy and the rule of law.

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Here is the full text, published on May 28, 2004:

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“In his speech, Putin promised to devote all his efforts to achieving a 7% annual growth rate. On one fundamental point he is right: that is the only way to substantially reduce poverty and offer prosperity to all. To achieve it, he must unleash the creative energies of his people. He could not only leave behind an economy twice as large, but his legacy could ensure that, in twenty years, that economy is quadrupled. That would allow reaching an economic and political level in line with Russia’s extraordinary cultural achievements.

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But the key element to realizing that vision is understanding that economic freedom under the rule of law is the path to high growth. He must implement the structural reforms necessary for the transition to a modern and free economy, and do so coherently. As someone said, ‘the third way’—that is, half-measures—only guarantees that a country remains part of the Third World. For Russia to grow sustainably at 7% annually for two decades, the guiding principle must be to eliminate the system of state-sanctioned privileges that dominates the economy.

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An essential reform is that of the broken pension system. One that allows Russians to have real ownership and control over their pension savings, and to invest them inside and outside the country. This would send a powerful signal about the opening of the economy. Furthermore, it would demonstrate the government’s commitment to the free movement of capital, which in turn would encourage greater foreign investment. If done well, and accompanied by advances in areas such as capital market regulation, the creation of a mortgage market that favors labor mobility, and the protection of minority shareholder rights, pension reform can generate a virtuous circle of investment and growth. But its greatest impact is the paradigm shift it produces by creating a country of worker-owners who value markets and free minds. In short, the rise of ‘workers’ capitalism’ would turn Marx on his head.

 

The main obstacle to reforms, however, may be the resistance of special interests whose privileges would end in a competitive and transparent economy. Some businessmen might oppose real competition and equal taxation; some unions, a more flexible labor market; and some bureaucrats, the push toward a smaller and more efficient state. Overcoming those obstacles requires a coherent economic program and a direct appeal to the people. If the government clearly communicates the goals, costs, and benefits of the reforms, and emphasizes that they seek to eliminate privileges for all equally, it will be difficult for special interests to prevail. Once the opaque policy-making process is exposed to public debate and media scrutiny, it becomes very difficult for entrenched groups to demand monopolies, protections, and state subsidies.

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The President was reelected with more than 70% of the votes, has the political backing of the Duma, and—as I can attest after participating in the reflection session with him last month—is open to new ideas for solving Russia’s old problems. He should build bridges even to those who have criticized him for wanting faster liberalization.

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Putin can start building that future by igniting a freedom revolution that summons the energies of all Russians. Furthermore, the technological advances of the information age continue to expose Russian society to new ideas, products, and innovations, making centralized control of the economy increasingly difficult. And the country will be able to benefit from its immense wealth in natural resources and its well-educated population once the appropriate policies and institutions are established: the rule of law, freedom of expression, the protection of civil liberties, and a firm opposition to all forms of terrorism.

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Rapid economic growth and poverty reduction would make Putin a good president, perhaps even a very good president. But to be a great president, he should also announce that he will follow the example of the Founding Fathers of the United States and serve only two terms, the only antidote to the dangers of prolonged power. We must remember the warning of Alexander Pushkin:

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‘Oh kings, you owe your scepter and mandate to the law, not to nature; while you stand above the nation, the immutable law still stands above you.’

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What Russia needed at the beginning of the 20th century was not a Bolshevik revolution, but an American one. The tragedy was that it had a Lenin instead of a Jefferson. Putin today has the historic opportunity to anchor the new Russia in the values of freedom and equality before the law. If he does, Russian citizens might well consider him the founder of modern Russia. We shall see.”

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The passion for power

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President Putin carried out valuable reforms in his first term. As Leon Aron, a Russia expert at the American Enterprise Institute, has explained, he introduced a partial—though highly imperfect—capitalization system.

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But he was unwilling, or unable, to follow the Chilean system of free-market reforms, democracy, and the rule of law (see my book “A House of Freedoms. How We Built a Madisonian Democracy in Chile”). He concentrated too much power and did not create the “institutions of freedom” indispensable for the proper functioning of a limited democracy.

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In the end, Vladimir Putin—unlike Generals Washington and Pinochet—did not want to voluntarily relinquish power. In a sense, he did not want to leave the exclusive lane that connects his dacha to the Kremlin. The passion for power was stronger.