Recognizing Growth Potential in the Aftermath of the Global Economic Recession

Paul Andreas Fischer

2/2/2017

Recognizing Growth Potential in the Aftermath of the Global Economic Recession

Glass-Steagall legislation was historically a prohibition of American investment in German Concentration camps and underestimated global antagonistic foreign threats; when viewed appropriately such an outcome was a certainty without this restriction in place. The prohibition on speculative loans using banking finances was also demonstrative of a long-standing disagreement between the billionaire families Rockefeller and Morgan, each of which had different views for the futures of their respectively massive fortunes built on industry in the former and upon military conquest in the latter and exorbitant returns on speculative investments. The Act worked brilliantly and allowed a basis of non-competition for domestic firms and industrial concerns for decades, though efforts to repeal it began as early as just two years after passage in 1932.

The United States is currently playing a dangerous game of recovering from a similar financial crisis while relying on foreign investments without this critical piece of legislation or an equivalency in place. Consequent to this has been stunted growth, exorbitant relative prices for large firms and relative impoverishment of the average worker. In order to evaluate the potential for growth by enforcing an optimal level of foreign investment through direct political means, a proof will be offered which demonstrates the hypothetical optimum investments in the recent past and the way those decisions can be replicated and watched play out for the long-term.

Foreign Direct Investment as a Result of Limitations on Banking Investment Capital

Each year an optimal level of foreign direct investment (FDI) can be seen as a function of the expected return on local investments and the return on foreign investments against the available stock. Financial securities play a role here as an economic function of the annual return on labor, or profit to the economic system from a domestic perspective. Contradiction is currently extant in the way that variance in the various forms of investment interacts with the cost of finances to produce a viable quantity of resources which are demanded.

There is no way to endorse the historical efforts which were made to open up American investment in foreign nations beginning with low levels of funding allocations to banking overwriting which were permitted as early as 1935. One fundamental problem with early attempts to repeal the effort which have been exacerbated in recent history, including the successful repeal of the Act, is constituted in the nature of the difference of the coefficient of inward investment to GDP and the outward investment to GDP.

Research conducted on nations up from the 1970s until the 1980s indicates that one dollar invested locally is equivalent in terms of GDP, funds lost to inefficiency that report to bank’s bottom line but which are lost to the general economy, is in fact worth 3.5 dollars abroad (Desai, 7). This means that under current market conditions, assuming normal statistical variations in investment, there are investment opportunities which should be directed outside of the domestic economy. An example of that is one of America’s major trading partners, China, which is among the ⅔ of the world which has not fully completed the transition towards democratic procedures. Current tax rates in China retain and reallocate ½ of income as taxes and in turn regional FDI, though this is low compared to many nations which claim higher rates of national income.

Repeal of Glass-Steagall as a Function of the Propagation of Democracy

American investments were not appropriately regulated during the 1930s, and the nature of the investmetns which were made played some role in the development of the Second World War. While the Rockefeller oil and industrial concerns did invest in Japan, the investments were targeted to prevent the boycott of specific regions which were beings starved out by the dictatorship (Moran, 262-4). Speculative investments which had been permitted by repeal efforts and compromise in the legislation in question allowed major investments to the dictatorship in Germany itself, which required direct negotiation with the leadership there. A leading financier for the Morgan family sat upon a German bank until 1940, shortly before the outbreak of war and well into the period of atrocities.

Incentivization to repeal Glass-Steagall and to condemn its fabricators is deterred by the reality of the economic situation with one of America’s primary trading partners at the time of passage, Germany, which was actively liquidating the investments through the Holocaust and had a government structure which could not support the reception of such funds. This means that, while these economic theories represent financial instruments which were not publically available at the time, had they existed it is likely that the coefficient for the bulk of such investments at the time was zero. Virtually none of the returns on American FDI in that scenario were being appropriately returned to the American economy, which demanded a complete prohibition of the leakage, something that was achieved for a short time period through passage of critical legislation, and restricted slightly with the American Banking Act of 1935.

For perspective, a similar situation has been reached in present day Bolivia, a nation whose capital is entangled with a large percentage of American foreign trade. The threat posed by the planned termination of American trade deals in 2022 for American firms downgrades the credibility of long-term claims which are made by the World Bank and other financial institutions which use the dollar as a standard of prosperity. The regional instability which has seen similar deals cancelled with Argentina as well as international nature of the cancelled deals with Germany and other NATO allies make this an act of warfare which is as terrifying for diplomats as for economists. Most importantly, it demonstrates a long-term consumption demand of financial capital which has historically and will currently not be sufficient to meet the basic demands of the population contained within the geographical boundaries of Bolivia as well as other nations.

Glass-Steagall and the Victory of the Cold War

Many trade deals are reciprocal in nature, so they require an influx of goods or services in return for goods or services. An exception is foreign aid, which is usually, though not always in the case of complementary goods such as military equipment that requires training, excluded from FDI estimates. Controlling this phenomenon through the Glass-Steagall Act, while not responsible for the fall of the former Soviet Union, was certainly a necessary component for the survival of the American economic system. Prior to the Doha and Monterrey Declarations, capacity building was not part of prioritizations efforts in foreign investments, so this change in global financial policy may significantly alter or change those decisions (OECD, 32).

It is only possible to view this as a matter of terms in contrast to the historical cliometric analysis of American investments at the time intrinsic to economic developments. The same is true of the current economic situation. The economic analyses revealed that the return to GDP from inward FDI during this period was indistinguishable from zero (Desai, 6). That means that FDI to the United States had been targeted in such a way that complementary products had to be bought in foreign trade at a loss or which would have no overall economic impact, ie reserve or surplus items.

Meanwhile, American investments abroad lost over two dollars in opportunity costs for investments which were made at home (Desai, 8). This does not yet prove that Glass-Steagall provided a necessary barrier to bad investments and saved America from falling to an economic crisis during the Cold War, because the barrier has already been demonstrated above to have saturated the domestic financial market with adequate funding as to prohibit effective addition to GDP. The question which emerges is whether thirty to forty cents on the dollar is still good trade, when the alternative of domestic investment will siphon funds away from other investment efforts.

Further research proved that savings encouraged an increase of spending of 26 cents for each additional dollar of domestic savings. This means that with Glass-Steagall, the proportion of FDI was bordering as inefficient already. Had Glass-Steagall been repealed during the period of research, then it can be safely estimated that the national reserves of cash liquidity would have been under threat as the shock of additional fund for foreign investment created an inefficient market. It is not a question of whether, but how, a critical limit of minimal reserves would be reached, prohibiting local and foreign investment and representing the financial insolvency of America.

Current Economic Forecast and the Return of the Glass-Steagall Era

There is no way for private industries to fail to take up the responsibility to save the United States, something which has occurred in the past. It can be implied that the lack of such a patriotic effort during the 1930s demonstrated foreign subversion in the economic system outside of that authorized by international treaties and obligations. There are a number of potential crisis regions which require both immediate and long-term attention for reasons which go beyond the financial, such as humanitarian or military, which have been addressed.

Impermeability of financial institutions to such an economic meltdown and foreign subversion is a state which is not attainable. In the short-run re-interpretation of fundamental American legislation will be necessitated in order to achieve and maintain a state of adequate financial security. This cannot be the long-term solution to a fundamental flaw in negotiating with despotic or even only partially democratic allies and trading partners, or former trading partners.

By adding a fail-safe which catches speculative investment, whether foreign or domestic, before it begins to lose compared to savings investments, the American economy can return to the natural rate of growth for the leading industrial nation in the world. Had the rates of growth observed during the time period in which loans inspired by the Glass-Steagall Act were in place, the decade after 1932, the standard of living in the USA experienced today would have been experienced by the early 1960s, the average American worker would be earning one million dollars a year by 1990, and today upwards of 4 million dollars annually. More importantly, the top 1% would not be able to collectively buy dictatorships and despotic governments to open them to democracy and trade, but individually buy them, opening the world to such a democratic expansion in social justice, welfare, and economic well-being as has not been rivaled in the history of humankind. It has been demonstrated that the returns during that period were not fabricated, but only the consequence of sound financial theory applied prudentially to national investment trends through noninvasive and logical expansion of the rewards and consequences of modern financial instruments

References:

Desai, Mihir C., C. Fritz Foley, and James R. Hines Jr. Foreign direct investment and the domestic capital stock. No. w11075. National Bureau of Economic Research, 2005.

Graham, Edward M., and Paul R. Krugman. "Foreign direct investment in the United States." Washington, DC (1995).

Organization for Economic Co-operation and Development. Foreign direct investment for development: maximising benefits, minimising costs. Paris: OECD, 2002.

Using Foreign Direct Investment and Market Integration to Measure the Foreign Economic Strategies of China

Paul Andreas Fischer

6/26/2016

Shirley Gedeon

Using Foreign Direct Investment and Market Integration to Measure the Foreign Economic Strategies of China

Chinese foreign success has recently been indicated in the gains made abroad. The region which substantially benefits from synergistic reforms with the commercial giant can be defined with two groups of emerging economies. New industrial economies (NIE) surfaced first, and the development there can be traced to the 1980s, and even includes or included China. Some of these are located elsewhere in the developing world. The investment that China has made is that other economies in the Southeast Asian region will join them.

In light of the savings and loans crisis of the 1980s and 1990s and resource pricing issues of 1999, the government of China has recently ensured that the dependence, both real and implied, of the “forced” entry into the World Trade Organization and supplication to the International Monetary Fund can be mitigated or eliminated within their sphere of influence. Direct foreign investment (DFI) is among the best ways of showing the trends of changes in the Chinese regional strategies. This mechanism can be seen as a progression from horizontal to vertical integration of industries and firms. Both of these measuring tools are available to arrive at a realistic understanding of the nature of continued growth and the conditions under which it can continue in the future.

While domestic growth during the 1980s is touted and Deng’s Four Modernizations are emphasized as critical to liberalization and transformation of the Chinese economy, it will be possible to see that market inefficiencies increased during this period. It was not until later, when Deng encouraged China to “cross the river by feeling the stones” that substantive changes were found. The Soviet Union had fallen, and not as a consequence of war with China.

As a recipient of DFI, China allowed liberalization of some markets. Others, notably petrol, were subject to price controls and governmental control increased early on. By doing so, all potential economic progress from free market institutions had been lost. The political gain remained.

Pressure increased with the fall of the Soviet Union, and China’s consumers were lost. Liberalization proceeded quickly. The way the Chinese market then transformed is remarkable. A distinct cultural shift accompanied this change, though it is not a valid economic tool because this shift was present even at the beginning as the market changed in name only. Understanding the nature of the Chinese market success is critical to the continued health of the global economy: if the transformation was a miracle, then the effort to export it regionally will fail and spell catastrophe for both China and for better qualified recipients of DFI.

By examining the DFI, a trend is found in which the Chinese investments in regional nations may actually be self-defeating in nature. Even during the crisis of 2008, foreign investment to other countries from China only slowed their growth temporarily. Rather than investing in nations that consume Chinese products, investments are being made into competing countries. This arising vertical integration is a new trend, and part of the incentive to invest in China during the 1990s was created by the benign nature of bland Chinese political ambitions on a geopolitical, or at the time even regional, scale.

This paradox of investment options has created a difficult decision for China which is not being decided on rational economic advice, but under supervision of the government which has relative control of the mechanisms of economy. Politically, the money is more safely invested within the range of the bulky People’s Liberation Army, with its limited projection capabilities, than in parts of the world where the global community may be hesitant or unwilling to become involved should complications arise. Unfortunately, this also has stunted the economic development of other nations and embodies a false sense of security into an unsustainable level of growth which may be dependent on exploitation of regional economies.

Competition with other regions of the world could fuel Chinese development into a new and sustainable era of technological progress and growth. Whether investments in regional or domestic endeavors will fulfill this purpose remains to be seen. The ultimate risk is that no objectives will be achieved, and that regional investments may foster substitutes and replacements for the limited consumer demands of larger economic systems while failing to provide adequate competition to increase productivity in China to spark growth after the demands of foreign consumption has been met.

There are two important conclusions which may be drawn from the broader trends in DFI to and from China. Firstly, the only hope China has of continuing the growth secured by horizontal integration is to encourage competition and increase profits from successful vertical integration with foreign emerging or recently emerged markets. Secondly, this goal has only been partially realized as two thirds of Chinese foreign investment has stayed in the region.

Political Goals and Increasing Centrality of Chinese Strategy

While it is possible that political goals come in conflict with each other, ie. China sees regional investments as investments in security with value regardless of the long-term success of such investments, the environment of synergy naturally predicates growth. Loss of synergy can be evaluated as an opportunity cost of development and is evident in the integration of Chinese economic developments in the past. Early outsourcing occurred as a result of Japanese technology firms seeking a lax source of labor and standards, which were found in China. The firms that refused to cross over subsequently failed.

Executives and corporate names remained in Japan at that time, which made the process one of horizontal integration. In order for growth to be sustainable, and rates of successful loans to increase, competition must be indicated by vertical integration. The best way to distinguish between these two phenomenon is by measurement of the domestic value added (DVA). As competition increases, and synergy with it, the DVA increases while a lower DVA indicates a fragmented economy in which competition is prohibited by virtue of governmental standards, or discrepancies in environments.

The amount of value added from import to purchasing price among Chinese goods, or the DVA, has risen from 25% to 50% as a result of increasing development. That number is still terrifying by industrial standards, a developed country such as the Netherlands expresses concern when the DVA has dropped to 80% at any point. The DVA is an indicator which serves a function beyond that of just actual production in a nation, but also indicates the stability and centrality that economy plays to the global economy.

One quick note which may help the less numerically inclined to understand the increasing relative importance of DVA is that it may help to reverse the method of calculation when looking at DVA across industries or nations. A DVA of 50% means the exported product is worth 200% of the price of the imports. With a value of 80%, a change of just thirty points, this becomes 400%, add another ten and the increase in value is 1000%, and so on in an exponentially increasing fashion. In other words, small percentage changes in the West correlate to massive shifts in developing results.

China has an economy which currently plays an indispensable role in the global economic structure. This role was occupied in just a generation. Growth beyond sustenance requires more than performance, it also necessitates creation. The massive elimination of poverty as well as the difficulties of developing a consuming class sums up the achievements and the shortfalls of the economic miracle in China.

It should be assumed that through brute force alone, China will reach parity with Western economies. Regional investments in competitors should mean that Chinese firms will have just as difficult a time retaining the status quo as Japanese firms did in decades past, even if exclusion of other markets abroad slows the process down slightly. That is a point at which current economic policies will fail dramatically.

DVA parity between Western and Chinese economies necessitate a level economic playing field, and even the smallest governmental interventions outside of direct necessity or protectionist practices could disrupt global supply chains. Currently the impact of China’s experimentation with economic policies is mitigated by the universal nature of economic institutions and foreign nations. China’s political system must evolve in order to be allowed to assume a greater level of responsibility.

Had the World Bank invested with a similar geographical prejudice, there would have been a humanitarian crisis in China unrivalled in the history of mankind. Some would argue that during the rise of Mao Zedung, under the “protection” of the iron curtain, such a situation had already occurred once in Chinese history, though without an intentional perpetrator. Entrusting such a responsibility and risking that event to occur as the consequence of intentional policy making is not a viable option currently, but may be in the future. In detailing the optimistic growth and achievements of the Communist regime in China, this paper will assume such political development only facilitates and does not interfere with the continued development there.

Growth and Prosperity: From Potatoes to Refrigerators

The documentary film detailing one hundred years of Chinese Revolution, Born Under a Red Flag, details the shift from agricultural economic zones to manufacturing in terms of culture, politics, and economy. This is echoed in reading as well and evaluation of whether the Chinese economic transformation is a miracle or economic fact, and whether it is reproducible, determines the direction of the burgeoning economy. That is because the centrality of the developments in China actually mean that the government will have a role in determining how the global economy changes in consequence to success there.

Discussion of the incipient role of China on the global stage would be ungrounded without understanding the provinciality of the recent past. Watching the development of China must have been something similar to watching a history of economics. Towns without even a scale or a market for decades have now seen their young living in new skyscrapers in urban centers, and even engaging in political activism.

Many decisions by government and private interests alike have been correct. The Chinese transformation was ignited by a decree allowing the agricultural workers to keep a portion of their crop after paying a quota to the government. All of the agricultural zones immediately reported bumper crops.

This is an example of incentivization that has supplanted the iron rice bowl or, more frequently, impoverishment of the past. These policies were not limited to humanitarian concerns, or forced exclusively by necessity. Incentives were extended to foreign companies as well, which made China considerably more attractive for direct foreign investment than abroad or local opportunities.

In this sense, the Chinese government helped to foster the development of the economy through careful micromanagement of resources and policies. The policies of incentivization has proven to be effective and have been thoroughly implemented. It has also helped level the playing field when the competitive advantage lies against Chinese firms in terms of technological prowess and labor costs. Excessive costs from protectionist policies are mitigated by shared profits from the massive development found later.

Even as the source of funding for industrial expansion has turned outward, the horizons for consumers have effectively been focused inwards. This is both encouraging and worrisome. The indication would be that there is proof here of a reliance of the consuming class on some domestic production, or stimulus provided there. As long as Chinese growth is limited reliant on Western consumption and progress, any development into industries which are efficient or operate at parity will begin to limit the demand for Chinese goods.

This is particularly concerning now because with the development of a Chinese middle class, a wonder in and of itself, there is evidence that the growth of that middle class does not match that of the producing class. With available foreign demand held constant and limited to factors outside of the Chinese government’s control, competition for this demand has become increasingly fierce. The evidence for this is apparent in the politically and geographically motivated DFI of the last decade from China.

The manifestations of the middle class go beyond increased standards of living, refrigerators in the home and the like. It is a result of a massive investment in infrastructure which has completely rocked country and city lives socially, politically and economically. Skyscrapers, highways, and migratory workforces that come to the cities for portions of their lives all typify this development. The Chinese middle class must now also compete with nations who have sustained such lifestyles for centuries for patents, efficiency, and resources.

There is no word for sustainable growth. Optimistic goals of maintaining continuing increases in growth have already failed. That is an indication that the limits of easy expansion are already being neared.

There are three factors which play a role in the approach to these limits. Firstly, the economic factors of production which were employed by foreign nations that China now makes use of are being exhausted. Secondly, supply for foreign nations can only be necessitated by the rate at which those developed economies can grow. Finally, competition which arises may pose the same or a similar threat to Chinese firms.

Even if emerging markets are not more efficient or cheaper, capitalists in the West are sure to know that fragmenting a strong union can be in their interest despite a moderate financial setback. It is also worth noting in conclusion that it may very well be that the financial recession saved the Chinese economy from immediate ruination. Competing emerging markets were devastated as Western nations gobbled up stimulus money and FDI, at their expense. While there is no point in retrospectively imagining what might have happened, it is interesting that those countries had about the same chance of taking on the Chinese economy as China ever had at taking on the Rust Belt, but unlike America which has an established and strong middle class, loss of manufacturing in China would certainly result in a humanitarian crisis of the sort the world has never before seen.

Lingering Problems: Corruption and Bilateralism

Interestingly, in China, with a communist government, a bad work ethic can be a crime against the state. The policy of the iron rice bowl has also created a crisis of low quality production. Attempts to regulate this have been either misdirected, during Deng-era crackdowns on crime, or inefficient, as seen in subsequent redundancies in quality checks.

In a certain way, these policies are being recreated in trade agreements. By overlapping Free-Trade Agreements with bilateral trading incentives, a “noodle-soup” syndrome has arisen which is of great concern to the international business community. This is the sort of threat to long-term security which has characterized foreign hesitancy to invest in China.

To understand this hesitancy in the future, it is necessary to look at the past once again. During the rise of the current government, many teachers and those labeled corrupt were shot. Students were sent to the countryside, which crippled not only the Chinese academic system, but those throughout satellite Soviet nations which had some level of interdependence. The extreme reactionary behavior with underlying motives of consolidation of power is not completely departed and both in Tiananmen Square and in the execution of thousands of criminals in the wake of a threatening “gang of four”, violence has been noted with concern by the rest of the world.

Today that history of politicized violence translates into regional friction and unwillingness for other nations of the world to allow their educated to participate in research in development or pursue contracts in a country with a government that has eliminated such assets in order to maintain control in the past. Of the three barriers to the development of China into sustainable growth, the inability of academic structures to build confidence in foreign talent or to incentivize local brainpower to stay in China is probably the most concerning. While membership in the World Trade Organization has lended some credibility to the endeavors of the government now, such gestures of goodwill are betrayed by a recurring wheel and spoke nature to regional trade agreements.

This lingering problem can be addressed in the form of increased institutionalization throughout the nation. Sent down youth did return to the cities and liberalization commitments, though shallow, are present. The proof will be in pudding as the case were, and that will be indicated by rising levels of development, and with them competition with Western middle class industries and a rising DVA.

Other issues remain in the form of ensuring that China peacefully occupies its transitory role without eclipsing existing economies or fueling competition within economies that are close geographically or politically. The crisis of 2008 cannot be emphasized enough as an indicator of the sensitivity of this topic. Regional investments not only threaten China’s position as the world’s greatest exporter, but also threaten to cut into the domestic market.

By investing in developing countries abroad and developed nations both of those threats can be effectively eliminated. While the USA went through a position in 2009 that was similar to the Cultural Revolution’s “sent-out” youth programs by cutting out student loans, the position was short-term and institutions were neither eliminated nor shut down. Progress continued on a skeleton crew basis, an indicator of financial turmoil and not of fundamental political change. This means that American consumerism will continue to be a determining factor in Chinese economics in a way that China did not develop into a viable partner for the Soviet Union after World War II.

Now that China has developed a middle class, it must navigate a treacherous path of maintaining the barriers which prevent local or even foreign manufacturing from serving a similar impact to its economy as the USA and Japan suffered with the emergence of China. This may necessitate re-evaluation once the development level in China is equal to the United States today. A good estimate for the time frame involved here should be found in DVA.

Provided that the stumbling block provided for emerging economies has set them back in a significant fashion, with this 600 billion dollars in re-allocated investment that had been expected in those economies, for several decades, analysis of the DVA to create a time-frame for China’s chains to manufacturing can be conducted. It took approximately a quarter century for the DVA to rise from 25% to 50% in China. In order to be competitive with Western markets and allow encroachment on manufacturing industries without risking humanitarian disaster, the DVA must rise to at least 75-80%.

Unfortunately this level of increase in DVA in terms of total output represents a greater change than the development required to increase from 25% to 50%. This means that it costs more dollars and takes more time to acquire higher levels of development. Without analyzing production curves and assuming an equilibrium market for patents and technical advancements, it should take between double and three times the amount of time and resources to bring DVA from 50% to 75%. This is because a DVA of 25% only represents under 40% less total output than 50% while a DVA of 75% represents 200% more output than 50%.

If China has the 50 years necessary to reach the development of the United States, and the domestic or foreign investment needed to do so, then success should be guaranteed. A middle class will emerge and be well established. Competition can begin in earnest with Western institutions, and growth as well as development in regional and foreign markets can be encouraged. Ironically, it is the very sources of capitalism which have enabled this progress which threaten the Chinese economy the most.

Given the opportunity, these sources of capital will give no regard to humanitarian concerns and divide the monopoly on manufacturing enjoyed by China simply to gain a greater bargaining power. There will be no sense of security or of loyalty in such a situation. This is the risk created by investment in Western economies and should be treated with as much caution as an investment in regional economies. The latter is substantially preferable, for while the Chinese military may not be able to enforce political objectives in the target of such investments, security in such investments is high, and there is another layer of opportunity before money goes into economies which lie in direct competition with Chinese manufacturing.

The bottom line is that any political action which can be taken to ensure investment remains domestic must be taken, or the risks are an entity in the rest of Southeast Asia, which is as large in population if not development as China, emerges in competition for the same limited role as China. 2008 was not a solution, but a mere stumbling block, and impediments to development and the barriers which arose as a result could be removed as quickly as in a decade or take as long as half a century. Which one of these actually results will likely determine the long-term success of the Chinese economy, and will likely be the result of carefully targeted investment by the global community as well as the Chinese government.

The Russia of V. V. Putin

Paul Andreas Fischer

6/16/2016

Shirley Gedeon

The Russia of V. V. Putin

Centrally administered socialist states replaced democratic divisions for regional conflicts. Ultimately it was seen as a failure, with GNP across Eastern Europe dropping below that of the United States, though it did allow some substantial growth. The reasons for this failure will be seen as a combination of the motivations and consequences of such an economic system in Soviet Russia.

There were multiple debates which preceded decision making, and which later bound the workers to their decisions. Most frequently these would take the form of five-year plans and determined important factors such as the rate of growth and technological investment. While some sectors, such as mining, did keep up with the United States, the reality of the Soviet failure to provide for citizens can be found across the economy. Japan and America combined had a fifty times greater hold on science and academic intensive industries.

Stalin believed that the internal logic of capitalism would exploit labor. This drove the attempt to mirror growth in capitalistic countries. Inevitability of communism played a key role in this belief, and the losses which were incurred by forcibly or prematurely establishing a command economy would be offset by greater losses if this were not preconceived. The paradox of how to create an industrial technologically advanced economy became a question for Soviet leaders.

New economic policies also focused on collectivization of land. The goals of the Party could not be achieved under post-war circumstances, operating at 5% pre-war levels, and so denationalization of small scale production occurred in a series of decisions known as New Economic Policies (NEP). This was effective and saw the rapid expansion of production. It was not as effective as the command economies which saw 50 years of technological progress attained in a decade within the Soviet Union, a fact proven by the defeat of as well as by virtue of invasion by Nazi Germany, among the leading capitalist nations in the world, a couple decades later.

A grain supply crisis by 1928 followed expulsion of the left, the Trotskyists, and foreign relations deteriorated. Success of nationalization efforts under those dire consequences lead to a great realignment. This lead to the year of the Great Break, in 1929. This was the source of Stalin’s emphasis on increasing the scope of five-year plans dramatically. His emphasis on command economies would be combined with fear of war, which was dramatically foreseen.

Soviet planning was successful in its creation of technological and industrial growth amongst an era of crisis. A long-term period of peace, embodied in the Cold War, however, saw the expansion of a shadow or black market amongst industrial goods. Since liberalization of price markets, the Russian shadow economy has grown from 15% to a quarter or perhaps as much as 40% of the overall economy. It is not, as was the case during command economic eras, concentrated in industrial sectors. Deep problems with Stalinist economic systems began to emerge after the war period, and one of these was removal of k/n ratios meaning that normally benign corruption struck into military or industrial bases upon which the Russian economy was dependent.

A break in this rule was found in the aggressive campaign in Afghanistan. With troops only coming home in 1988, the drawn out war nearly exhausted the superpower’s capability to succeed. It is ironical to watch the dominance espoused by Kruschev among third world countries to have crumbled to this point. After years of funerals for leadership, the Soviet Union’s last “strong man” dissolved the union following secession of the Ukraine and worldwide velvet revolutions. This is a second point, that communism, which appeared to be successful in the threat or reality of war but lost ground during peacetime, would also crumble partially as a consequence of military operations.

The Helsinky conference is perhaps the beginning of the manifestation of what some saw as the end of the Soviet Union as early as Hungarian protests in 1968. In 1975 the agreement signed there forced recognition of human rights violations and ensured prevention of exploitation of workers through political dictatorship throughout member states. The way that the Russian economy was prevented from continuing the unbridled success that lead to the rise of the Soviet Union is the cause of this symptom of political malaise.

When Marango described the fall of the Soviet Union later, reference is made to the fundamental issues with communism as an economic system and the inconsistencies it creates. The same argument for the existence of government among economic systems also defeats efficiency of communism except in very particular circumstances. This argument will be summarized shortly.

Certain freedoms exist which the government has neither the capability nor the interest in being involved in. On another end of the spectrum, there are industries which undertake to provide services in which government presence is necessitated. Within this spectrum, every industry requires different levels of government involvement. This is represented by the fact that not all taxes are excise taxes, but vary based on income or revenue both in total amounts and proportions of income paid.

Communism was successful in the face of a total war, because in that economic period, with a grain shortage, the involvement of the government in every industry became necessitated. Micromanagement was an asset, and while a free market may have succeeded as well, even the option of failure in any of the industries would have represented a destabilizing impact on political and social structures. During the Afghanistan war as in the post-war period there was a greater need to emphasize government control of certain modes of production.

This risk of shadow market equality can still be seen today, but it should be argued that growth of the shadow market in Russia is healthy because it represents a movement from industries critical to health and security such as food production and industry into those less critical. In other words, it is not that there was too much waste occurring, but more that it occurred in areas where such waste could not occur. During a period of crisis, the government could ask for near complete obedience, outside of those conditions such a request lead to uprisings. Finally, as with any such capitalist economy, incentivizing the movement of the shadow economy requires an incentive, traditionally reflected in interest which banks offer to firms in order to invest their profits in other industries and here seen in the overall growth of such an industry.

A new form of leadership has arisen in Russia, and with it have come a resurgent emphasis on some very old traditional values. The siloviki are those with security backgrounds, which include V. V. Putin. These are supporters generally who share belief in persistent existence of hierarchy. As Russia’s equipment ages and the share of GDP devoted to the military has dropped, it is important to understand this terminology as a manifestation of the re-emphasis of political goals. Rather than losing importance, removing control from regional governors was critical to siloviki as well as Putin’s early agenda.

One interesting aspect of the siloviki is whether the eight-fold increase among political elites of this group is in spite of, because of, or causal to the rise of cronyism and oligarchy in Russia. Cronyism is the use of nepotism or familiar ties beyond quid pro quo into the realm of fraud. Oligarchy seeks to justify these objectives by establishing this method of control as the political status quo. “Taming” these forces have made the tools, such as export revenue taxes, of soft authoritarianism usable.

Soft authoritarianism has arisen in Russia as a reaction to these two forces coming in conflict with strong nationalism. One tool which was used to concretely describe this change was the Gref Plan, already in place prior to Putin’s election. Redefining fiscal federalism only went so far, though, and relative control or stabilization of industries through the Gref Plan promised to destabilize the economy. The answer appeared in the United Energy Systems reform and dissolution.

The targeting of natural monopolies in the electricity sector remains among the longest standing successes of Putin’s presidencies, and the market was liberalized in 2011. Creation of competition in markets has been seen in dominant industries such as the railways as well. Ending cronyism among the Gazprom and Rosneft oil and gas industries has become a dominant feature of the presidency of Dmitry Medvedev.

After eight years of Putin’s leadership, the constitution necessitated leadership change. At a critical juncture for many political goals, and unwilling to see those goals go unfulfilled, Medvedev was found to allow Putin to retain a position of leadership without breaking his norms of soft authoritarianism. With public support in excess of 80% for most of his presidency, it would have been hard to find any suitable candidate outside of the president himself.

The most important aspects of his administration also build on Putin’s own goals. Russia was once the IMF’s greatest debtor, and during the period was able to pay back all foreign debt. Foreign currency reserves, the warchest of a modern economy, had dropped to levels similar to a large corporation and have now been buttressed. Despite economic gains, the statement that presidency left was dominantly a political one, demonstrating soft authoritarian principles that would not give way to dictatorship.

Dual economic functions arose in many industries as an inheritance from the Soviet Union, and original liberalization of markets, including the oil industry, has given way to nationalization. Those responsible include Yegor Gaidar, one of the liberal technocrat from Moscow or, like Putin, St. Petersburg. Selections of such geographically and politically oriented individuals are an example of cronyism despite the resurgent siloviki class and reaction to Yeltsin era cronyism.

The bribe tax is a concept which has arisen under various conditions. Sutela points to abuses of market liberalization as impeding the stabilization which would have been the second step in the political transformation in the resurgent democracy expected from Russia. These include health hazards of dropping alcohol taxes and rule breaking in the corporate field. Others would point to the gutting of educational and healthcare expenses as a consequence of massive expenditures in waging war against Afghanistan.

The Russian economy is underdeveloped as a result of dramatic losses in the realm of intellectual property, as stated above. Even within the production efficiency frontier, however, there remains a dramatic discrepancy in levels of output. This is due partially to cronyism and pursuant economic policies. It is also a relative indicator of the cost of fighting the expansion of the systems of oligarchy which have become entrenched. The inefficient small-scale factories which are left over from the Soviet era are also fingered as a causal factor.

The bottom line, however, is that the massive credit which Putin’s regime won great acclaim, and rightfully so, for paying back was misappropriated. While the rating of Russia has increased by around 9 levels due to this progress in repayment, the fact still remains that the funds available were neither sufficient nor appropriately used to employ the full capacity of productive force, which could be massive. The majority of the factories are Soviet-era remnants, and frequently one factory cities dominate, with a quarter or a third of factories being built after 1992. This creates a picture of success, but obsoletion of manufacturing machinery has erased the gains of more efficient modern construction.

Russia’s primary source of revenue, as Europe’s gaspump, fails in contradiction to the primary sources of employment in the country. Because much of the product is prepared for export, the domestic market actually reduces income. That creates a unique economic situation. When employment rises, revenue falls and unemployment or lower levels of economic activity in various sectors of the Russian economy means a greater cash flow for the largest corporations, which are now publicly owned.

There is not a full explanation in the rise of corruption in the post-Soviet era which can be found there, and this should be considered the least of the symptoms of this critical paradigm. Failure to expand markets appropriately has other consequences, which one should look to China as a method of comparison. The excess of labor in China is a result of a different set of priorities. Wages there cannot go any lower and the price demanded can vary almost completely, this means that an increase or decrease in the population has virtually no impact on the function of the economy within practical limits, while every good consumed domestically will provide dividends abroad.

In Russia, it can be seen that conversely, wages and domestic consumption may vary greatly while increases or decreases in the price of oil have widespread repercussions throughout the world. Every barrel extra which can be exported increases the Russian importance in the world while the marginal price of oil is difficult to increase as a result of domestic consumption increases. This creates an incentive in Russian economics which may date back to Soviet era relationships with client states in Eastern Europe to eliminate domestic consumption by distribution of rent across populations. This economic anomaly or irregularity may also help to explain how the Soviet Union was able to maintain competitiveness for such an extended period of time.

Rosneft is the Russian oil producer which has become the subject of scrutiny and nationalization in recent history. It is an oil giant, and has a history with partners such as Norway’s Statoil and England’s British Petroleum. They are frequently the subject of political thrusts, and this can be seen in a recent press release that features a picture of Vladimir Putin in which concerns for global oil reserves are made clear.

While the Italian interview details a recent potential discovery of 100 million tons of oil equivalent, a finger is pointed at the United States for dropping oil production, which has lead to the recent report estimating expiration of oil supplies in the near future. Igor Sechin, the CEO of Rosneft, announces pleasure in the oil discovery but is concerned about the future. He is a prime example of the expansion of the siloviki class among business and political elites. This can be seen in his position in Moscow under Putin.

The alternative to this source of oil, both politically and mechanically, would be Gazprom. Efforts to subdue the giant, founded in 1989, found themselves in a greater quagmire of issues for various reasons including those political. The bias in political stories around the company also varies dramatically from that authorized by the nationalized Rosneft. In one article from the New York Times, European nations are depicted as standing firm against bullying efforts from Russian firms, including Gazprom. Proposals included in consideration are limiting supplier shares to 40% and establishing a Nordstream pipeline to bypass the Ukraine.

The purpose of such legislation would be to avoid a repeat of the Gas Wars of 2006 and 2009. Today Gazprom provides ⅓ of the gas to the European Union. This brings parallels to regulatory action in the news from the Gas Wars in which titans of Russian industry were actually incarcerated, frontlining some newspapers with mug shots or photos of the executives in prison garb.

Finally, there is the future which is seen perpetually in uranium. While the world’s largest producer of the energy is Khazakstan, Russia remains a premier supplier of the product. Nations such as France depend nearly entirely on atomic power for energy concerns. Along with coal and hydro power, uranium represents a reserve of energy which is substantial beyond the economic capability of the Russian state.

Some of this is left over specialization from the Cold War and client states, but most of this reserve is unique to Russia’s situation. The reserves and production are augmented by decommissioning nuclear weapons, which should be finished by 2030, and provide further sources of supply. With his master’s in mining, these are concerns which Putin is specifically able to address, and he has used his expertise to win big political victories in these economic fields. If his goals are attained, the massive increase in nuclear power generation may be the greatest and most dramatic legacy of a Russian leader since the remilitarization efforts which supported the Vietcong in Southeast Asia.