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Russians are stuck in the 'middle-income trap'

Vladimir Putin will win the Russian presidential election on Sunday. That is one of the safer predictions I could make. He has guaranteed that outcome not just by crushing the opposition and gagging the media, but also by doing things that should make people happy.

He has increased pension payments by 9.4 per cent, boosted welfare payments, cut the cost of housing by 30 per cent, paid to freeze utility bills and gasoline prices, given big raises to university professors, doubled the wages of soldiers, more than doubled the salaries of police officers.

So people will vote for him. But, unlike the last time he won an election, they are far from pleased with him, or with their lot in life. The protests that followed December's Duma elections were only a small indicator: Polls show that 70 per cent of Russians are either utterly indifferent or completely antipathetic to the leader they once adored. To maintain their affections – or at least keep them from staging a complete revolt – he has had to buy off their insecurities with great tranches of petroleum money. According to Citibank, his new spending commitments will be affordable only if oil rises to $150 a barrel.

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And that spending won't make Russia wealthier or more competitive. It will keep people from slipping behind, and that's about it.

In this, Mr. Putin is confronting what leaders of many ex-poor countries are discovering: That it was easy to win mass popularity by getting people out of desperate poverty, but that the next step is elusive: Without a full set of democratic institutions and a competitive economy, people get stuck there. And when people are trapped on the first step, they stop believing.

Russia appears to be subject to what the economist Barry Eichengreen, in published last year, calls the "middle-income trap." He analyzed the economies of dozens of countries that have risen above absolute poverty since 1957, and found that when their per capita GDP rises to somewhere between $12,000 and $16,000 a year, their economies suddenly stall, and annual growth falls by at least 2 percentage points a year. They get stuck in the lowest end of the middle.

This is exactly where Russia is perched. As economist Philip Hanson notes in a on Russia, countries hit this wall because "easy gains from the flow of labour and capital out of low-productivity sectors and into higher-productivity sectors, and also from technology transfer, has been exhausted" – that is, their regimes have had an easy time moving people out of peasantry and post-communist urban poverty into some sort of minimal employment, but moving them beyond this stage requires a much larger investment and a more open economy.

There's evidence that other countries, such as China, are beginning to fall into this trap. In 1981, , at least 77 per cent of Chinese were in absolute poverty (that is, with family incomes below $1.25 a day); by 2008 this had fallen to 13 per cent. But, the bank notes, a far, far smaller group of people have been able to rise above $2 a day, and hundreds of millions appear stuck in this awkward space between the end of starvation and the beginning of actual comfort and hope.

In other words, free money only goes so far. China's foreign-exchange earnings and Russia's petroleum income were powerful tools for ending utter misery and guaranteeing political stability. But the next stage is a challenge. Escaping the middle-income trap, as countries like South Korea have done, requires the creation of a functioning, competitive large-scale internal economy. Beijing at least has a sense of the importance of this goal. Last month, the People's Bank of China published a road-map to non-export prosperity. Whether their top-heavy regime can pull it off is a matter for debate.

Russia, despite having almost twice the average income of China, may be further from escaping the trap. Lilia Shevtsova, an analyst with the Carnegie Moscow Centre, recently pointed out the "Putin consensus" – which won him massive victories based on "comparisons with a pathetic, inadequate Yeltsin and constant reminders of how difficult the 1990s were, fuelled by high oil prices, promising uninterrupted economic growth and unlimited resources for a patrimonial state" – is now collapsing.

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Before, leaders like Mr. Putin could tell voters: "You were desperately poor, insecure and at risk of actual homelessness and starvation. Now you're less poor, more secure and protected from the worst humiliations. So why worry about such imported fripperies as political choice and functioning markets?" This is the moment when that pitch begins to flop.

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About the Author
International-Affairs Columnist

Doug Saunders writes the Globe and Mail's international-affairs column, and also serves as the paper's online opinion and debate editor. He has been a writer with the Globe since 1995, and has extensive experience as a foreign correspondent, having run the Globe's foreign bureaus in Los Angeles and London.He was born in Hamilton, Ontario, and educated in Toronto. More

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