Taylor Rules: The Distinguished Scholar and Former Advisor to Presidents, John B. Taylor, Wargames a Bush II International Economic Policy. TIE's Exclusive Interview

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TIE: Tell us about your trip to Russia in July.

Taylor: Actually I had two recent trips to Russia. I went to Russia in June soon after I was sworn in as Undersecretary to meet with economic officials, legislators, and business people, and to see how things were developing on the economic policy front. In July, I went with Commerce Secretary Don Evans and Treasury Secretary Paul O'Neill. The trips were follow-ups to President Putin's and President Bush's new initiative to engage on economic/business issues as well as on security issues. I think the Evans/O'Neill trip went extraordinarily well--it was historic in my view. It was a different kind of economic engagement than I've seen before. You have two people who have done very well in business in America talking to people trying to do business in Russia and then sharing their view with leaders in the Russian government. We visited different kinds of businesses--from a small plant that produces labels for beer bottles and Coca-Cola bottles to a large factory that used to build Soviet submarines and now reconstructs boats for shipping oil along the Volga River. The trip included meetings with President Putin and Prime Minister Kasyanov, where there was serious discussion about Russian WTO accession and broader economic policy issues. The Russians now seem genuinely interested in reforming the economy to improve economic growth. The new 13 percent flat tax and cutting the profits tax from 36 to 24 percent are already pretty impressive. They talk about the tax changes a lot; they're very proud of that.

They've got a land code reform for private ownership, and they've just passed a money laundering law. The banking sector is still very closed, and it is very difficult to get a loan if you are trying to start up or expand a business--I met with Russian Central Bank Chairman Victor Geraschenko and talked about that problem. There wasn't very much talk about macroeconomics or about large loans from the international financial institutions on this trip. I think that was refreshing. Most of the discussion was about more microeconomic issues--business development, why foreign investment is low, why entrepreneurship is still remarkably low. The inflation rate is still too high, but the economy is starting to grow. Overall, I thought these were remarkably good visits.

TIE: Why do you think entrepreneurship and investment are still Iow there?

Taylor: Well, there are a number of reasons. There are still a lot of problems with rules and regulations, dealing with the bureaucracies, dealing with the people who have to check what you're doing, making sure the product's okay in their view. They visit firms every other week. There are still a lot of problems with contracts not being enforceable and with corruption. It's much more difficult. It takes so much time to start up a new business because of so many rules and regulations. That reduces the willingness for entrepreneurs to start businesses. And foreign investors are still shy about going into Russia.

TIE: How long do you think the cycle will be before trust develops?

Taylor: I think it depends very much on how fast they can change the laws and enforce them. It has taken ten years since the fall of communism to get this far; it's probably going to be another ten years before these kinds of changes are made, and then ten years after that before things really are viewed as a completely new system. So I think it will take a while, but who knows? It's always so difficult to predict the timing of economic and political reform. Who would have predicted the fall of the Berlin Wall would have come as quickly as it did?

TIE: Even though you didn't discuss macroeconomics, did you get any sense that the global slowdown is affecting them?

Taylor: Not as much as other countries I've been watching, say Mexico or Western Europe. The relatively high oil prices have helped them. …