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2004-17-11:Ruslan Grinberg analyses the results of russian economy development
Ruslan Grinberg, Dr. (Econ.), Professor, Director, Institute of International Economic and Political Studies RAS, Moscow analyses the results of russian economy development at the pages of the journal "Svobodnaya mysl".

Svobodnaya mysl, 2004, N 4.

MONEY-BOX PHILOSOPHY Russian Economy: Preliminary Results

At first glance, Russia's economic performance looks impressive. Growth of GDP by 7 percent is indeed high and totally unexpected even by the government. Among the global heavyweights, only China is growing faster at 9-10 percent. It is not clear whiter part of this growth is accounted for by high international oil prices, which it far from stable (for a quantitative estimate see attached World Bank report).
The foreign trade surplus is not only large but also rising. Russia's currency reserve is growing and has exceeded $84 billion. This is larger than commodity imports for a whole year - three times above the minimum safety limit. Domestic capital investment is expanding at 12 percent after a 2.6 lull in 2002. Incoming foreign investment exceeded $5 billion in 2003.
There were signs of a de-dollarization of the economy, not necessarily a positive phenomenon, since the flight from the dollar was mostly to the euro rather than to the ruble. Security markets flourished but remained relatively narrow and mostly oriented towards a few blue chips in oil and metals.
However, the country has finally overcome the "2003 syndrome", i.e. the widespread expectation of a crisis caused by a synchronic breakdown of dilapidated fixed capital and inability to pay foreign debts. But nothing like that happened. The debts were easily paid and technological catastrophes were minor.
ON THE NEGATIVE side, unemployment grew for the first time since 1998. There was little expansion, if any, of small business, which still amounts to only 10 percent of GDP compared with over 59 percent in Central and Eastern Europe.
Growth of personal income by 13 percent would look more convincing were it related to a middle class comprising a solid 70 percent of the population, like in the West. But in Russia two thirds of the total increment of personal income goes to only 20 percent of the population. Therefore, there was no positive correction of excessive income inequality and social polarization. The gap between the two extreme deciles representing the richest and poorest parts of the population has reached 14-15 times compared with 13.4 times in 1998, 8-9 times in 1993-1994 and 4.5 times at the end of the Soviet era.
Thus, economic expansion did little to reduce mass poverty. It also failed to stop the processes of labor de-intellectualization and production primitivization. This is growth without development.
TWO DIFFERENT SCHOOLS OF THOUGHT assess these results from opposite angles, One, "ideological liberalism" has so far prevailed over government policy. It explains the successes of the economy mostly by pursuing policies that help create a favorable climate for domestic and foreign investment by reducing taxes, promoting pension, education, housing and communal reforms.
For the other school of "liberal pragmatics", to which this author belongs, This is not the main road. Compared to other former centrally planned economies, Russia's tax burden is not excessive - it is in the same area of 30=31 percent of GDP. The main deterrent is not high taxes but the absence of market prospects for manufacturing and government policies aimed at diversifying the economy.
The new cabinet, as well as the old one, still believes that diversification and elimination of the raw materials slant in the economy can come about automatically, as a result of lower taxes and the above mentioned reforms. But without special stimulation and support from the government, diversification is impossible, as demonstrated in most emerging market economies and in some advanced economies too. The accent on minimizing government in the economy has reduced the share of government expenditures in GDP to a third while in OECD countries it varies between 45 and 55 percent.
This issue is now being discussed in the context of what to do with the windfall revenues from high oil prices. The idea of the administration is to channel them into a Stabilization fund that should not be spent for current needs but saved for the future when oil prices fall and windfall revenues disappear.
This sounds logical when all elementary current needs are satisfied and when diversification proceeds satisfactorily without government intervention. This, however, is not the Russian case and it looks absurd sitting on a pile of money that brings only one percent per annum. A father that keeps money in the bank instead of spending it to pay for urgent surgery for his sick child is a bad parent.
Therefore, the task of a responsible government is to set priorities for a structural policy and appropriate necessary finance under strict control. Time is scarce but some crucial industries like aircraft building can still be saved by joint efforts by the government and private business.
AS TO THE NEAR FUTURE, the horizon is not clear of problems. With oil prices far from falling, the prospect is for the Stabilization fund to reach 500 billion rubles by the year's end. It is not clear, however, how the government intends to invest this money. Our ministers are particularly fond of showing off their money-boxes as testimony of their wisdom and ability to come up with some extra cash when pressure from below becomes hard.
For this reason, 2004 will, sorry to say, be another wasted year. It looks like the president favors the self-regulation school. Chances for a change in economic policy are therefore rather slim. But also the political system itself is overweighed with irresponsible decision making. The government is more dependent on the views of one person than on the analysis of the results of its policies. The parliamentary system is not democratic and therefore not efficient. And society unfortunately prefers authoritarian management.
The government will continue its unpopular reforms, albeit slowly because a hurry in reducing living standards of the majority is risky.
The president ordered inflation not to exceed 10 percent this year. That will be difficult to achieve. In 2003, an election year, natural monopolies were forced to reduce their claims. This year it will be harder to restrain them.
Hopes for the further decline of the dollar are far-fetched. Realistically, it will continue to fluctuate close to parity with the euro.
Modernizing the economic infrastructure and raising the wages of those employed in education and science are priorities in a nation with a historically strong industrial, R and D and cultural tradition. In Soviet times, young people were eager to join the area of science where there was more personal freedom. Today with wide opportunities for a business career and poor salaries in science, the attraction of that area is low. A civilized country should be able to improve that discrepancy.
HOWEVER, THE ADMINISTRATION LACKS THE WILL to systematically support the humanitarian sector of the economy - culture, science, education, medical help), as well as to formulate clear structural priorities. This is explained by the fact that the Russian authorities are too weak and too corrupt to pursue a rational policy, Why allocate money to worthy purposes if it will be stolen? Why not wait and save it until better times? The logical conclusion is to minimize government functions and pass them over to private business.
But it is a gross error to believe that private enterprise can substitute for the government in all cases. Both theory and practice of modern democratic societies show that business and government are most efficient when they complement each other, not when they substitute for each other. There are always areas of human activity where private capital will either not invest or will do so on a sporadic philanthropical basis. In Russia, private business is not in a position to support elementary and high school, fundamental research, most cultural and medical activities. They remain the areas of government responsibility. The responsibility of business in these areas is to honestly pay taxes.
Russia has not been too lucky in another way, The world is extremely competitive and nobody is eagerly waiting for new Russian goods in the world markets.
What is the way out of these difficulties? First, there has to be an understanding that inadequate government intervention is as bad as too much regulation. Second, Russia should surround itself with economic space consisting of CIS nations, Russia is a big country but not big enough to be self-sustainable in terms of markets and resources. However, progress in their mutual economic integration is scant. The illusion that CIS countries can faster join the world economy acting separately is dying very slowly. Russia should become a leader in this area.
The West is applauding our liberals but with its own interest in mind. It welcomes introduction of the flat income tax rate - in Russia, but not at home. It is clinging to policies of protection of its own agriculture but sees no reason to welcome such schemes in Russia, It deplores authoritarian tendencies in our country but welcomes Putin's growing power to conduct unpopular reforms. Liberal policies in Europe are cited as a model for restoring a zoological capitalism long deceased in advanced countries.
We have probably still three or four years in reserve until the positive aspects of the Soviet legacy are completely squandered and the country is solidly entrenched in the global periphery. This future is guaranteed unless the current moneybox philosophy is refuted.

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