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The Russian Economy has Exhaustedits Former Sources of Growth

The country needs a new model of development, but this requires serious institutional changes. Officials are not interested in this, although the current policy of living ‘beyond the country’s means’ threatens to bring about serious social protest. These were the conclusions of the recent roundtable on ‘Scenarios of Russian economic development up to 2030’ at the HSE April Conference

The Russian economy is exhausted, growth rates are falling, and optimistic declarations by the country leaders or their policies do not inspire confidence. For example, the expected growth rate of 5% is virtually unachievable, as is improving Russia’s position in the world investment climate ranking from 120th place to 20th. Future scenarios, unless serious institutional changes take place, appear to be negative. This a brief summary of the presentations by Evgeny Yasin, HSE Academic Supervisor, Evsey Gurvich, Head of the Economic Expert Group, Sergey Guriev, Rector of the New Economic School, Andrey Klepach, Deputy Minister of Economic Development of the RF, and Alexey Vedev, Director of the Center for Structural Studies, during the round-table discussion on ‘Scenarios of Russian economic development up to 2030’ which took place as part of the HSE April Conference on April 3, 2013.

Institutions vs. stagnation

Alexey Vedev said that according to the Ministry of Economic Development, the long-term forecast is that oil prices should remain high, and economic growth will be assured by by means of expanding savings and consumption, while the resources for this will come from external sources. High oil prices provide a rate of economic growth of 2-3% a year, and the Ministry of Economic Development is trying toadd to this bypumping credit into the economy. in order to achieve the growth level of 4.5-5%.

However, according to Vedev, such an option will not solve the problems of economic growth in the country. We’ve been living under the conditions of increased credit in the economy for 20 years. And now we are being offered the same way of development up to 2030. In 2012 about 1.5% of Russia’s GDP growth was achieved by means of increasing consumer credit and 2012 saw a staggering annual growth in consumer loans – up to 48%. As a result, the market has become overheated.

The Central Bank and the government are turning a blind eye to this problem, since there are no other ways of providing economic growth. But such growth clearlyisn’t sustainable.

According to Vedev, we can only achieve a growth of 4-5% ormore by removing the institutional limitations for economic development, including improving competition and decreasing corruption in the context of the balanced development of the banking sector. But the Ministry of Economic Development is not considering this option.

Money vs. institutions

Andrey Klepach, Deputy Minister of Economic Development of the RF, defended his ministry’s policies. According to him, a fast-growing economy is incompatible with a low level of monetization. ‘M2 money supply today in Russia is 44% of GDP, by 2013 it should have grown to 53-54%, and by 2020 – 70% of GDP’, he emphasized.

Relying on liberalism and institutions is overestimated, Klepach believes. ‘Today the institutional illusion is growing, but there are no valid evaluations and calculations of the connection between the quality of institutions and growth rates in the economy. Russia had high growth rates of economy – 7% annually, but the quality of institutions was low. At the same time, there have been many examples in our history when liberalism was accompanied by a falling GDP. Before the crisis, Spain had higher growth rates than France, but corruption there was higher. The problem is much more complex than this’, the official said.

Usually, when people talk about institutions, they mean the legal aspects, but we should also talk about the behavioural aspects: of business, people and officials. ‘Most of the large breakdowns which we have witnessed recently happened because of a breach in manufacturing techniques, rather than corruption. Comprehensive control is important, including the structure of public costs and internal demand. At the same time, we should always look at not only the short-term, but also the medium- and long-term effects’, Klepach warned.

However he did acknowledge the importance of institutions, since even if they don’t influence growth rates directly, they can definitely influence improvements in the quality of the economy.

According to Klepach’s forecast, the maximum economic growth in Russia can be 4% annually, but onlyunder several conditions. Structural and quality changes are necessary. The improvement of human capital quality (through modernization of the education system etc.) can generate 0.2-0.5% of GDP. Transport infrastructure can add 0.2-0.4% to GDP, and the development of high technology will improve GDP by 0.3-0.5%. Foreign capital inflow should add between 1 and 6% to the GDP.

‘The upper classes are unable to, the lower classes don’t want to’

According to Evsey Gurvich, there are 4 possible scenarios for the country’s development up to 2030. The first scenario is the breakthrough one, when institutional changes are fortuitously combined with high oil prices. The second and third scenarios are medium, where either high oil prices are combined with institutional stagnation, or institutional change happens alongside stagnating oil prices. And the third scenario is inertial, where both oil is cheap and there are no institutional changes.

In order to implement the first scenario, Russia should rise from the bottom to the middle of the World Bank’s Doing Business rankings (closer to Turkey and Bulgaria), Gurvich believes. With such institutional progress and high oil prices, the country’s economy can grow by 4.2% annually up to 2030. In the other cases, we won’t be able to see GDP growth higher than 3% or possibly even 2%.

Gurvich believes that one of the middle scenarios is most likely, when institutional development is absent but there is some growth of oil prices. At the same time, according to the economist, what is important is not the growth rates by themselves, but how well governmental bodies’ adapt to these figures.

It is possible to lead a life with growth rates at 3%. It will, however, be rather painful. We’ll need to lead a modest life, cutting our cloth according to our means. Which means not spending billions on arms modernization, the solution of the problems of Far East, hosting the Olympic Games and the football World Cup.The government is hardly likely to agree to this. And this leads to the main risk for the country’s economic development. Attempts will be made to speed up the growth by all possible means – softening monetary policy and increasing state spending. Then we will fall to even lower growth rates, and stagger from crisis to crisis.

The population will be discontented with the slowdown in economy growth rates and, correspondingly, their incomes. As a result, a situation will be ‘the upper classes are unable to, the lower classes don’t want to’.

Growth as a sacrifice to political stability

S. Guriev believes that the lack of interest in institutional development is connected with a reluctance to face political competition: ‘United Russia is not interested in fighting corruption, since its task is to remain in power, not to improve the life of citizens. In order to remain in power, it is better not to develop institutions, otherwise political competition will emerge. New officials will drive out the old ones, and the economy will probably grow’.

 

April 11, 2013