- to support some big and inefficiently functioning enterprises – as a preventive factor against social destabilization. This explains the political and administrative restrictions imposed on dismissal of workers engaged in inefficient production;
- to limit the administrative reform to constant redefining of the range of functions of various state bodies alongside a refusal to implement any fundamental alterations in the state administration system;
- to raise taxes in order to ensure macroeconomic and social stability.
RUSSIAN ECONOMY IN trends and outlooks This type of economic policy inevitably has a number of natural consequences. An economy based on government demand is, in principle, more inclined towards preserving and supporting monopolies – as well as inflation. Monopolies ensured stability of the economic and political situation – although at a heavy price: the quality of goods and services was low, while the rate of inflation increased. The predominance of government demand was mitigating the need of economic agents in a lower inflation rate because government investments had priority over private ones, and it is for the private investor that a low inflation rate is more important as a precondition for lowering interest rates. The government’s decisions were becoming increasingly individualized (or targeted) – it granted privileges as incentives for certain types of investors and producers in order to compensate them for the increasing taxes, high interest rates and administrative barriers. In effect, that policy can be described as a demand economy.
The Macroeconomic and Structural Limitations of the Model Existing in 1999–2009 (the Demand Economy) Necessitating the Elaboration of a New Growth Model Budgetary issues. Increasing budget expenditures coupled with a halt in the growth of oil prices resulted in budget deficit. The Russian economy suddenly became very vulnerable to external shocks due to the unpredictable behavior of oil prices.
At the same time, the Stabilization Fund’s dual role (that is, the role of the government’s reserves generated by the super incomes from oil exports) in dealing with the strategic tasks of Russia’s economic development explicitly manifested itself. On the one hand, the reserves helped to avoid budget populism and money supply sterilization, simultaneously serving as a safety cushion in a crisis situation. On the other hand, the presence of substantial reserves in face of a crisis became a powerful factor of modernization slowdown, because social tension was released at the expense of a delay in the restructuring of bankrupt enterprises. A similar situation was observed in the banking sector.
A monetary policy, based on suppressing the process of strengthening the ruble’s exchange rate in nominal terms at the expense of an accelerated inflation rate, was also no longer effective in providing solutions to the existing problems. The ruble’s exchange rate was strengthening, and in real terms it had long ago surpassed its 1997 level, amounting by the time of the onset of the crisis to 65% of its rate in nominal terms (25% in 1999). In such conditions the exchange rate of the national currency could not seriously protect domestic producers from foreign competition1. At the same time, a persistently high inflation rate produced two-digit interest rates on credits, thus making it impossible for domesticó businesses to obtain muchneeded resources and creating obstacles to the development of the housing mortgage sphere.
Previously, that situation had been in part relieved by availability of cheap foreign credits.
Now, in crisis conditions, some serious problems arose. Further growth of the Russian economy will require the emergence of a domestic credit system which, in its turn, requires a low inflation rate.
The pitfall of insufficient competitiveness is contemporary Russia’s most dangerous structural challenge. If ten years ago this country had average-quality institutions and a qualified As calculated by A. Vedev, approximately 75% of Russia’s domestic demand produces inflation and growing imports, and only about 25% of it promotes domestic production. (Vedev A. et al. Na puti k deshevym den’gam.
[On the Way to Cheap Money.] / Bank of Moscow’s Strategic Research Center. 2010. June).
Section Socio-political Context and cheap labor force, now the situation has undergone a fundamental change. High labor cost coupled with weak institutions and low labor productivity limit opportunities for increasing industrial exports and satisfying the growing domestic demand by domestic output. In the past decade labor cost was growing at a stable rate, while institutions were stagnating or even somewhat deteriorating1. Naturally, both these indices become important only when set against similar indices in the countries with comparable levels of economic development that are competing with Russia for attracted capital and production capacities. In terms of per capita GDP Russia has been rated first among the most dynamically developing markets; in terms of business climate (doing business) its position, on the contrary, became worse – now it has joined the ‘backward’ group together with Brazil, India and Indonesia whose per capita GDP is far below Russia’s. So this country is becoming relatively less attractive in terms of investments – for foreign and domestic capital alike. Among other things, this is evidently one of the reasons for the recently started capital outflow from Russia.
In other words, Russia has found itself in a structural ‘trap’ created by the combination of (relatively) expensive labor and (relatively) bad institutions. Quite understandably, the competitive sectors in such a situation will be services and raw materials production (exploitation of natural resources) which, in fact, are currently dominating Russia’s national economy.
There exist two ways out of that trap: either the quality of institutions must be improved to match that of labor, or labor quality will deteriorate to match that of institutions. Russian economists, for evident reasons, prefer to discuss the issues of improving the quality of institutions. However, the scenario of labor deterioration cannot be entirely dismissed, either. It is precisely in this direction that today’s Russia is being pushed by the current migration trends.
The demographic crisis represents one more systemic problem that has lately acquired some new outlines.
One facet of this crisis is the natural population decline that can be only somewhat slowed down by the government’s measures designed to stimulate natality. Besides, Russia’s ablebodied population has recently started to show a downward trend. There exists an opinion that the demographic problem can be solved by means of external migration. However, in reality modern migration may only provide a solution to the issue of quantity, while only aggravating the qualitative problem. Migration is flowing into Russia from countries with lower levels of development and is represented by a population with a much lower demand for political and human potential development institutions (first of all in the spheres of education, health care and science). Thus, the issue of improving the quality of Russia’s institutions and human capital becomes hopeless.
Its other facet is the rapid spread among the creative class of an exit strategy based on the desire to start a new life in another country. This is a rather new phenomenon requiring some serious consideration. It is probably for the first time in Russian history that this desire to emigrate is associated with a markedly improved well-being level rather than with its worsening. Globalization coupled with rapidly improving domestic living standards have produced a rapidly growing well-educated and mobile class consisting of individuals who feel competitive on the world labor and capital market. There is a demand for them in the most developed The issue of institutions’ quality was considered, in particular, in: Freinkman L., Dashkeev V. Rossia v 2007 godu: riski zamedlenia ekonomicheskogo rosta na fone sokhraniaiushcheisia institutsional’noi stargnatsii.
[Russia in 2007: the Risks of Economic Growth Slowdown Against the Backdrop of Persisting Institutional Stagnation] // Voprosy ekonomiki [Issues of Economics]. 2008. No 4.
RUSSIAN ECONOMY IN trends and outlooks countries of the world, and they may easily move from country to country. As a result, Russia has to compete for her own creative class – as if it has already become international property.
This situation has given rise to some fundamentally new conditions in terms of institutional environment improvement. Members of the creative class, in fact, no longer need better institutions in their country of origin because they can get all the necessary services (a political system, education and public health care) whenever they want. But without a demand for modern institutions there will be no supply. So this has become the most cumbersome structural obstacle in the way of Russia’s modernization.
The entrepreneurial climate is yet another serious limitation of the existing economic growth model. If one accepts the hypothesis that the entrepreneurial climate is more favorable in countries with higher levels of economic development, Russia will represent a noticeable exception: here, the quality of the relevant institutions is much lower than in countries with a comparable per capita GDP level. Out of about 200 countries of the world, Russia is at 50th position by its development level, while in terms of institutional quality it is among the second hundred. According to the latest ratings and opinion polls among entrepreneurs, the problem of gaining access to infrastructure has recently become more acute.
Rapidly rising oil prices coupled with a growing economic activity of the State during a certain phase were neutralizing the entrepreneurial climate’s negative influence on economic growth. Meanwhile, Russia has found itself at the very bottom of the international competitiveness scale by a number of individual indicators. These are, first of all, the customs regulation; the procedures for starting and closing down a business; the construction business; and investor protection. Besides, serious limitations are imposed by the existing status of basic (law enforcement) and financial institutions.
Russia’s spatial development serves as another structural limitation to increasing its competitive capacity. Because of the uneven territorial development and insufficient responsibility of regional and municipal authorities for the situations in their own territories the federal budget bears an excessive budgetary load, while the regions are not interested in seeking new resources. The mechanism for appointing heads of regions has become an additional factor for them to lobby for redistribution of federal funding in their favor. In absence of proper incentives for territorial consolidation of human and financial resources, as well as any mechanisms for such consolidation, the financial pressure exerted by the regions on the federal government will be constantly renewed and thus give rise to an inevitably unreasonable allocation of budget expenditures.
1.1.4. The New Growth Model: The Supply Economy The exhaustion of the potential of the growth mechanisms applied in 1999–2008 in combination with the challenges posed by the global crisis have put forth the question as to the need to generate a new economic growth model. The new growth policy must be able to put forth some mechanisms that will enable Russia to become successfully competitive in the struggle for human and financial resources (human and investment capital) that is currently going on a global scale. Below we are going to look at the key components of the new growth model.
Budgetary policy. The major directions of the budgetary policy are: to reduce the budgetary load relative to GDP; and to lower the budget’s dependence on the fluctuations of the world market situation.
The achievement of these goals will be helped by the reestablishment of the rigid budget rule: budget estimations must be based on a fixed oil price level that does not depend on any Section Socio-political Context political negotiations but instead is geared to, say, a decade’s average price. In other words, budget rent-generated revenue must be guaranteed with a high degree of probability. If it becomes necessary for expenditures to exceed the amount of revenues calculated on the basis of that assumption (structural revenues), the government must raise taxes or borrow money – and these must be ruble-denominated loans. Their aggregate sum must not exceed 25% of GDP. If oil prices go above the estimated decade’s average, the surplus revenues must be transferred into a reserve fund and by no means be spent on current consumption even if there occurs a parallel government debt growth.
Budgetary policy needs to resort to a structural maneuver towards increasing the investment and innovation-oriented (on human capital development) budget expenditures, while simultaneously cutting social welfare expenditures (through expanding the regions’ powers) and providing funding to the power structures.
At the same time it is necessary to optimize budget expenditure. The adoption, in recent years, of the laws on autonomous and budget-funded institutions that have significantly transformed their status and separated their obligations from budget obligations can be regarded as only the first step in the direction of budgetary network rationalization. It is important to define more precisely the role of the Stabilization (or Reserve) Fund in order to prevent the use of its resources for the support of inefficient enterprises.
Any further alterations in the tax system must be brought to a minimum, with the exception of those that deal with the expansion of the revenue base of regional and municipal budgets. However, here we mean expansion of the tax powers of the sub-federal bodies of authority rather than the redistribution of the existing tax revenues.