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Ekonomika i revoliutsiia: uroki istorii [Economics and Revolution: Lessons from History] // Voprosy Ekonomiki. 2001. No 1.

Section 1.

The Socio-Political Context conditions of catching-up development, the State should take upon itself the responsibility to compensate for market uncertainty, and especially for the weakness of the nascent market institutions1. However, the subsequent course of events has indicated that such an excessive state interference in economic matters can cost society dearly both in economic and political terms. The Big State ossifies and, at some point, becomes an obstacle to modern economic growth. The overcoming of this obstacle always requires a large expenditure of resources and, sometimes, a heavy loss of life.

The existing growth model demand-side economics The major elements of this model are as follows: the high levels of social and political stability as the key aim of the government; the continually growing prices for hydrocarbons;

budget expenditure growth as the principal source of demand; a gradual increase in taxation;

the continuing existence of a potential for inflation; the increasing role of narrowly targeted decisions, and the reluctance to set up the rules of the game.

The existing growth model which emerged in the 2000s is based on the presence of significant, cheap and untapped financial resources that owe their existence not to labor productivity growth but to a favorable external market situation. In fact, Russia has had a version of this model since the 1970s, and its popularity is almost as high as it was in the first decade of its existence. The rapidly rising expenditures of the state budget make it necessary for Russia to further accelerate the climb in prices for energy resources in order not to end up with a massive budget deficit.

Under the existing model, the State is the most important source of demand. The major part of demand is coming from the medium and low-income strata of the population (pensioners, unemployed persons, civil servants, military personnel, and workers of state corporations). An important role is played by the funding of the power structures in the part of arms purchases and the upkeep of military personnel. (However, in this regard, 2010 was a watershed year for Russia, given the Russian militarys announcement of big military purchases from NATO countries.) Another important sphere of state-generated demand is investments in infrastructure. However, being well aware of the high levels of corruption in this sector, the government has become much more circumspect about investing in infrastructure than in the social sphere.

It is not easy for a government to decide whether the priority for investment should be infrastructure or the social sphere. Social expenditures are oriented to a more competitive market, and they are really capable of generating a rise in consumption. The infrastructure sectors are more heavily monopolized, and investments therein result in a rise in prices (or tariffs) rather than in a rise in demand for the relevant goods and services.

At the same time, social expenditures considerably boost inflation and increase demand for cheap imports. The experiences of the past few years indicate that a rise in demand for cheap commodities and services is satisfied not by the domestic producer but through imports from cheap labor countries (first of all, from Asia)2. This circumstance considerably reduces the potential impetus of budget expenditures.

Gerschenkron A. Economic Backwardness in Historical Perspective: A Book of Essays. Cambridge, Mass.:

The Belknap Press of Harvard University Press, 1962.

According to Aleksey Vedevs estimates, 75 % of growth in domestic demand resulted in inflation and a rise in imports, and only 25 % stimulated domestic output. (A. Vedev et al., Na puti k deshevym dengam [On the Way RUSSIAN ECONOMY IN trends and outlooks To a certain extent, this demand could be compensated for by means of exchange-rate policy, that is, by restraining the process of the rubles strengthening. However, the monetary authorities have a very narrow scope for action in this direction, especially given the current high level of prices for hydrocarbons.

Yet another problem associated with social expenditures is their irreversibility. Once social obligations have been assumed, they can be safely repudiated only in conditions of a severe political and economic crisis. The insufficiency of budget revenues will not be accepted as an excuse by the population. from this point of view, expenditures on infrastructure are much more politicized, and therefore are easier to give up.

Under this model, the priority of social stability will prompt the government to pursue conservative policies in the labor market the policies aimed at preventing the release of excess workers, and therefore obstructing structural innovation. To be condoned by the authorities, the release of excessive labor should be done very cautiously and under the control of the State. This approach can be very fruitful, as is exemplified by the 2010 experience of AvtoVAZ. However, this example cannot be replicated on a massive scale.

If structural reforms are abandoned, the maintenance of macroeconomic and social stability will require a steady rise in taxation that is, a revision of the policies pursued in the past 15 years.

Finally, an economy based on state-generated demand is, in principle, more prone to the preservation and protection of monopolies. In response, the monopolies will indeed ensure economic and political stability, but at a price. The price will be a lower quality of goods and services, and a higher rate of inflation.

The predominance of state-generated demand will lower the need of economic agents in bringing down the inflation rate, because state investments will then become more important than private investments but it is the private investor who is more interested in the inflation rate being lower as a stimulus for bringing down interest rates.

Apparently, the State will increase the pinpointedness of its decisions by creating incentives for some categories of investors and producers that will compensate them for tax hikes, high interest rates and high administrative barriers.

Growth for the sake of structural modernization supply-side economics Modernization should put the main emphasis on the quality of growth rather than on its rate. This approach necessitates the creation of a new growth model based on stimulation of the supply of goods and services, i.e., on ensuring adequate conditions for successful functioning and development of economic agents.

This model has the following three major elements.

Firstly, a steady decrease (instead of an increase) in the budget burden as a percentage of GDP, i.e., a decrease in both budget expenditure and taxes. Practically all successful examples of catch-up development in the post-industrial world took place in countries with budget loads that were smaller than those in the most advanced countries. (This is the principal difference between contemporary catch-up development and catch-up development in the industrial epoch of the 19th and 20th centuries. It is especially important to prevent a rise in taxes on labor: instead, such taxes should be gradually reduced;

to Cheap Money]. Tsentr strategicheskikh issledovanii Banka Moskvy [The Center for Strategic Research of the Bank of Moscow]. 2010. June.).

Section 1.

The Socio-Political Context secondly, the restoration of the macroeconomic balance, i.e., the budget deficit decreases, while budget expenditures become more rational and efficient;

thirdly, currency policy should be investment friendly. This means that the ruble should be transformed, step by step, into a regional reserve currency. As the efficiency of domestic output stimulation by means of restraining the strengthening of the national currency considerably decreases, it is necessary to start inflation targeting, which will make it possible to keep interest rates at a level acceptable to investors;

fourthly, maintenance of economic openness as the most important condition for stimulating domestic competition, development of the Customs Union and the common economic space, accession to the WTO and the OECD, and, later on, movement toward the creation of a common economic space with the EU that can be considered to be a strategic goal of the countrys external economic policy. All this does not exclude the implementation of measures designed to boost non-primary exports on a day-to-day basis;

fifthly, neutralization of opportunistic incomes, which means a return to the initial ideological and practical design of the Stabilization Fund which was formed in order to accumulate revenues from the sale of hydrocarbons at a time when their price exceeded the cut-off price set for a number of years;

sixthly, a profound reformation of every branch of the social sector, first of all the pension and medical care systems, which should be brought into line with the demographic and financial realities of the post-industrial time; strengthening of the private and individual principles of the functioning of these branches, and bringing their development to conformity with the formation of sources of long-term investments;

seventhly, a consistent implementation of privatization with the emphasis being put not on fiscal tasks but on social and political objectives, such as the formation of a broad stratum of non-oligarchic owners of means of production (medium-sized and big businesses), the formation of a middle stratum, and the attraction of strategic investors. This type of privatization would generate demand for modernization, macro-economic resurgence and the abovementioned structural reforms. (This is exactly what happened in the 1990s, when the beginning of privatization opened the way for macroeconomic and political stabilization.) Of course, the above conclusions are not meant to minimize the importance of reforms in the political and law-enforcement spheres, which are designed to protect property rights, develop competition, and overcome corruption, i.e., to provide solutions to the acute problems that have been so widely discussed in recent years.

1.1.4. The key challenge: structural modernization in conditions of a rent-based economy Figures for 2010 indicate that the resurgence of economic growth has failed to become synonymous with an exit from the economic crisis. The economic situation remains unstable and highly dependent on state-generated demand. The necessity to maintain a high level of expenditure despite the impossibility of a significant increase in taxes suggests a rise in borrowing as the only possible solution. In its turn, borrowing creates a number of immediate and long-term problems for the governments of all countries, because all those debts will have to be repaid. Moreover, their repayment will become a major drain on the state budget for years to come.

The governments of the leading countries of the world are faced with a hard choice, which is of a fundamental importance for the prospects of global economic development. They are RUSSIAN ECONOMY IN trends and outlooks to chose between the tightening of budgetary policy and the continuation of budget incentives. The first approach will conduce to macroeconomic resurgence in the future, but can cause recession in the immediate term. That will be very unpleasant, both in economic and political terms, and can threaten the ruling parties with the loss of their mandate. The second approach will maintain the current level of economic growth. However, it is fraught with the danger of the emergence of some serious problems that will take at least a decade to overcome.

Both approaches are based on the experiences of the previous two great crises. An attempt to tighten budgetary policy in the mid-1930s resulted in the resurgence of a recession, which was brought to an end only by the Second World War. On the other hand, an attempt at growth stimulation in the 1970s caused a fall into the trap of stagflation, which the economy was able to disentangle itself from no sooner than the early 1980s after passing once again through a deep recession.

The austerity vs stimulus discussion among economists and politicians is gaining momentum. Not surprisingly, both parties are actively appealing to the memory of John Maynard Keynes who, indeed, put forth the idea of economic stimulus but never recommended that it be used on a scale as massive as that in the 1970s, when Richard Nixon declared himself a Keynesian and pursued state intervention policies under the guise of Keynesianism.

Given all the importance of this discussion, it fails to precisely reflect the essence of the current problem. Its main shortcoming is the discussants attempt to find a solution in the old logic of business as usual, i.e., an attempt to revive the pre-crisis rules of the game and to blissfully continue pre-crisis economic policies. For them, the only question is in funding the best way to weather the current storm by sacrificing either growth or financial stability.

In essence, this polemic replicates on a national level the logic of the behavior of large enterprises you should bide time, receive and restructure credits, and then it will be business as usual.

The key problem of such an approach is the actual abandonment of the modernization component of anti-crisis policy. Waiting for growth to recover on the micro or macro level makes governments prone to maximally safeguard stability and to condone nothing that could undermine their electoral prospects.

However, the problem is much deeper than that. A systemic crisis always has a strong modernization component. The crisis or, better to say, the process of its overcoming implies the potential achievement of new levels of competitiveness and promises some new economic and technological solutions.

The overcoming of a crisis does not reflect on growth figures, like its beginning did not coincide with the beginning of recession. The case in point is the emergence of a new quality of growth, a new growth model, and a new model of socio-economic regulation, this time apparently on a global scale. To achieve these ends, governments should pursue a conservative budgetary policy that would stimulate innovation instead of helping traditional enterprises to preserve their market share and profits.

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