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A policy aimed at ensuring competitiveness of the economy through allocation of potential investment resources to the Reserve Fund limited prospects for modernization of produc tion and, eventually, made the economy dependent to a greater extent on a situation which prevailed in international markets. Insufficient volumes of investments in the real sector of the economy (considering the existing age, technological and sectorial structure of fixed capital) had a negative effect on the structure of economic growth. It is to be noted that aggregate domestic factors were insufficient to neutralize the impact of the external de mand on the rates of economic growth. Whereas in the 20002004 period inputs of the domestic demand accounted for 75% of the increase in the GDP, in the 20032004 period domestic factors impact decreased by 20%. In a situation where incomes of businesses and households kept growing, unstable growth in output of goods of final demand stimu lated demand in import goods. In 2004, growth in imports amounted to 24.9% as against 24.2% in 2003 and 13.4% in 2002. That trend was also maintained by higher efficiency of imports in a situation of a gradual appreciation of the ruble exchange rate.

In 2004, in the structure of commodity resources of the retail trade, the share of im ports stabilized at the 2003 level and amounted to 44%. Rates of mainline imports were hindered by strong competitive positions of Russian food manufacturers. Whereas in the 202 2003 period the share of imports in the volume of food commodity resources amounted to 34%, in 2004 it went down by 2%. The market of consumer goods was under greater pressure from imports. With such a slow down of the rates of growth in industries of the consumers sector as was caused by a permanent recession in light industry, in 2004 the share of domestic production in retail trade in non food products went down to 46.4%, as against 50.0% in the 20022002 period.

A relative decrease in value of import raw materials and material and technical re sources had a considerable effect on changes in competitive environment and identified problem zones. Unit weight of imports in the total volume of industrial commodity re sources increased by 7.6%, as compared to the beginning of 2004 and amounted to 29.8%. In particular, dynamic growth in investment imports as compared to that in output of domestic engineering industry was accompanied by removal of Russian manufacturers from the market. In 2004, the share of machinery and equipment in the total volume of im ports amounted to 41.6%, as against 37.3% in 2003. In the 2002 2003 period, the share of expenditure on purchase of import machinery accounted for nearly 25% of the total vol ume of investments in machinery, equipment and transportation vehicles. So, as regards general competitive advantages (taking into account a positive impact of growth in produc tion, on one hand, and a negative effect of appreciation of the RUR exchange rate and worsening of correlation ratios between domestic prices and imports, on the other hand) Russian manufacturers backtracked to the pre crisis 1997 level. (Fig. 5).

Section 3.

The real sector 34,33,34,32,32,33,31,2 32,31,30,29,29,29,28 27,27,28,4 28,28,2 28,26,25,25,25,26 25,25,24,25,25,1 24,3 25,23,23,24,23,23,22,22,23,23,23,22,23,4 23,5 22,1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 2003 Share of export in the volume of sales of industrial goods Share of import in resources for the use on the domestic market Fig. 5. Change in unit weight of imports (in resources) and exports (in sales volumes) in the 20032004 period in prices prevailing in respective months (%) The principal factor behind a decrease in competitive advantages of Russian com modities is lower efficiency in utilization of production factors. Higher rates of growth in wages and salaries, as compared to those in labor efficiency had a negative effect on qual ity parameters of economic dynamics. In the 2002 2003 period, real wages increased by 42.8%, while labor efficiency, by 17.7%. Such growth in wages and salaries took place in a situation where the gross profit of the economy in the GDP went down from 42.7% in to 40.2% in 2004 (Fig. 6).

180,160,140,120,100,1998 1999 2000 2001 2002 2003 80,60,Labor productivity Real salaries and wages Fig. 6. Dynamics of labor efficiency and real wages and salaries in the 19992004 period (% of the 1998 figure) RUSSIAN ECONOMY in trends and outlooks In 2003, there was narrowing between the rates of labor efficiency and those of real wages. However, it did not have a significant effect on efficiency indices of enterprises and entities. Dynamics of the domestic market was maintained by growth in real wages and salaries and households income and was accompanied by reallocation of incomes from industries to households, which situation eventually resulted in growth in production costs and a decrease in profitability. In 2004, growth rates of wages and salaries exceeded those of labor efficiency by four percent. However, further growth in expenditures on wages and salaries was limited by changes in competitive environment on commodities markets due to appreciation of the ruble exchange rate and growing pressures from imports. As a re sult, in 2004 the share of hired workers wages in the GDP decreased by 1.0% on the figure.

Table Structure of formation of the GDP by the income in the 19992004 period (% of the total) 1999 2000 2001 2002 2003 2004* Gross domestic product 100 100 100 100 100 Including:

wages (including unofficial labor remunera 40.1 40.2 43.0 46.7 46.9 45.tion) of hired workers Net taxes on production and imports 15.7 17.1 15.7 14.1 13.5 13.Gross profit of the economy and gross mixed 44.2 42.7 41.3 39.3 39.6 40.incomes * Preliminary data.

Source: the Federal Service of State Statistics.

The specifics of formation of the structure of households income and the GDP was determined by the structure of the gainfully occupied population: 92.1% of the gainfully employed, as against 7.9% of the self employed. The share of labor remuneration of hired workers accounted for over 63.3% of households incomes and 45.9% of the GDP (Table 3). Transformation changes in business environment contributed to growth in activities of small businesses. The number of workers employed by small businesses accounted for 11.3% of the total number of workers gainfully occupied in the economy. In 2004, in the structure of households cash incomes, the share of income received from business and property grew to 21.0%, which is an increase of 1.2% and 3.9% on the 2003 figure and the 2002 figure, respectively.

High differentiation of average wages and salaries by the branch of the economy and industry was preserved. Dynamic growth in wages and salaries in services industries, fi nancial sector and regulatory bodies was accompanied by smooth slowing of growth rates of accrued wages in the physical production sector as compared to the average level across the economy. The above trend was initiated by moderate growth in average wages in industry as compared to that in building industry. In industry, the extent of differentiation of wages was determined by a growing gap between the rates of labor remuneration in ex port oriented industries and those in branches of manufacturing industry. Nominal wages and salaries in oil industry exceeded the average industry wide level by 120%, in natural gas industry, by 260%, in nonferrous industry, by 70%, while in engineering industry and food industry, they fell below that level by nearly 15%. Sectorial specifics of labor remu neration had a significant effect on employment of labor resources in the economy and formation of the structure of households incomes and expenditures.

Section 3.

The real sector With regaining of social development parameters, significant changes took place on the labor market. In 2004, the annual average number of employed persons in the econ omy amounted to 67.4 million, as against 65.8 million in 2003 and 63.8 million in 1998. It is to be noted that change in demand in labor was determined by a shift of work force from the physical production sector to the market services sector. At the initial stage of recovery growth, that trend had a powerful effect on quality of life and gave an impetus to rapid de velopment of the services sector. However, in a situation where rates of industrial growth slowed down (while those of imports increased) the annual average number of industrial personnel tended to decline. In the past three years, a drop in the rate of employment was observed with all the branches of industry; the highest redundancy rates were registered in branches of manufacturing industry. Due to low efficiency in use of labor force and fixed capital in the investment sector and consumers sector, the gap between the rates of growth in manufacturing industry and extracting industry increased and, eventually, re sulted in a slow down of growth rates of the economy.

As a predominant portion of households income is received from labor remunera tion, employment related issues have become a priority (Table 4). The total number of un employed persons calculated using ILO methods fell from 8.9 million (13.2% of gainfully occupied population) in 1998 to 6.2 million (8.6%) in 2003 and to 5.9 million (7.4%) in 2004. A tension ratio (the number of unemployed persons registered with the employment service per a vacant job) amounted to 2.7 million, as against 2.3 million at the beginning of 2003 (Fig. 6). At the same time, with changes in demand in work force working time was used more effectively. In the first six months of 2004, length of a working day across the economy rose by 1.8%, while in industry, by 2.3%. The number of workers employed part time or being on forced unpaid administrative leaves fell by nearly 33.3%. In addition to the above, the length of workers unpaid holidays was reduced in compliance with norms of the effective legislation.

Table Structure of households cash incomes in the 19992004 period (%) 1999 2000 2001 2002 2003 Cash incomes Total 100 100 100 100 100 Labor remuneration, including 66.5 62.8 64.6 65.8 63.9 63.unofficial pay Business income 12.4 15.4 12.6 11.9 12.0 11.Property income 7.1 6.8 5.7 5.2 7.8 9.Social payments 13.1 13.8 15.2 15.2 14.1 13.Other income 0.9 1.2 1.9 1.9 2.2 2.Source: The State Committee for Statistics of Russia; the Federal Service of State Statistics.

RUSSIAN ECONOMY in trends and outlooks rates, as % proportion, as % 20 I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV -5 1998 1999 2000 2001 2002 2003 -----30 The share of unemployed as % of the economically active population Real incomes increment rates vs. the respective period of the prior year GDP- increment rates vs. the respective period of the prior year Fig. 7. Change in growth rates of the GDP, real households income and unit weight of unemployed persons in the 1998 2004 period (%) In the past four years, there was sustained growth in households real income, real wages and real accrued pensions. In 2001, ultimate consumption by households regained the pre crisis 1997 level, while in the past three years it increased by 30.5%. In 2004, growth in households real income, real wages and real accrued pensions amounted to 7.8%, 10.8% and 5.5%, respectively.

Growth in income has resulted in a substantial reduction in the rate of poverty. The share of persons with incomes below the minimum subsistence level fell to 24.9 million and accounted for 17.3% of the total number of the population, as against 34.6 million (24.2%) in 2002.

There has been a radical change in distribution of households by the value of average per capita income. In 2004, with average per capita income and real wages growing by 122.4% and 125.3%, respectively, on the 2003 figure, the share of households with in come over RUR 7000 and the share of households with income between RUR 4000 RUR 7000 increased by 8.6% and 1.7%, respectively, while that of households with income be low RUR 4000 fell by more than 10.0%. However, it did not weaken socioeconomic differ entiation of households by the income. By estimate, in 2004 the ratio of funds (which char acterizes correlation between the value of the highest income and the value of the lowest income of respective decile groups of the population) increased by 1380%, as against 1330% in 2003 and 1300% in the 20012002 period, while Gini coefficient (which charac terizes the extent of income concentration) rose to 0.406 in 2004, as against 0.400 in and 0.398 in the 20022002 period.

Section 3.

The real sector Distribution of income determined dynamics of current expenditures and savings in the households sector. In the past six years, changes in the structure of consumers ex penditure were determined by growth in unit weight of expenses on non food products and services in a situation where the share of expenses on food products was declining. It is to be noted that with the existing level of income there was a gradual shift towards more expansive food products in food sales and towards better quality import products in non food sales. As compared to the previous period, in the 20032004 period there was a nar rowing between growth rates of the volume of paid services rendered to households and those of retail trade turnover despite the fact that there was higher growth in prices and tariffs on paid services than on goods. It is to be noted that in the 20022004 period there was sustained higher growth in nonfood sales, than in food sales, as well as an increase in the share of sales carried out by commercial entities. Change in consumer behavior can be explained to a certain extent by slowing of the rate of inflation, as well as structural changes in pricing in respect of principal groups of commodities.

Growth in purchase power of households incomes ensured high growth rates of re tail trade turnover. In 2004, households spent RUR7567.2 billion on goods and services, (an increase of 23.4% on the 2003 figure). In 2004, the retail trade turnover increased by 12.1%, as against 8.4% in 2003. Change in the structure of households demand and in crease in the share of non food durable goods sales gave an impetus to intensive devel opment of consumer lending. Within a year, the volume of lending to individuals increased by 91% and amounted to RUR573.3 billion as of early December 2004. As of December 1, 2004, the share of loans extended to individuals accounted for 14.4% of the total sum of loans advanced by credit institutions (9.8% a year ago).

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