It should also be emphasized that the concentration of high proceeds within a single sector, or even in a few companies (including oil ones) creates preconditions of a degradation of the quality of an economic policy, gives a rise to the redistribution function of the state, which, in turn, generates prerequisites of an inevitable future crisis associated with the exhaustion of a ”pool” for funding populist actions.
Thus, the impact of the downfall in oil prices on Russia’s economic development ap pears far from unambiguous, and at this point one cannot draw any quantitative assess ments. However, from the qualitative perspective, it is evident that once their role as the extra economic source of growth declines, lower oil prices give a rise to additional mecha nisms that generate other sector’s development. But to make it happen, one needs an economic policy, whose adequacy implies, first, the soundness on the stage of high prices, i.e. prevention from a considerable increase of dependence of the budget on “cheap money”, and, second, its adequate reaction to the situation when the foreign eco nomic situation deteriorates.
These challenges are well known from our recent past, while experiences of some other resource abundant countries’ likewise witness similar lessons. As noted above, the collapse of the Soviet system was related to the unsound economic, primarily investment policy over the 1970s, when a drastic price rise for oil resulted in an economic and political euphoria. The Soviet leadership was at pains to suspend economic reforms designed be tween the 1960s–70s, which were aimed at boost the efficiency of the Soviet economy and its adjustment to new challenges (that presently are known as the post industrial chal Illarionov A. Putin aide says growth threatened by stes//inancial Times. 004.October 7; OECD. Accounting for Rssia’s post crisis growth.http://ideas.repec.org/p/oed/aecdec/404.html.
The Socio Political Background lenges). The process was coupled with a structural transformation and abandonment of the equilibrium state of the 1960s, whose fundamental feature had been the country’s low level of dependence on external markets, and a drastic rise of the latter on the domestic state of affairs. In less than a decade, the Soviet economy found itself dependent on im ports, i.e. on foreign exchange reserve needed to ensure import supplies. That particularly concerned the consumer market (food stuffs in particular), and the machine –engineering sector whose produce was designated to ensure the extraction of extra energy resources.
The country de facto implemented the “oil (and gas) for food” program.
Such a policy allowed maintaining the Soviet economic growth at a certain level (al beit not sufficiently high, but as of that moment, higher than in many Western countries that at the time were facing the stagflation challenges) and the postponement of the urgent economic and structural reforms. But ultimately it has led to a complete fiasco.
Another example of the time was Mexico. Thanks to colossal resources the country accumulated because of high oil prices, the government decided that they found a simple way to solve their problems12. The country was switched to the track of a drastic boosting of its growth rate and securing the nation’s economic independence by means of fostering the public sector. With various investment programs in place, Mexican growth rates surged from 3–4% (1975–77) up to 8–9% (1978–1981), while the average annual rise in invest ment accounted for 16%. The budget was run with deficit, though, as envisaging future revenues, the government was keen to borrow heavily. The situation became to darken with the change in the trend of oil prices in early 1980s. The country’s GDP began to fall, Peso was devalued by over 40%, the external dent grew from USD 40 bln. in 1979 up to bln. in 1985 against the background of a drastic acceleration of capital flight and the fall in foreign reserves to USD 1.8 bln13.
Finally, it is worthwhile citing Iran – the country whose regime first benefited greatly from the oil boom and collapsed not after the downfall of oil, but on their peak. The critical factor for the destabilization there became an accelerated modernization implemented by the shah’s government. The “from top to bottom” modernization was to a significant ex tent alien to the countries’ economic and social life and resulted in a rapid rise of tension in the society followed by the explosion in the form of the Islamic Revolution in the late 1970s.
But the governments of the 1970s could justify their actions, at least, by a practical absence of operating under negative dynamics of oil prices. Nowadays the situation is dif ferent – life itself showed that prices for main Russian commodities can fluctuate substan tially and their dynamics are unpredictable, which a sound economic policy should take into consideration.
Furthermore, the longer the present price levels for oil are maintained, the more fre quent the “this is forever” arguments can be heard. Such conclusions, however, are not convincing, and the dynamics of oil prices remains unpredictable and well “foretold in ret rospective”, with very convincing arguments of why a given situation took place.
The Government’s View on Economic Growth Problems The RF Government’s stand on issues of economic growth is mirrored in its program documents – “Main guidelines for the RF Government’s operations for the period until 2008” and the draft of “The medium term program of socio economic development H. Portillo, then the President of Mexico, declared that “…our fundamental mission is to manage the growing welfare” and it was he who began to use the “administrative abundance” term.
While in the first years of Mr. Portillo in the office, he was a golden boy both domestically and overseas, by the end of his year tenure he was accused of “squandering the nation’s oil revenues, bizarre external borrowing and inflating budget ex penditures”. After his resignation, President Portillo had to quit Mexico.
RUSSIAN ECONOMY in trends and outlooks (2005–2008)”. Both documents are complex and systemic. While the preceding Medium term program was approved just in August 2003 and covered the period between through 2007, the Government ruled to develop a new one. It seems quite natural, as the newly formed Cabinet must have to formulate parameters of its operations by itself. Fur thermore, the new “planning period” coincides with Mr. Putin’s second term, i.e. the eco nomic framework is naturally combined with the political one.
The debate focused on the objectives the President articulated in his 2004 Address to the Federal Assembly and, primarily, securing high rates of economic growth. In our preceding reviews, we have already cited four prevailing in the national expert and political community approaches to consolidation of economic growth efforts: an institutional ap proach (the focus on creation of institutions that promote growth), dirigist (an intensifica tion of the government’s direct participation in economic life); fostering the development of financial industrial groups; a radical lowering of the budget burden on the economy (the share of budget of the general in GDP)14. The 2004 discussions highlighted a clear preva lence of the first two approaches, which evidently manifested itself while experts were de veloping the Medium term program.
As in earlier analogous documents, the Medium term program accentuates the shaping of the institutions that secure a sustained functioning of a modern market econ omy at a high pace. In general terms, the set of proposed measures corresponds to tasks of the third stage of reforms. The priority economic policy avenues for the years to come are:
– creating conditions of increasing human competitiveness, enhancement of efficiency of the health care and educational, and pension and social protection systems, the housing and communal complex, a consistent overcoming the poverty;
– solidification of the state, including implementation of the administrative reform, in creasing efficiency of the judicial and law enforcement systems and institutions;
– fostering civil society institutions, which is viewed as a critical factor of consolidation of economic growth efforts;
– strengthening the guarantees of property rights, including intellectual property, as well as promotion of privatization and enhancing of the efficiency of the public property management;
– development of result oriented budgeting mechanisms, a transition to the develop ment of agencies’ budget reports and new principles of budgeting at the federal level and consequently on the regional level;
– promotion of competition and reduction in the non market sector, a profound im provement of the anti monopoly law and the anti monopoly bodies’ operations, includ ing a liberalization of terms and conditions of economic transactions (mergers) along with a greater liability for monopolistic actions;
– liquidation of “bottlenecks” in the economy’s development, primarily infrastructure and technological ones, including reforming natural monopolists and increasing their op erational efficiency;
– boosting the national producers’ competitiveness, developing small and medium sized businesses, which also form the investment attraction and economy moderniza tion factor;
Russian economy in 2002. Trends and outlooks. Issue 24. M.: IET, 2003. p. 19 Russian economy in 2003. Trends and outlooks. Issue 25. M.: IET, 2004. p. 16 Section 1.
The Socio Political Background – encouragement of the innovational development of the economy, increasing the role of R&D in the country’s economic development and their contribution to diversification of the economy;
– fostering economic development of Russian regions, supporting regional socio economic development strategies, and creation of conditions that would encourage the Subjects of the Federation and municipal entities to mobilize the respective avail able economic growth resources;
– integration in the world economic ties and promotion of the openness of the national economy, which suggests joining the WTO, development of integration ties n the frame of CIS and other integration agreements (EURASEZ, United Economic Zone, the Union State), intensification of cooperation with EU and receiving the membership in Proponents of the institutional model of consolidation of economic growth are skepti cal towards possibilities for developing sectoral priorities of economic development. It is assumed that in the modern post industrial world the state may not – and should not – “appoint” priority sectors in the medium or longer run. Plus, practically all the sectors to day have a chance to grow into a locomotive for the growth of a national economy.
In parallel with that, there was designed another approach to the acceleration of eco nomic growth that suggested an intensification of an immediate involvement of the state in economic processes and fostering certain sectors. Underlying the approach is an as sumption that economic growth will be fading unless it is not guided by the state and the mission of doubling GDP in ten years will consequently be failed. As concerns main instru ments of this particular approach, they are as follows:
Sectoral growth strategies, which should identify major challenges, bottlenecks in the socio economic development area and suggest ways to resolve them. By their es sence, these are ministries and agencies’ actions plans, which can also form the basis for assessing performance of the respective agencies and their heads’ efficiency.
A serious problem arising in the event this approach is implemented lies with the fact that such strategies are designed practically under non existent budget constraints. Sec toral representatives identify development avenues and growth points they believe are de sirable or necessary and design a program of their development (or elimination of a given bottleneck) and, naturally, set maximum volumes of funding. As a result, by some esti mates, the envisaged aggregate volume of resources of the strategies developed in amounts to USD 1 trln. Though the respective computations suggest the availability of both the public and private capital, they do not substantiate the possibility for their attraction.
The RF MinFin appears loosely associated with the work on the strategies design and has not by far regarded them as a serious instrument capable to produce budget requests, while the private businesses’ readiness to participate in an implementation of such strate gies and the level of their participation are to a greater extent dependable on the political prospects for the country’s development, rather than thoroughly designed strategic documents.
Standardized (or targeted) forecasting as the basis of the country’s macroeconomic policy. This term first appeared in 2004 in the course of drafting the Main guidelines of the of the RF Government’s activity and generated a heated debate. Its proponents viewed it not only as a way of analysis of development tendencies of the national economy, but building the tendencies with account of these or those government’s actions, which in this case become exogenous to the forecast and affect envisaged outcomes. In other words, the standardized nature of the forecast reflects its dependence on a given policy underway and, accordingly, proceeding from a set of economico political options, it can help formu late a set of forecasts one of which will be the targeted one. Critics of this approach RUSSIAN ECONOMY in trends and outlooks claimed that it essentially did not differ much from the traditional Soviet economic planning system, thus inhibiting the possibility for market forces, which can offer more effective, al beit not planned by the government, to exert their influence.
The state investment activity forms one of the key parameters of any dirigist policy. It is assumed that the government should invest in some sectors of a national economy which appear either insufficiently attractive to the private sector and may provide a strong impetus to economic growth, or may encourage the private sector to head for the sectors that are considered attractive.