Russian Economic Reform

Past Articles on the work of each of the 21 Expert Groups can be accessed here:

Strategy 2020 Final Report

Published on March 18 2012
Posted by: jeff

The final “Strategy2020” Report (of 864 pages), which was completed in December, has finally been released and I will attempt to cover some of the most interesting “economic” issues over the next few weeks as part of my commentary on unfolding economic developments. Many of the Report’s main recommendations have already been aired in the media, either as direct reporting or as part of coverage of the discussions of policy makers as they try to decide what course to set over coming years.  

Apart from the introduction the Report is divided into six main parts, but there is also a so-called “budget maneuver” section at the end which makes “suggestions for restructuring the expenditure side of the budget”. The six  main parts are: 1) “new model of economic growth”; 2) “basic macro-economic conditions for growth”; 3) “new social policy and development of human capital”; 4) “infrastructure, including balancing development and good living environment”; 5) “efficient government”; and 6) “external economic issues”.

These main parts encompass the work of all of the 21 Expert Groups listed on the right-hand side of this page. The whole report (in Russian) can be accessed by clicking on “2020strategy.ru” in the top right hand corner of this page.

The first main part of the Report, “new model of economic growth”, is divided into three sections: “securing macro-economic and social stability”; “strategy for improving the business climate and increasing investment attractiveness with the aim of moving to more stable growth”; and “stimulating innovation”.

In this “post/blog/article” I will concentrate on the “securing macro-economic and social stability” section. Anyone familiar with the Russian economic policy debate will aware of most of the issues. So, I will only mention what I think are the most important or interesting issues and, occasionally, add some commentary.

The Report says that labor productivity growth is likely to decline in coming years unless the “share of investment in GDP” can be substantially increased. In my view, the word “share” carries the unfortunate connotation that the share of something else should necessarily be reduced. But this is far from the case, with the reality being that a strong rise in investment would considerably increase GDP. I think that this is the most urgent economic issue facing Russia, and it would make solving many other issues – such as the pension fund deficit – so much easier.

According to the Report, Russia’s population will fall by about 10 million in the period to 2025. At the same time there will be a fall in the share of working-age population (due to its aging). Russia needs to attract about 700-900 thousand immigrants per year purely to ensure the maintenance of the workforce at a constant level. Incredibly, in my view, the Russian authorities seem to do almost all they can to discourage people from moving to Russia – and this includes Russians who have immigrated but might return in a better political and economic environment.

The Report identifies six main policy objectives for establishing a “new model” of economic growth: creating conditions for the emergence of long-term and “affordable” borrowing by the private sector; maintenance of long-term macroeconomic stability conducive to private sector development (including reorienatation of the tax system in favor of economic growth); the creation of conditions for significant growth in business activity and increase in domestic competition; more efficient use of labor resources of the economically active population, including greater internal mobility of the population; greater use of Russia’s competitive advantages in human capital; and expansion of market capacity and the ability to find new niches in the global division of labor by stimulating non-oil exports and international cooperation of Russian companies.

On the macro-economic front, the Report says that a main priority is to reduce inflation to below 5%. Macro-economic policy is covered in more detail in the second of the six main parts of the Report, under the heading “basic macro-economic conditions for growth”, and – having spent almost 20 years of my life working in this area – I am wary of hard and fast rules or targets. Nevertheless, in the current situation 5% is a reasonable policy objective. This part of the Report expresses recognition of the conflict that may arise between achieving the inflation objective and a ruble exchange rate that may have a negative impact on the competitiveness of Russian industry. But, this is almost a perennial problem of monetary policy in any country. The Report suggests a number of financial sector reforms and developments to mitigate this, but the problem will not go away.

The Report also supports active measures to limit some of the non-monetary factors of inflation, including reducing the influence of monopolies and increasing the competitiveness of domestic markets. In my view, Russian has a federal anti-monopoly service that knows what needs to be done in this area, but perhaps could do much more if it had the more active support of other areas of government.

Amongst the suggested financial reforms noted above, is better financial sector regulation and supervision by the relevant authorities. As the Bank of Moscow affair clearly demonstrated, this has been one of the great failures of Russian economic policy.

The Report says that there is a general need to increase budget spending in a number of areas of the economy, and that these total about 4% of GDP in the period to 2020. In order to maintain macroeconomic stability these increases should be offset by decreases in other areas totaling 2% of GDP. This involves a change in the basic direction of government spending away from consumption and toward the development of human capital, infrastructure and the institutional environment for innovative activity.

Of course the devil is in the detail, but in my view these number seems reasonable general goals – with needed sensible public investment spending partially paid for by the elimination of often totally wasteful, inefficient and corrupt spending.

The Report also suggests a new mechanism for cost containment and the use of “rental income” accumulated in periods of high natural resource prices, with a “budgetary rule” on the size of the debt and the method of using reserve funds.

The Report canvasses ways to improve the business climate. These include reducing the size of the state sector and the influence of monopolies, the promotion of competition, reduction of corruption and improvements in the institutional environment. Look at the article on the left-hand side of this page which I wrote in 1992 – that is, twenty years ago – and you will see that then I noted the importance of a number of basic institutional factors. In general terms, the issue of the institutional environment has been the single biggest policy failure in Russia since the break-up of the USSR. Sure, things have happened – but nowhere near the degree which they should and could have!

The Report suggests the provision of greater support for non-commodity exports and international cooperation of Russian firms  in order to support economic growth through a more active focus on external demand in the non-resource sector, thus increasing the share of non-oil exports. The main identified areas are simplification of cross border movements, better taxation administration, and export promotion programs.