Russian Economic Reform

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Small steps sometimes better than “strategic” decisions.

Published on May 01 2012
Posted by: jeff

The last weeks of Vladimir Putin’s time as prime minister have been filled with a flurry of meetings and statements which might suggest “economic reform” will begin to rapidly accelerate in the weeks after the May 7 presidential inauguration (and presumed return of Dmitry Medvedev as prime minister).

But what is “economic reform”?  Or more precisely, what is sensible economic reform? Is “strategic” economic reform always the best? And, how effectively will reform be implemented?

Putin has been making much of the need to lift Russia from 120th place to 20th place in the index of “Doing Business” which is produced by the World Bank – and a so-called “Road Map” is being prepared for this. Few would dispute that aiming higher is sensible. Various working groups and committees are considering issues such as customs administration, construction permits, access to electricity etc.

Actual implementation, however, is another thing given Russia’s bureaucratic tradition and the vested interests of so many in the present system. There will be some improvements but, at the end of the day, the only way to get very significant reform in most of these areas is to sack swathes of top managers and bring in new ones with a mandate for change (and a fear that they will lose their own jobs if they do not perform). While Medvedev is very reform minded – and capable of sacking people – Putin’s whole approach suggests that he distrusts “new faces” and is more comfortable when working with people if he knows their “flaw in the weave”. (In this, Putin’s approach is similar to such people as Napoleon, Stalin, Hitler and Mao.) And, Putin will constantly be looking over the shoulder of his prime minister.

Then there is the much touted “tax maneuver” to change various tax rates and aspects of the tax base. In my view the “maneuver” is of secondary importance to the “Road Map” reforms. Russia’s taxation policies and rates are not as big an impediment to economic performance as some would claim, but tax administration is lousy (although slowly getting better) and is, indeed, one of the things pulling Russian down in the “Doing Business” Index. As far as rates and the base are concerned, gas producers will be more heavily taxed and there will be some adjustments to oil taxation, but other changes are likely to be relatively minor.

Also, in my view, in the “secondary importance” category – or, at least, should be – is the supposed major “strategic” decision about deciding between (as “Vedomosti” reported it on 16 April) Russia being an “energy superpower” or a “knowledge economy”.

 “There is no decision yet”, said Deputy Economic Development Minister Andrei Klepach last week, and added that  “another round of discussions will be held and after that the government will come to a decision either way”. Vladimir Putin’s press secretary reportedly indicated that discussions might take up to a month.

If such a “decision” is to be made it is very appropriate that it be given weighty consideration. But a more fundamental issue is whether such a “decision” should be made at all! The “right” choice is not completely obvious – and presumably this is why a decision has not yet been made.

This “decision” will supposedly be based on a report prepared by the Ministry of Economic Development which considers two possible scenarios for the Russian economy out to 2030.

One scenario has Russia relying heavily on oil and gas, but with substantial modernization and development of new fields, energy intensive industries, and associated infrastructure – ie it essentially attempts to take greater advantage of Russia’s resource base. The other possible scenario gives at least equal importance to supporting the development of the “high-tech” sector, with policy and budgetary resources re-orientated toward the development of “human capital” (ie education, science, health ), “information”, non-resource transport infrastructure etc.

The Ministry report suggests that the “energy superpower” trajectory would give average yearly GDP growth of about 3.5% in the period to 2030 while the “knowledge economy” trajectory would give about 4.5%. It obviously favors the later.

While I also think that the “knowledge economy” approach is the best, I could turn out to be wrong! Reports such as these are good for promoting discussion and assisting the development of policy but – in my view – they should not become the basis for major “strategic” decisions that are inflexibly implemented.

Rather than staking everything on one strategy – which may turn out to be wrong – a better approach would to focus economic policy on some basic and fundamental issues such as those supposedly included in the “Road Map” and which will bring great benefits regardless of which “strategic” decision is, or would have been, best.

Getting “Road Map” type issues right also means that market forces can be left to play a greater role in the evolution of the economy as either an “energy superpower” or a “knowledge economy”. In turn, this means less need to make a “strategic” choice soon after 7 May.