Russian economic upturn?

Doug Henwood dhenwood at panix.com
Thu Jan 27 07:37:25 PST 2000


[from Johnson's Russia List]

Date: Wed, 26 Jan 2000 From: Stephen Shenfield <Stephen_Shenfield at Brown.edu>

THE CURRENT ECONOMIC GROWTH: WHAT DOES IT MEAN FOR RUSSIA'S FUTURE? Stephen D. Shenfield

Many people, bombarded by apparently contradictory information, must have trouble trying to form a coherent picture of what is going on in the Russian economy. On the one hand -- reports of continuing economic growth. On the other -- reminders that the deep structural problems are still there, such as the estimate by the Institute of International Finance that capital flight continues at the rate of $20bn per year (RFE/RL, Jan. 25).

Optimists will think that in spite of all the problems a turn for the better is at last on the way, while pessimists will suspect that the growth is more a statistical artifact than reality.

Reports appearing in the Russian press (and sometimes on JRL too) of booming sales by specific consumer goods enterprises -- a chicken factory here, a clothing factory there -- do suggest strongly that the growth is real. But the growth is of a special kind, with a limited potential that will soon be exhausted. It does not signify a lasting turn for the better.

The precipitous decline in output between 1991 and the financial crash of August 1998 was the result of two distinct phenomena: first, the underuse of available productive capacities; and second, the decay of available productive capacities caused by decapitalization (net capital investment insufficient to compensate for ageing of the capital stock).

A higher rate of utilization of productive capacities could always (in principle) have been achieved by means of state policy of two kinds: first, measures to protect Russian producers from the flood of cheap imports; and second, macroeconomic regulation along Keynesian lines to maintain the effective demand of the population at an optimal level. The decay of productive capacities could have been halted and reversed only through private and state investment.

The crash of August 1998 finally did the job that a protectionist policy should have accomplished earlier. The effective demand that had previously been met by imports now supports home production. This is the major source of the growth that has occurred since. Keynesian stimulation of effective demand could fuel further growth, but how much depends on the rate of utilization of productive capacities that has already been reached.

There is reason to think that the rate of utilization is now quite high. According to the recent report on the investment climate in Russia by the Expert Institute, fuller utilization of existing capacities could increase GDP by no more than another 8--12% (Voprosy ekonomiki 1999, 12, p. 4). However, it may not be possible to realize even this growth potential in the absence of urgent investment to relieve bottlenecks arising in infrastructure. Thus the railroads had great difficulty in coping with the 14% increase in freight traffic in 1999 generated by the revival of industrial output, there having been no renewal of the park of train wagons and locomotives in the past five years (NG 12/11/99, p. 4). Most crucially, renovation of the electricity generation network has been so badly neglected that there may not be enough electricity to support industrial growth in coming years (interview with deputy minister of fuel and energy Viktor Kudriavy, NG-politekonomiia 11/23/99). True, there is plenty of scope for more efficient use of energy in Russian industry -- but that also presupposes large-scale capital investment.

Another factor behind Russia's relatively favorable economic situation at present is the high world price of oil. This might lead one to expect a cyclical pattern, with each fall in the oil price plunging Russia again into crisis, to be temporarily rescued by the next rise. But in future years Russia may no longer be in a position to benefit from its oil exports. The oil industry too has been starved of investment, so that it produces only half as much oil as it did a decade ago. Without the necessary investment, warns the Expert Institute, Russia may within 5--10 years become an oil importer!

Similar considerations apply in other export branches, such as arms and aerospace. Successes are possible in the immediate future, but in the absence of investment their source will dry up. The gas industry is the only exception in this regard.

This argument exposes an additional meaning of the Chechen war -- its opportunity cost. For the Russian government might have used the proceeds from the present favorable conjuncture in the sphere of foreign trade for emergency renovation of infrastructure and other measures (such as combatting TB and AIDS) that would help to keep open the possibility of Russia's survival and long-term recovery. Evidently these are not top-priority concerns to Russia's "patriots" -- whether of the red, brown, or blue variety.



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