"I am not proposing devaluation of the ruble."
"I did not suggest Portugal as an example for Russia."
These and some other statements by presidential economic advisor Andrei Illarionov at his news conference on June 3 might have misled some analysts into assuming that he is currently on the defensive in the disputes over prospects for economic growth. In fact, Illarionov remains on the offensive.
Illarionov placed special emphasis on one item in President Vladimir Putin's budget address, the one pertaining to work on the 2003 budget. According to the president, Russia can no longer increase non-percentage spending (i.e. spending not related to servicing state debts). Illarionov warns against the delusion that high state spending and high tariffs set by natural monopolies (comprising the non-market sector) facilitate economic growth. On the contrary, they inhibit it. For countries like Russia (meaning the level of development and the scale of the economy) 17-18% of the GDP is the optimal size of state spending. In Russia nowadays, spending is almost twice that. China, the country whose economic successes are discussed with something close to outright envy, has cut state spending over its years of reforms from 38% to 13%, then raised it to 18-20% again, and has kept it close to optimal ever since. The share of products and services of natural monopolies amounts to 1-3% of the GDP in most countries; but it is 6-8% in Russia. The nation can no longer carry this burden.
Illarionov was asked his opinion on the statement of Prime Minister Mikhail Kasianov: "There will be no breakthroughs" (concerning the president's order for more ambitious economic targets). Was this perhaps a covert refusal to follow orders? "I object to breakthroughs too," Illarionov replied. Demanding a 20% reduction of state spending every year is ridiculous. It would be much better to reduce it by 2-3% of the GDP every year for several years running, the way China did. Unfortunately, the Russian Cabinet has not done anything in this respect over these last two years.
Asked exactly which items of state spending will have to be cut, Illarionov replied: "Everything will have to be affected." The economist was also curt when asked about the preferable rates. "I won't answer that." There are no preferable figures. The range of options is broad, from -14 (which Russia "achieved" in 1992) to +42 (which Equatorial Guinea reported in 2001). All the government has to do is refrain from preventing citizens from achieving what they want to achieve. If we have really managed 6.5% growth every year these last three years, what has happened to make us consider more than 3% growth impossible now?
Needless to say, the call for the Cabinet to be more ambitious should not be taken as an order "to make up some nice figures". The matter concerns faster implementation of a whole range of measures, including lowering taxes for industry (the aim of cutting state spending), protection of business from bureaucracy, deregulating hard currency legislation, preventing changes in the exchange rate. This policy is steadily pursued by Kazakhstan and Azerbaijan, and their economic successes exceed those Russia can report. GDP growth in Kazakhstan amounted to 13.2% in 2001 (against 5% in Russia), inflation was one-third of that in Russia, while wages and pensions (their equivalents in hard currency) exceeded Russian levels. Kazakhstan has been recognized as a country with a free-market economy.
What about Portugal, which is said to be amazed by Russia's great interest in its model of development? In December 1999, Putin did refer to Portugal and Spain. But it was not Illarionov who advocated the Portuguese model then; it was the Strategic Development Center, which was working on Gref's program at the time.