SOURCE. Jacques Sapir, "Russia's Economic Rebound: Lessons and Future Directions," Post-Soviet Affairs, Vol. 18 No. 1, January-March 2002, pp. 1-30.
NOTE ON THE AUTHOR. Professor Sapir is director of the Center for the Study of Modes of Industrialization at the School for Advanced Studies in the Social Sciences in Paris. Working papers of this Center on the Russian economy (in French) are available at: http://www.ehess.fr/centres/cemi/pages/documents.html
In this paper, Professor Sapir assesses the scale, causes, and prospects of the rebound that the Russian economy has experienced since the crash of 1998.
The rebound began in food processing and other consumer industry in November 1998. It began to show up in macroeconomic indicators by summer 1999. This shows that the rebound cannot be attributed to the rise in world oil and gas prices, for this did not impact on growth until fall 1999.
With the inflation rate hovering around a tolerable 20 per cent, percentage growth rates of the main indicators in 2000 and 2001 were as follows:
2000 2001
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GDP 8 5 Real incomes 9 5 Industrial output 12 5 Investment 17 8
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In interpreting these figures, account needs to be taken both of the slowdown in the rebound and of the very low levels from which the rebound began. Thus an increase in investment of over 25 per cent in two years may seem impressive, but investment intensity (investment as a proportion of GDP) was still only 14.5 per cent in 2001, compared to 30 per cent in 1991 and an optimal level (in the author's judgment) of 25 per cent. And the author observes that "even in 2001, Russia still is a tremendously impoverished country by comparison with its 1991 situation."
There have nonetheless been several positive developments (besides those reflected in the main indicators shown above):
-- Tax revenues have increased considerably, and the budget deficit has been reduced.
-- A rise in exports and a sharp fall in imports have improved the trade balance.
-- The capital flow controls imposed by the Central Bank of Russia (CBR) in spring 1999 reduced illegal capital flight from $21bn in 1998 ($26bn in 1997) to $12bn in 2000.
-- By the end of spring 2001, CBR foreign currency reserves had reached $34bn and were still growing at a rate of $1bn per month. This enabled the CBR to counter speculation against the ruble on the exchange market.
-- Consumer industry has used increased profits to improve the quality of its products.
-- The role played by barter in the economy has declined. The share of barter in inter-enterprise transactions has fallen from 53 per cent in late 1998 to 25 per cent.
-- Payments discipline has improved.
Professor Sapir identifies four main direct factors behind the rebound. One of these is the action taken by the CBR against capital flight. The others are:
(1) gains in the competitiveness of domestically produced goods relative to imports as a result of the massive devaluation of the ruble
(2) gains in labor productivity through returns to scale as plant that had been running well below capacity began to be used more intensively
(3) the policy of low prices for utilities, especially energy and transportation. Without these subsidies, enterprise profits would have been much lower despite other favorable conditions.
Professor Sapir points out that some key measures which facilitated the rebound were taken in defiance of the "Washington consensus." Unfortunately, some of these measures have since been reversed on liberal advice. In particular, CBR regulation of capital flows was relaxed in August 2001. The predictable result was a sharp decline in the level of the CBR's reserves. About $2.5bn were lost in the space of a few weeks ($1.2bn in a single week!).
The author considers the main problems which may threaten the current recovery in the short or medium term. He argues that liberal economists overestimate the threat posed by inflationary pressures caused by excess liquidity. On the contrary, the supply of money before 1998 was too low, while both growth and de-barterization of the economy increase the demand for money.
There are, however, some real threats to continued recovery. They include mismanagement of the electricity network (RAO-EES) and a creeping revaluation of the exchange rate that is already braking growth and may put growth into reverse in 2003. But the most serious threat is Russia's debt. Prospects for mid-term recovery depend on the level of public and private investment, but the investment resources potentially made available by reduced capital flight are being siphoned off into debt repayments. These are due to reach $23bn a year by 2003.
Professor Sapir identifies four conditions which need to be met if short-term recovery is to lead to long-term development:
(1) Investment needs to be substantially increased and guided into priority sectors.
(2) A well-founded economic strategy needs to be developed. The author regards the Ishayev program (see item 3 below) as a fairly realistic albeit imperfect attempt to formulate such a strategy.
(3) Clear, well-functioning, and legitimate property rights need to be secured.
It is especially difficult to give legitimacy to property rights in view of the corrupt way in which privatization was carried out in the 1990s. The "most logical solution" is the "clean install" option -- that is, the re-nationalization and re-privatization of illegally privatized assets. (1)
(4) Foreign trade policy needs to be adapted to Russia's place in global trade.
Professor Sapir argues that the three most important geographical zones for Russia's foreign trade are Western Europe, Eastern Europe, and the CIS. He gives the following percentage breakdown for exports and imports in 2000:
Zone Exports Imports -------------------------------------
Western Europe 35 40 Eastern Europe 12 5 CIS 19 25
Europe + CIS 65 70
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Thus roughly two-thirds of foreign trade is with Europe or the CIS. Priority should accordingly be given to developing an effective payments union within the CIS and to negotiating a trade agreement with the European Union. It also makes no sense to focus the ruble's exchange rate on parity with the dollar. What matters is the Euro. Joining the World Trade Organization (WTO) should not be a near-term goal: it would entail obligations which Russia's economy cannot at present meet.
Note
(1) The "clean install" metaphor is borrowed from the computer field.