|
European
Economic Perspectives 24
Stuck
in Transit
Can
Russia regain the political will to implement essential economic reform?
A new Report examines the state of the Russian economy and policy
options for the future.
The
year 1998 was supposed to be the time for a big push for reform in
Russia, after a long period of inactivity. But since the financial
crisis of 17 August 1998, when delays in reforms, the lack of fiscal
discipline and an overvalued exchange rate finally forced the government
to devalue the rouble and default on its debt obligations, the Russian
economy has been ‘stuck in transit’ – unable to make the leap to a
fully functioning market system and with the political process now
paralysed by campaign fever.
A
new Report, published by CEPR and the Stockholm Institute of Transition
Economics and East European Economies (SITE), explores the traumatic
events of August 1998 and the deep flaws they exposed in the process of
reform. The Report discusses the policy options for rebuilding the
Russian economy once the elections are over, drawing on research carried
out at the Russian European Centre for Economic Policy (RECEP) in
Moscow. The Report reveals that:
•
Economic growth can take place without structural reform: In the
immediate aftermath of the crisis, many forecasters predicted
hyper-inflation and a large and rapid fall in production. But this
gloomy scenario has not yet materialized: the Russian economy has been
on a path of recovery with impressive growth rates in industrial
production, albeit from a low base and mainly in import-substituting
activities.
•
Devaluation can be beneficial: Commentators tend to focus on corruption
and the absence of the rule of law as the main causes of the crash. But
the depression in Russia’s industrial heartland was largely caused by
the success of macroeconomic stabilization. The rouble’s collapse in
1998 freed industry from an uncompetitive exchange rate, allowing steady
growth for the first time in a decade.
•
Arrears are pervasive: From the beginning of transition, non-payments
have been pervasive: from the state to its employees and providers of
goods and services; from taxpayers to the state; and from firms to
firms. All these arrears are linked: enterprises under financial
pressure run arrears, first to the state, and then to other enterprises
and their own employees. This ranking follows the line of least
resistance. It is clearly less dangerous to upset the tax collector than
colleagues or employees.
•
Russia actually collects 33% of its GDP in taxes: Russia’s legendary
failure to collect taxes is frequently cited as the most glaring sign of
the weakness of the Russian state. But calculations of Russia’s tax
capacity reveal that, across federal, regional and local budgets, Russia
collects about as much in taxes – 33% of GDP – as would be expected
for a country of its income and economic structure, based on
international comparisons.
•
Financial-industrial groups may be an obstacle to competitive markets:
The Russian government has allowed and even encouraged the growth of
financial-industrial groups (FIGs), which involve close relationships
between financial institutions and industrial enterprises. This may well
have been justified given the advantages they provide for their members
in terms of economic performance. But it is vital to bear in mind that
FIGs have a negative effect on competition and flexibility, both of
which are crucial for long-term growth.
•
Russia may be trapped in a barter economy: There has been enormous
growth in the use of barter. Barter is more common in larger enterprises
and in more concentrated industries, but the likelihood that an
enterprise will engage in barter is independent of its financial
position. This implies that since the search costs of finding
countertrade partners are very low, the economy may be in a trap where
barter is so pervasive that it is less costly to make exchanges without
money.
The
Report concludes that the parliamentary (Duma) election held in December
1999 and the presidential election scheduled for Spring 2000 have
created a post-crisis environment in which politicians are taking a
cautious approach to economic policy. This has both positive and
negative consequences: positive in that policies have become
predictable, but negative in that the political will to engage in the
large-scale institutional and structural reforms essential to
sustainable recovery is still absent.
The
new Duma and the new president will at some point have to face the
underlying structural problems and lack of institutional development.
The fundamental political challenge – of rebuilding a constituency for
implementing the necessary reforms – remains.
This
article discusses ‘Stuck
in Transit: Rethinking Russian Economic Reform’ edited by Erik
Berglöf and Romesh Vaitilingam. Erik Berglöf is Director of RECEP and
SITE, and a CEPR Research Fellow; Romesh Vaitilingam is an independent
writer and consultant.
|