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Moscow Times
January 10, 2001
What a Waste of a Year
By Mikhail Delygin
Mikhail Delyagin is director of the Institute for Problems of Globalization and
economic adviser to former Prime Minister Yevgeny Primakov. He contributed this
commment to The Moscow Times.
Since 1994, Russia's reformers have been calling every year "one more lost year for reforms." 2001, however, is particularly deserving of this title. This was the year in which hopes were crushed and Russia's economic boom -- which provided GDP growth of 19.7 percent, industrial growth of 30.4 percent and a 33.5 percent increase in investments over the past three years -- ran out of steam.
The slowdown started back in September. The cause, therefore, was not falling oil prices -- the most common excuse given by the government for its blunders -- but the unwillingness of the authorities to tackle key structural problems, such as the lack of property rights protection, the arbitrary and unchecked behavior of monopolies, the degradation of depressed regions and the corrosion of the state administrative apparatus. Bureaucrats, in exchange for the superficial support of the president, have been granted carte blanche to do whatever they please (according to a recent newspaper survey of businessmen, the price of bribes for influencing government decisions has doubled in the two years since Vladimir Putin became president).
Something in the order of $20 billion per year flees the country as a result of the failure to resolve these problems. And the Russian economy increasingly resembles a person with ruptured arteries.
At the Civic Debates Forum on Dec. 20, the ultra-liberal presidential economic adviser Andrei Illarionov effectively conceded the bankruptcy of the liberal economic course, noting that policies had "decayed with staggering rapidity -- faster than was the case during the first term of President Boris Yeltsin." He pointed out that in 2000 Russia received an additional $25 billion and in 2001 an additional $32 billion purely as a result of favorable conditions on the world markets and admitted that a continuation of the policies pursued by the government of Yevgeny Primakov in 2000 and 2001 would have resulted in GDP growth not of 8.3 percent and 4.9 percent, but of around 15 percent.
Amazingly, when faced with the challenge of falling prices, the government did not even talk about the need for structural reforms and increasing the effectiveness of the bureaucracy, let alone try to implement such measures. For the most part, the rhetoric boiled down to assurances that Russia still had sufficient funds to see it through to the end of 2002, even if action was not taken. This would seem to be an incredibly short-sighted approach, but maybe the Russian government has plans to move the country at the end of the year.
Official claims that GDP growth in 2001 was between 5.5 percent and 5.8 percent and will be 4.3 percent in 2002 are quite absurd. Between January and September growth was 5 percent and then it ceased; thus for the whole of 2001, GDP growth will be below 5 percent.
The estimate of 4.3 percent growth for 2002 is based on an oil price of $23 per barrel for Urals crude. The actual level is unlikely to exceed $20 and thus GDP growth should not exceed 3.5 percent. If one factors in structural problems, it should be no more than 3 percent. In the two years of Putin's reign, economic growth has slowed from 8.3 percent in 2000 to what will likely be less than 3 percent in 2002.
Industrial growth has fallen from 11.9 percent in 2000 to 5 percent in 2001 and will be no more than 3.5 percent in 2002. Growth of investments has fallen from 17.7 percent in 2000 to 8 percent in 2001 and will likely fall to below 5 percent in 2002.
Only the drop in inflation has remained insignificant, from 20.8 percent in 2000 to 18.7 percent in 2001 and will probably remain above 15 percent in 2002. Price growth of manufactured goods has increased from 12 percent in 2001 to 16 percent in 2002, as a result of monopolies acting with impunity.
The main factors affecting economic development in 2002 are the unresolved structural problems mentioned above, in particular burgeoning corruption. Falling world commodity prices and the erosion of reserves built up from 1999 to 2001 will further exacerbate the situation. 2002 will not be a crisis year, but a "pre-crisis" year with expectations being set accordingly.
The money supply shrunk by 0.1 percent in November for almost the first time since August 1998. Between January and November 2001, the money supply grew by only 25.8 percent, while over the same period of 2000 it grew by 42.1 percent, and of 1999 by 39.4 percent.
This is in keeping with the government's course, determined as it is to control inflation purely by fiscal tightening. This is useless, as inflation is caused not by excess money supply but by the unchecked abuses of monopolies. This is corroborated by the fact that inflation has been accelerating despite further belt-tightening measures. Inflation grew from 0.6 percent in September to 1.1 percent in October, and 1.7 percent to 1.9 percent in December.
Further fiscal tightening in these conditions will only undermine the banking system, having a braking effect on the economy and provoke a new non-payments crisis.
Falling exports and growth of imports are not so much brought about by falling oil prices as by domestic factors and above all by maintaining a fairly stable exchange rate in conditions of inflation. Growth of the real ruble exchange rate by 22.2 percent in 2000-2001 has boosted imports while undermining exports and the whole of the manufacturing sector.
The government can try to halt the growth of the real ruble exchange rate not by containing inflation (which requires structural reforms and primarily a much more active anti-monopoly policy) but by devaluing the ruble in line with inflation. This is a palliative measure that will do severe damage to the key potential source of modernization -- domestic demand -- and will widen the gap between export-oriented sectors and the rest of the economy. Devaluing the ruble in line with inflation will also undermine efforts to de-dollarize the economy and lead to faster depletion of Central Bank reserves.
Modernization in Russia can only be achieved if structural problems are resolved. However, while the government is controlled by the oligarchy --which it still is -- these structural problems will not be addressed as it is not in the interests of big business. Thus Russia's recovery is impossible without reform of the existing political system.
This means that the government will almost certainly be unable to avert devaluation with all the ensuing deleterious consequences and may not be able to cope with the political fallout.
The creation of a military-police state in such circumstances is highly likely. This would put Russia on a similar trajectory to relatively successful Third World countries such as Chile, South Korea and India. In these countries the elite comprises approximately 5 percent of the population, the middle class between 10 percent and 25 percent, and more than 70 percent of the population lives in poverty.
Under a military-police state, successful modernization is possible. However, in Russia such a regime would not work as the army and law enforcement agencies are among the most corrupt and ineffective structures in the country.
Therefore, absolutism Russian-style would be neither enlightened, nor competent, and as a result short-lived. Such a regime would collapse within three or four years. This would clear the way for Russia to find a constructive economic alternative to ultra-liberalism, combining liberal values and national interests, and to undertake a new attempt at systemic modernization.
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