#5 - JRL 7005
Izvestia
No. 230
December 2002
[translation from RIA Novosti for personal use only]
ECONOMIC MIRACLE FOR RUSSIA, AS VLADIMIR PUTIN'S ADVISER SEES IT
Georgy BOVT, Yelena KOROP

Andrei Illarionov, top economic adviser to President Vladimir Putin, has presented a report entitled "The Formula for Success. How to Make the Russian Economic Miracle" in the framework of the Foundation of Complex Applied Studies' "Accelerated Economic Growth" project. While initially expected to unveil his vision of prospects for speeding up economic growth to 2010, Putin's adviser went beyond that, going as far as 2015. His conclusion is that such a miracle is possible. But the means of achieving it would have to be very different from those that are most frequently suggested in Russia these days.

Illarionov's presentation, full of provocative ideas and accompanied by a slide show of charts and tables, can be divided into three parts: the search for Russia's place in the world economy, exploding common economic myths and misconceptions, and a case for an economic miracle during the lifetime of the present elite.

The presidential adviser believes that there is the potential for Russia's economy to develop rapidly. Furthermore, from the "gloom and doom" part of his report, where he charts how Russia's performance has increasingly lagged behind the global average on all relevant economic indicators, it actually follows that the country does not have much choice in the matter.

Today the way Russia looks on the map of the world is as follows: its share of territory constitutes 11.5 percent, its population is 2.32 percent of the global total, its unified purchasing power is 1.79 percent and its gross domestic product in terms of currency rates ratio is 1.1 percent. The unavoidable conclusion here is a cruel one. Human history has no precedent of a gap this wide between territorial power and economic irrelevance holding for any extended length of time. As Illarionov put it, either the GDP starts to grow, or - as the presidential adviser was not willing to say - "the country will disintegrate" or "independence will be forfeited." In outlining the three scenarios of Russia's development in the first half of this century he had revealed earlier, Illarionov once more cited the example of Portugal, the poorest European Union member country. His estimate is that at an average annual GDP growth rate of 8 percent - a rate Putin happens to have called for both as premier and as President - Russia would catch up with Portugal by 2024. At the 6.5 percent rate, reported from 1999-2001 and characterised by Illarionov as "inertia," this target may be met by 2037-2038. At the growth rate of 4.4 percent, as projected by the Economic Development and Trade Ministry, an average Russian will never live at the same level as a Portuguese.

Next Illarionov discussed the explosion of myths and misconceptions. He took care to avoid identifying these with the Cabinet, but the implication was there nonetheless. The nub of the matter was that many factors held up today as supposedly helping economic growth do not really have any significant positive effect. Illarionov reached that conclusion by analysing the statistical interdependency among various components of economic policy and economic growth in some 150 countries from 1991 to 2001.

He said he had failed to discover any consistent statistical linkage, either positive or negative, between economic growth (data on 163 countries) and increasing investments in the economy, nor between direct foreign investment (167 countries) and economic growth. The theory about the beneficial effect of domestic demand on economic growth, which is increasingly popular in Russia, is not borne out either, he said, and neither is the theory that growth could be facilitated by active bank crediting of the economy. The same statistics lead Illarionov to the conclusion that increasing the percentage of fixed capital investments in the GDP actually slows growth rather than speeds it up. Rising oil prices also contribute to the slowdown, as there is a consistent inverse ratio between average export price growth and the growth of the economy at large. The same kind of dependency can be observed between electricity price growth and economic growth, as the incentive for energy conservation does not appear to work in this sense.

If, as Illarionov asserts, these popular economic hypotheses don't work in Russia, then what is the secret of the economic miracle that he claims is possible in Russia? After all, even a superficial glance at Russia's posture in the global economy and, hence, politics makes it clear that this miracle is truly vital if the collapse of the Russian state, and indeed the Russian civilisation as it has evolved over the past few centuries, is to be avoided.

Putin's adviser is very specific in his conclusions. In the final analysis, he feels, there is only one way out, which again is suggested by analysing processes in other countries. The formula for success lies in cutting the government down to size, that is, diminishing the public sector and the government's role in redistributing the GDP via the budget, the natural monopolies, taxation, etc.

On the basis of Organisation for Economic Cooperation and Development member countries, which are the most advanced nations economically, and of 26 countries including Russia whose economies are in transition, Illarionov calculated that the optimum state GDP share for rapid economic growth is 19-23 percent. Countries placed within or next to this range tend to grow at the fastest rate. States that take the "big government" road inevitably slump into stagnation and crisis.

A prime example is Japan, where the growth rate is now hovering at zero. Illarionov believes this crisis has been brought about by government policies that over the past thirty years expanded the state's share in the GDP from 19.3 to 45 percent. By contrast, in China the public sector in 1995 was a third of what it had been in 1979. At just 13 percent, it enabled the PRC to become one of the world's fastest growing economies.

Illarionov points out that in 1992-1994, government income and expenditure made up 50 percent of the GDP. The growth, at minus 12 percent, was negative. From 1995 to 1998, the state share decreased to 40 percent, with the GDP growth rates remaining negative, although, at minus 2 percent, nowhere near as alarming. Downsizing the public sector to 34 percent has enabled Russia to reach an average annual growth rate of 6 percent.

Now, however, the public sector is again displaying a tendency towards growth, warns Illarionov. Already, it has reached almost 35 percent. To be sure, there are different assessments here, with some economists actually putting the state's share in the economy at a minimum of 60-65 percent.

All the Cabinet has done up to now is announce a course for cutting government spending in the long term, while pegging it at the current level for the time being. If it goes ahead with this, Illarionov warns, by 2015 Russia's GDP growth will not exceed 3 percent. Expanding the state's GDP share to 40 percent (according to Illarionov's calculating methods) would entail zero growth. But if the share were to be cut down to at least 25 percent, within 13 years this country would reach a growth rate similar to Portugal's 8 percent.

Overall, the presidential adviser's formula for an economic miracle comes down to the following: cut the share of government spending in the GDP, cut taxes, balance the budget, and end domestic and foreign government borrowing.