#20 - JRL 7276
RIA Novosti
August 4, 2003
UNFINISHED REFORMS MEAN NO LONG-TERM GDP GROWTH
By Professor Yevgeny Yasin, Doctor of Economics, president of the
Liberal
Mission Foundation
In his state of the nation address to parliament President Vladimir Putin set the task of doubling Russia's gross domestic product within the next ten years. And although many Russian economists consider the target feasible, if ambitious, the way strategic priorities are being set seems controversial and calls for comment.
The economic picture today is as follows: we have a robust and earning export sector - you know which one. It yields 18 per cent of GDP, is responsible for 80 per cent of exports and employs something like 3 million workers. Another sector is the processing industry, agriculture, transport, construction and in general industry catering for the domestic market. This is 40 million more people and 57 per cent of GDP. There is also a third, non-market, sector. It includes 20 million but, minus the budget area (the national power grid Unified Energy Systems, Gazprom, the Ministry of Railways, housing and communal services, etc.) we have here around 5 million, who produce about 7 per cent of GDP.
In the first sector, productivity per worker is five times as high as in the second. In the second, it is half as high again as in the non-market or third sector. Mind you, the non-market sector is a considerable part of state industry implicitly subsidised by the population.
Reform of the natural monopolies, at least the power sector, have got off the ground. Prices are being liberalised bit by bit. When the wholesale electricity market becomes a reality, first 10 per cent, then 15 per cent and so on of power will be put on sale. With such a phased arrangement, it is hard to think that no irregularities will occur. A transitional period cannot last more than a year or two. But the piquancy of the situation is that the president is demanding high rates of economic growth. He argues as follows: we need no reforms for reforms' sake, what we need is economic growth. Such growth - not, of course, 7 or 9 per cent a year, but just 5 to 6 per cent provided restructuring reforms are stalled - is possible. Why?
The current philosophy is: growth can be ensured if business is given every opportunity by reducing taxes to a minimum, keeping back wage rises and gas, electricity and fuel prices, reducing the state's share of GDP, etc. All this is done in expectation that business will accumulate resources and actively invest them inside the country. If this philosophy is taken as a guide, reforms of the natural monopolies and creation of a market will have to be put off. A full-blooded market is impossible with unbalanced prices. If prices are freed, they will certainly shoot up. It then appears that the current programme for accelerated economic growth over the short- and medium-range presupposes price freezing.
I do not think we can keep up high rates of growth for long without structural reforms, above all in the power and gas sectors, by separating the competitive sector and putting it on a market footing.
The crucial thing is to plump for a massive hike in gas and electricity prices to be inevitably followed by rocketing prices in housing and communal services - almost double the present levels. All these measures will make sense only if pensions and public sector wages are boosted appreciably.
Where can the money be found? On the European market gas is priced at 100 to 120 dollars per 1,000 cubic metres. In the CIS, it is between 40 and 80 dollars and inside the country 20. A simple calculation suggests that given an open market without export duties, without delivery limits, with producers free to choose where to sell their gas, the prices will settle at about 80 dollars. The difference between the producer price - 20 dollars - and the consumer price - 80 dollars - makes the rent. Multiply it by 580 billion cubic metres and you get 30 to 35 billion dollars. The breakdown today is as follows: part of it forms budget revenue - in 2001 it amounted to slightly more than 8 billion dollars. The rest is used to keep the prices low for all consumers without exception. This is an outrageous waste, because if gas is sold at this price, no one will save it.
My proposal is to leave some of the perks enjoyed by Russian consumers (let them pay 50 dollars) and to contribute the rest to the budget. The money will be used to raise wages and pensions, because public sector workers are among the worst off. The income gap is too wide and appears unjust to ordinary people. As a liberal I should have said "do not raise them by any means and let them die". But this is something that cannot be done. Confidence is a factor of economic growth. Structural reforms in the economy cannot any longer be carried out at the expense of the poorer sections of the population. My scheme is indeed a bit paradoxical. But there is one question that needs to be answered: which is more important for us if we want to accelerate growth and, above all, to develop - resources or incentives? Resources or a challenge?
Our assumption, so far, has been that as soon as money appears in pockets , growth kicks off. In a way this is the case, but our studies suggest that apart from money we also need stimuli, which we are lacking today. Stimuli existed in 1998-1999, when we were in a very difficult situation. It was then that productivity began to rise, especially among those who were worse-off: in engineering, the light and food industries, and not among the fat cats in the fuel and energy complex. But later, with petrodollars pouring in, production growth sharply slowed. The British historian Arnold Toynbee used to say that challenges rather than coddled conditions develop a civilisation. If there is a challenge, it generates the energy for response - and the civilisation forges ahead.
In any scenario, provided our proposals are put into effect and gas and power prices rise, incentives for saving will appear. Effective power savings will reduce production costs, and this fact will attract domestic and foreign investors.
One should not think that with the rent withdrawn and handed over to budget recipients, the non-market sector will swell due to considerable resources being distributed via the budget.
Rising prices are a consequence. The consequence of a large part of the non-market sector becoming market-driven, and that includes the housing and communal services. A sector employing a workforce of five million settles on a market footing, setting off competition and an inflow of investment. True, we markedly raise wages in the public sector. But this means we are finally abandoning the Soviet system when people were paid much less than they earned and were charged far less than it all cost for housing, electricity and other bills. Now everybody will have to pay as much as is dictated by the market. But this means the elimination of the non-market sector. This is structural reform. And the ones that should pay for this reform are the economic sectors that seem to have needed resources. Our estimates show that growth in industrial costs will be 12-13 per cent.
A consequence would be lower growth rates. There is the rub. We should decide which is more important - structural reforms or immediate growth? My view is that without structural reforms there will be no accelerated growth in the longer term. Not to mention accelerated, just sustained growth.
If the present model of economic development is chosen, growth rates in 2004-2007 will be 4.5 to 5 per cent. And this with a favourable situation. Then they will start to fall. And if our energy prices show negative growth, we will have to say good-bye to high rates even earlier. If, however, we take the path I just outlined, growth rates even in the best conditions will not be more than 2 to 3 per cent in the next three years. But then they will be able to climb to 6-7 per cent or even higher.
(The views of the author are not necessarily shared by the editorial office.)
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