20 September 2012, 17:05

Challenges for Russian economy

Challenges for Russian economy

Miracles happen and economic ones, too. Russia will be able to tackle corruption and dependence on oil and gas. Russian entry into the WTO is good for the national economy. These and other issues were discussed in an exclusive interview given to the Voice of Russia by leading Russian economist Dr. Viktor Polterovich, who is President of New Economic Association.

Dr. Polterovich, what are in your opinion the most pressing problems of the Russian economy?

I would paraphrase this question a little bit: “What are the main tasks of the Russian economy?” First of all, in my opinion, we should increase our labor productivity and make it as high as in Western Europe, build a society based on law and democracy and eventually join the European Union. This is in my opinion the main tasks for Russia at the moment.

What do you think of the economic policy of the current Russian government?

I would say that we do not have a clear plan on how we should achieve the aims that I have mentioned. There are different attempts to do this, which are not very systematic. But there is no well-thought-out plan for that, though it is absolutely necessary.

Many economic pundits believe that the main problem of the Russian economy at the moment is a very high income inequality. In your opinion, how could we solve this problem?

I agree that this is a serious problem. Maybe not the most important one but definitely one of the most serious. We have a high income inequality in our country that tends to grow even more.

Of course there exist different means for solving this problem. First of all, it is the introduction of a progressive income tax system instead of an equal tax rate for everyone. This measure is being discussed in Russia currently. Our government believes that it does not make sense to introduce a progressive income tax system in our country because people who would have to pay this tax would definitely hide their income. I think that this assumption is not quite right. In the 1990s it was of course very easy to hide your money, but now it is almost impossible because one can find information about the incomes of most people in the data bases of the tax administration. If you are very rich, one can at least roughly estimate your income and you will not have an opportunity to hide everything.

I see here another obstacle. In order to pass a law about a progressive income tax system in Russia, our parliamentarians must vote for that. But this law would hit them before anyone else, because these are usually very well-off people who cannot hide their money so easily. Thus we have fallen into a trap from which we need to find a way out. The government should comprehend that if the income inequality in our country reaches a certain limit, it would amount to a social explosion that would have bad consequences, mostly for the rich.

At the moment our parliament discusses the introduction of a progressive property tax system. This measure is also very important, but not so efficient, since it is a lot more difficult to estimate the value of property.

Another essential problem for Russia is its dependence on oil and gas exports. Do you think the nation can overcome this in the future?

Yes, of course! To do this we should first borrow West European and American management concepts very intensively. Here we need a special institutional system that would be able to handle this task efficiently. If we build such a system, adapt Western European and American management concepts and increase the labour productivity in different branches of our economy, primarily in the industry, the problem of Russia’s oil and gas dependence will be solved.

According to research carried out by “Transparency International” the level of corruption in Russia is a lot higher than in Western Europe. Is there any chance to tackle this problem?

First of all, we need to point out that technological backwardness, underdevelopment of civil society and poverty are always closely connected with corruption. If we take a look into the past of many developed countries, we will see that they also suffered from corruption at some point. A very good example is the experience of the USA at the beginning of the 19th century. The level of corruption there at that time was as high as in Russia in the 1990s: corrupt police, corrupt customs and so on. The historians of American bureaucracy J. Knott and C. Miller mention in their works the amounts of money that one needed to pay in order to become for example a policeman in New-York City. It all lasted about 70 years. The main cause of such huge corruption in America was actually a very fast democratization. At the beginning of the 19th century only less than 10 percent of the population of the U.S. had the right to vote. Then after certain political reforms a large part of the inhabitants of the country obtained this right. Since most people were not politically engaged, the right to vote was not of a great value for them. At the same time there existed some political groups, who were very interested in getting the votes of the electors. In this situation there occurred an immense political corruption. Only a gradual development of the civil society in the United States made it possible for the country to find a way out of this seemingly hopeless situation.

The attempts to achieve fast democratization and launch market reforms in Russia in the 1990s have also led to an enormous corruption in the country. Although, as you of course know, corruption existed already in the Soviet Union where most goods and services were scarce. One could not just go to a shop and buy goods there. To obtain them one needed to use his connections. If you worked for example in a box office in a theatre you could supply a hairdresser with free tickets and then have your hair cut without queueing. This was a widely used, almost a standard form of a relationship between people in our country. And of course a fast transition to a new economy could not make them suddenly change their behavior and stop doing what they were used to doing.

I believe that it will take us a lot of time to solve the problem of corruption in Russia. This is a very slow process. We know that even countries in Western Europe and North America are not able to get rid of this problem completely. What we need here is a set of well-thought-out measures that could reduce the impact of corruption in our country. I also think that numerous anti-corruption regulations in our laws only do us a lot of harm since they make our legislation unable to work properly and hinder our development. For an effective struggle against the corruption we need professionalism, sense of tact and patience.

As a scientist, do you believe that economic science or simply economics can help solve the main problems of Russian economy?

Yes, definitely! First of all, economics can tell what one should NOT do. Although it does not always succeed in that. For example in the 1990s a lot of economists believed that all developing and ex-socialist countries of the world should follow the so-called 10 “Washington Consensus” prescriptions to achieve a successful transition to a market economy. These prescriptions included trade liberalisation, privatisation of property and strict control of money supply by the government. All countries that followed the “Washington Consensus” prescriptions experienced in the end a very strong recession in the economy. When it happened, economists all over the world realized that they were mistaken and started to pay more attention to reform strategies. So the first thing that an economist can tell is what one should not do.

Second, economics can help analyze experiences of other countries. Both of those that had a successful development and of those that on the contrary made mistakes and therefore fell behind. It is very important to comprehend these experiences in order to be able to create a good development program for the future.

Finally, economists are good at mathematics and can build models. It is important to use not only one scientific approach but the whole range of economic theories such as institutional economics, econometrics and so on. All this should be applied for examining every essential problem of an economic policy. Only when you get simillar results using different methods, you may be sure that you are giving proper recommendations.

This summer Russia’s finally joined the World Trade Organization. What are in your opinion its main advantages and disadvantages for the country?

A WTO entry always implies a lot of haggling. And the less you match their standards, the easier it is for you to haggle since then you have something to yield. Our customs barriers were always lower than in other countries of the same level of development – that is why it was not so easy for us to haggle. In my opinion, it is good that we joined the WTO not right away but after some 10 years of haggling. If the entry had been fast and spontaneous, our enterprises would not have managed to prepare for that properly.

The awaited results of Russia’s entry into the WTO remain ambiguous. Our producers of agricultural goods are of course very worried because they fear the increasing competition. In other countries of the world the agriculture gets subsidies from the government. In Western Europe and the USA these subsidies are very big. Russia is not so rich and cannot pay the same amounts of money – that is why foreign importers of agricultural goods automatically get competitive advantages. What we need here is a very well-thought-out policy that could raise our agriculture instead of ruining it.

Russian machine manufacturers are also anxious about Russia’s entry into the WTO because our technologies in this field are strongly lagging behind. If we suddenly open the way for import now, it could ruin our machine building.

Some branches of the Russian economy, however, benefit from our entry into the WTO. At the moment it is not so easy to say, whether we get more advantages or disadvantages on the whole. According to the calculations that I know, we shall neither win nor lose too much. Nevertheless, a healthy competition that occurs when a country joins the WTO, should definitely foster its development. Here I see a potential advantage for us.

Is there anything Russia can learn from other countries of the world?

I believe that we could learn something from almost every country of the world. Some nations, however, had experiences that we should examine very thoroughly. These are for example Japan, Korea and Taiwan – states where economic miracles have happened. These used to be developing countries with a low level of welfare and it took them only 20-30 years to become developed countries.

The post-war experiences of West European countries are very important. Primarily that of Germany. After the Second World War the nation was completely devastated and managed to become the biggest economic power in Europe in a very short time. The reconstruction experiences of such states as Spain and Portugal is also very interesting. In the past these were backward countries, but now their level of development is rather high.

It is worth mentioning that strategies of most countries that achieved fast economic growth over a long period of time have had several similarities. And it is very important for us to understand what these similarities are. Of course the situation in every country is somehow unique. But we can see for instance that all these states have borrowed technologies of more developed nations very intensively instead of trying, as some Russian politicians nowadays offer, to create an innovation economy right away. It is impossible! An innovation economy should be built gradually, as a country adopts the modern methods of management.

Nearly all countries that I have mentioned such as France, Japan and Portugal have also used indicative planning in their economic policies. Some states that have achieved success only recently, for example the Czech Republic, are making indicative plans for their economies too. As a matter of fact, the ability to plan is very important for a catching-up country.

There are also a few other common features of successful economic policies. It is important for us to examine them and adopt here in Russia.

An American company has conducted a survey among expats working in Russia asking them how they could characterize their Russian colleagues. A lot of foreigners said that most Russians believe in miracles. How can you explain that?

I see a certain amount of irony in this answer of foreign professionals. They probably wanted to point out that the Russians cannot calculate very well and therefore tend to exaggerate their future results. I think this is partly true.

Talking about general social mood in Russia, I would say that it is rather negative. The research of “European Performance Satisfaction Index” has shown that Russians have a rather pessimistic attitude towards our economic development prospects. However, when they talk about their personal future, they tend to be more positive.

On the other hand, I would say that it is definitely worth believing in miracles because they happen not as seldom as it seems. The existence of the European Union is for example a miracle. Could anyone in the 1940s imagine that France and Germany would have a common currency someday? Can you imagine a large organisation where all decisions should be made unanimously? Most people would say: “Of course not! It is impossible for such an organisation to exist”. Nevertheless, the European Union is a proof that it is absolutely possible.

Miracles happen. As you know there is even a special term: “An economic miracle”. In Germany it was connected with the reform of Ludwig Erhard. I believe that an economic miracle can happen in Russia as well, for example if our welfare, let us say in 15-20 years, reaches the European level. It is possible for us to make such a miracle happen, but of course it will take a lot of time, patience and hard work.

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