Russia’s recent elections of a new parliament and a new president have prompted intense analysis of the country’s economic priorities and the best way to achieve them. Russian economists and other observers are now debating the best path to sustained economic growth and a fertile investment climate that will raise the economic well-being of the country’s citizens.
To promote this debate, more than 450 Russian experts in economics, law, sociology, and management from government, the Duma, and the private sector gathered in Moscow on April 5–7 to discuss the investment climate and prospects for economic growth in Russia at a conference sponsored by the State University Higher School of Economics, in collaboration with the IMF and the World Bank. As IMF Acting Managing Director Stanley Fischer observed in his opening remarks, “Those who attended came from a remarkably wide range of thinking … and strengthening reform is on everybody’s mind”.
Over the three days of discussions, a striking level of agreement emerged on the need for market reforms. Professor Yevgeny Yasin, academic supervisor of the Higher School of Economics and the conference’s main organizer, confirmed that although the participants came from a wide range of professions and academic backgrounds, they reached a remarkable degree of unanimity on the main considerations underpinning the discussions. These were
- After nearly ten years of experience with transforming the economy, basic mainstream reforms do work.
- Despite many setbacks to economic transformation, the achievements should not be underestimated.
- The way to equitable growth is through structural reform and strengthened social safety nets.
- And, vitally important, reform works best when the country “owns” its economic program.
The State University Higher School
The State University Higher School of Economics was established in 1992 by the Russian government to assist economic reforms in Russia by training professionals in modern economics and other social sciences, as well as by providing academic research, consultancy, and policy advice in these fields. The Higher School of Economics is an autonomous university that serves as a training and scientific research center for the Ministry of Economy of the Russian Federation. It has regional branches across Russia and maintains exchanges with the London School of Economics, the Sor-bonne, and Harvard University, among other institutions.
None of the speakers advanced some of the arguments that might have been heard in recent years—namely, that high inflation is needed for growth or that cheaper credits are needed for industry.
The conference represented the more public side of a quiet process under way at the direction of President Vladimir Putin, who has charged the Center for Strategic Research—a think tank headed by reformist German Gref—with hammering out a plan to prioritize and streamline the Russian economy. This task will range from overhauling the cumbersome tax code to slimming down Russia’s infamous bureaucracies. The strategic economic plan is due to be presented shortly.
The first stage of the conference featured four working groups that focused on macroeconomic conditions for economic growth, institutional and structural limitations to growth, social policy and economic development, and state regulation of the economy. Forty-seven working papers, prepared by Russian experts and staff of the international financial institutions, provided the basis for presentations and discussions. The working groups culminated in an open plenary session where working group chairs from the Higher School of Economics—Professor Yevgeny Gavrilenkov, President Alexander Shokhin, Professor Lev Yakobson, and Chancellor Yaroslav Kuzminov—provided summaries. Fischer, Yasin, and Johannes Linn, Vice President for Europe and Central Asia at the World Bank, also addressed the plenary. Many spoke positively about the prospects for the Russian economy. Gavrilenkov commented that “while discussions during the workshops were often animated and divergent views were expressed, all participants agreed that the Russian economy is growing and on the upswing and that IMF estimates of a 4-5 percent growth rate over the medium term could be considered most conservative.”
But in a paper titled “Economic Strategy and Investment Climate,” Yasin and his coauthors (Sergei Alek-sashenko, Yevgeny Gavrilenkov, and Arkady Dvorkovich) pointed out: “Certain positive tendencies in the development of the Russian economy … emerged after a period of difficult market reforms. This does not give ground for complacency, though. Transformations are not over. We have a market economy, but not a free one and, therefore, it is inefficient. That is why new crises are ahead unless market transformations progress.”
All the participants agreed that the preservation of macroeconomic stability and the broadening and acceleration of structural reforms are essential to achieve high productivity and sustainable output growth. They concurred that the key challenge now is to improve the investment climate, and that savings, which are more than adequate, must be kept in the country through proper incentives.
“An improvement in the investment climate could reap big rewards for the economy,” Fischer said in his address. “It could also help reverse capital flight, which has averaged $10-20 billion a year since the early 1990s. Russia’s economy, and Russia’s financial needs, will look very different when Russian savings, instead of fleeing abroad, are used to finance productive investments in the domestic economy. The failure to strengthen the rule of law and improve governance, in both the public and corporate sectors, is at the heart of weak investment, the failure of enterprises to restructure, and capital flight.”
A number of broad conclusions, as well as specific measures, emerged from the conference:
- Strengthening the rule of law and weeding out corruption requires that laws be made clear, discretion in interpretation be removed, and federal laws be enforced throughout Russia. The judiciary needs adequate financial compensation, and courts and judges must have increased independence. Compensation for damage caused by state actions must be ensured. Transparency of the public sector must increase, especially in activities not currently subject to treasury control, such as the Road Fund.
- Industrial restructuring must advance, and corporate governance must be improved. This includes completing the privatization process, promoting competition, and tackling noncompetitive industries. Fostering a level playing field requires the protection of property rights and minority shareholders. Also, the legal responsibilities of managers must be raised and international accounting standards introduced.
- The entrenched problems of nonpayments and barter must be rooted out. Tax offsets and negotiated tax payments must be eliminated at all levels of government. As Shokhin pointed out, archaic taxes—such as the turnover taxes—must be removed. Cash collections from natural monopolies must be raised, and rules need to be established to permit nonpaying customers to be disconnected. The bankruptcy process will need to be strengthened in a number of areas, including through more forceful use by tax authorities.
- Bank restructuring and an increase in central bank transparency must be advanced. Gavrilenkov noted that, during the conference, participants unanimously agreed on the need to restructure the banking sector. Banks must become more effective intermediaries between savings and investment and should not provide directed credits to particular enterprises or sectors. Insolvent banks must be dealt with more forcefully. A competitive private banking sector must be fostered, including through promoting the entry of foreign banks. Banking supervision needs strengthening, and central bank accounting procedures and disclosure practices must be improved and subsidiaries divested.
- There is a need to reform the public sector through tax, expenditure, and civil service reforms. Gref noted that deregulation appeared to be one of the most important issues. Functions and organization of government beg reexamination and consolidation, and the roles and relationships of different levels of government should be clarified. Administrative systems bear strengthening, as do regulatory frameworks and the governance of institutions. Civil service reform is needed, as well as a strengthening and streamlining of the tax administration. A correct balance between the rights of taxpayers and the tax authorities should be sought, while most tax exemptions, particularly for the value-added tax and enterprise profit tax, should be eliminated. Further, the burden of personal income taxes warrants review.
- The social safety net for the poor, elderly, very young, and those unable to work requires strengthening to support restructuring and growth while reducing poverty. This implies the careful targeting of limited resources. Housing subsidies must be reviewed, and reform must begin on the health care and pension systems. Equally essential to help the new generation cope with the market economy is investment in education, Yakobson emphasized. “The most recurrent themes [in the social policy working group] were the labor market and the recognition that education policy should help the new generation adapt to new conditions,” he said.
- Agricultural and land ownership reforms are needed to facilitate the development of a genuine land market that ensures full rights to own, buy, sell, rent, and mortgage land.
To underpin reform generally, a broad base of support must be developed, and vested interests must be resisted. This is the key to building ownership of Russian reforms within Russia and to improving the country’s prospects for success.
The conference left open issues that will require further consideration, including the appropriate size of the public sector and how to deal with natural monopolies, but many lessons were learned, and there was no shortage of good ideas. The question now is whether it will be possible for Russia to develop its own economic reform program—a program worked out by Russians, effectively supported by civil society, and owned by Russia.
Correction: In the table of IMF arrangements as of March 31 that appeared on page 143 in the April 24 issue of the IMF Survey, Argentina was inadvertently omitted from the list of IMF members with Stand-By Arrangements. The entry for Argentina should have read: Date of arrangement: March 10, 2000; Expiration date: March 9, 2003; Amount approved: SDR 5,398.61 million; Undrawn balance: SDR 5,398.61 million.