#2
strana.ru
November 3, 2001
"Fundamental Change" Responsible for
Rejuvenation of Russian Economy
Interview with Anders Aslund, Economist and Senior Carnegie Fellow, reveals that
"Russia is in good shape and continuing to do well."
By Michael Hewitt
Q: Dr. Aslund,you have stated that high oil prices and the 1998 devaluation of the ruble cannot take all the credit for recent economic successes and that other factors have contributed to the recent rejuvenation of the economy. Please elaborate on these factors.
A: The main factor is the financial crash of 1998, which introduced hard banking constraints in Russia.The World Bank has calculated that enterprise subsidies in Russia accounted for 60 percent of GDP in 1998 as compared with 5-10 percent post crisis.[As a result of the crisis] everybody was forced to accept hard budget constraints.It was a monumental change which helped lead to a balanced budget,thereby reducing subsidies to enterprises.
You now see that barter has virtually disappeared,having fallen by two-thirds. Enterprises previously had cash,but they made money out of barter because it gave them huge government subsidies.
Last year the consensus forecast for GDP growth in 2001 was 1.5 percent.It turned out to be 8.3 percent.This shows there was something fundamentally wrong in people's thinking.People said that [the growth] was only a result of the oil price and ruble devaluation.But these two factors were present at the beginning of 2000 [when the 1.5 percent growth predictions were made] and therefore they can't really claim all the credit.
The point is that the Russian economy started working. Others will say that it was a level effect;that is,that the base was so low,the economy had nowhere to go but up. However,African countries have been going down for thirty years;in other words,there is no bottom.It is only a question of what policies you pursue.And the policies in Russia fundamentally changed leading to a balancing of the budget and effectively cutting very corrupt enterprise subsidies.As a consequence of this and other measures,the government eliminated barter.
Q: Even if the oil price can't take full credit,it is certainly still an important part of Russia's recent economic success.With the global economic slowdown,OPEC may have trouble cutting production enough to sustain a favorable world price.Since such a drop would be detrimental to Russia,what,in your opinion,should be Russia's policy toward OPEC?
A: This is really question of game theory and of what you think will happen. Personally I think that that such a move would cause a big mess in Saudi Arabia and therefore I think that you shouldn't think much about the oil price.
I think the Russian policy should now be to expand oil production as they have been doing and retake their place on the world market.Russia has enormous advantages over the Middle East in terms of political stability.And Russia should capitalize on this stability.I think that attitude is reasonable for the time being.
Q: In the past year the Russian government has undertaken ambitious plans to reform natural monopolies such RAO UES and the transportation industry.How do you see this effecting inflation given that tariffs are bound to increase?
A: I don't think that one should be particularly worried about that.If it happens it will be a one-time effect.If you take electricity and gas,the price should go up.With regards to railroad tariffs,the price should go down.Russian railroad tariffs toady are too high,and they have been so persistently throughout the 1990s.They have an enormous monopoly effect,which is one reason why the Railway Ministry is doing so well for itself.
Q: In one of your reason working papers you discussed the myth of the production fall after the Soviet collapse. In particular you note that before the breakup of the Soviet Union,producers tended to overstate production to exceed state quotas whereas after the breakup,production was understated in order to minimize exposure to taxes.
In addition,you argue that value detracting manufacturing further led to an artificially high Soviet GDP.
All these factors made state statistics quite unreliable.We know that domestic manufacturing has recovered since 1998. What is your opinion on the accuracy of the statistics we now receive regarding improvements in the "real economy?"
A: Statistics are getting better and better all the time, but you have the other factor that small enterprises are not included.In Russia,statistics are less of the problem since there are so few of such [smaller] enterprises.It is a much bigger issue in Ukraine and therefore the underestimation of the GDP is much greater. If you take for example the retail trade sector,I checked a few years ago,and 70 percent of retail trade is estimated; e.g.is taking place through artificial or small channels of small enterprises and as a result you get statistics which are pretty much guesswork.I was rather struck by the latest revision of state issued GDP estimates.They revised it upwards by about 2 percent over the last 2-3 years.They changed their methodology such that they used the 1995 economy as a base for measuring GDP growth.The big old sectors declined and the new sectors grew and if you don't account for that then this means that GDP growth is still underestimated.What we are seeing all the time is that all revisions are upwards.
Q: What should be the focus of reform now?
A: Judicial reform. Previously there were two reforms that were important for improved enterprise performance: improving the tax system,which was a basis for extortion, and eliminating subsidies.he tax rates have been brought down to where they should be and the tax system improved.
The other important change has been subsidies,which have been significantly reduced as a result of the elimination of previous incentives that existed under the barter system.
And then you have the broad concept of corruption,and the question of how do you clean up corruption.Judicial reform is the key to diminishing corruption after you have cleaned up the tax system.
Q: Reforming the tax system and eliminating subsidies happened relatively quickly.What do you see as a time frame for implementing judicial reform?
A: I am not a lawyer and so I cannot really discuss it but of course these things take time because it is a question of changing people's behavior and [in Russia] you have a lot of people who are obviously corrupt or otherwise opportunistic.
Q: What do you hope that people take away from the Fifth Annual Russia Investment Conference?
A: I think it is pretty obvious that Russia is in good shape and that Russia is continuing to do well.And as Johannes Linn of the World Bank said,Russia is now a haven of normalcy in a pretty messy world.
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