#6
From: "Stanislav Menshikov" <menschivok@globalxs.nl>
Subject: RUSSIAN ECONOMY STABLE DESPITE WORLD RECESSION
Date: Sat, 3 Nov 2001
"MOSCOW TRIBUNE", 2 NOVEMBER 2001
RUSSIAN ECONOMY STABLE DESPITE WORLD RECESSION
But Continued Growth Needs New Stimulants
By Stanislav Menshikov
The Davos meeting, which was held in Moscow the other day, was significant in two respects. Despite expectations, it did not attract anti-globalist demonstrations. It was also unusually optimistic as to the outlook for the Russian economy.
The absence of demonstrations does not mean that there is no opposition in Russia to integration into the global economy. Some industrial bodies have voiced their concerns about entry into the World Trade Organisation (WTO). There is no unanimity over liberalising capital outflows and the general tempo of opening up the economy, But these issues have so far not been a point of interest to labour or other mass organisations. No anti-globalist network has been established, and no finance for such purposes has been provided. Therefore, foreign guests of this World Economic Forum will return home with a clear impression that, at least, in this respect, the business climate in Russia is favourable. For a country that had been largely isolated from the outside world for decades this might seem strange, but it is a fact.
It was also unusual to see so many foreign speakers take a favourable view of the Russian economy's ability to withstand world recession. The former perception that the country is an economic shambles and is able to survive solely due to infusion of foreign money has all but evaporated. One can still read primitive claims by self-styled experts that current economic growth is due largely, if not exclusively, to high world oil prices. But by now most serious analysts have come to realise that the main locomotive of economic growth in Russia today is expanding domestic demand fuelled mostly by personal consumption and private capital investment. Out of the 20 percent growth in GDP in the last three years (1999 to 2001), at least 16 percent is accounted for by domestic factors and only 4 percent by favourable external conditions. Even if oil prices were lower, the annual growth rate in those years would have averaged 5.1 percent, instead of 6.2, a relatively insignificant slowdown, but certainly no stagnation, let alone catastrophe.
The same holds true for the future. A further fall in oil prices below will reduce surpluses in the balance of payments and federal budget, making it harder to meet foreign debt payments out of current revenues. But it will not stop growth, and reserves accumulated in the good years should make it possible to weather the storm. Contrary to some domestic Doomsday prophets, who were also heard at the Forum, we do not believe in a new crisis coming.
The principal reason for this optimism is that, given present government policies, personal consumption expenditure will continue to provide a solid base for overall growth. The big question mark is capital investment. Despite an expected 8 percent increase this year over 2000, it is still much less than the domestic economy can generate. Consider the following figures. Out of net business revenues in the first half of this year, around 600 billion roubles were spent for new fixed capital investment. Looks like a big sum. But 1200 billion (or twice as much) was used for financial investment into bonds, shares and miscellaneous securities of other domestic companies while another 300 billion was invested abroad. Ergo, less than a third of available capital resources went into domestic fixed investment.
A lot of harsh words are being said about such practices of Russian private business. The truth is that in the first decade of market reforms (1992-2001) its main thrust has been to grab government economic assets accumulated during Soviet times. After most of these were privatised, the principal way for the bigger concerns to expand has been to gain control over less successful companies. More fixed assets were amassed this way than was possible to fully utilise, and much of the superprofits gained in the export industries are being reinvested in mergers and acquisitions. The hope is that when the list of profitable objects of expansion is exhausted, capital resources will be redirected to investment into modernisation and building new plants. When this change occurs, it will be an important new engine of growth acceleration.
The government can help facilitate this turnaround in happening. One way is to further stimulate domestic demand by expansionary wage and pension policies. The other is to continue reducing taxes. The profit tax next year will be lowered from 35 to 24 percent. This will hopefully promote fixed investment. It was also disclosed at the Forum that the government is planning a substantial reduction in the value-added tax (VAT) from the current 25 to 16 or 17 percent. The advantage of VAT reduction is that it combines lowering the tax burden on business with making things easier for consumers. It is thus a powerful stimulus of overall demand.
This is a correct direction in Vladimir Putin's economic policy. If not spoiled by inflationary pressures from the natural monopolies or untimely rent increases, these measures should work towards guaranteeing another few years of uninterrupted strong growth in the economy.
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