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#18 - JRL 7129
Moscow News
April 2, 2003
Debating New Economic Program

The Economic Development and Trade Ministry has come up with a socioeconomic development program for 2003-2005 which is supposed to rid the country of its dependence on raw materials

The program's authors say that anyone dissatisfied with the paper is welcome to lash out at it. It has already been discussed at the Academy of Sciences round tables, and is open to criticism on an Internet site that has been expressly opened for the purpose.

One of the program's drafters, Deputy Minister for Economic Development and Trade Arkady Dvorkovich, talks about it with MN's Dmitry Dokuchayev.

The socioeconomic development program, popularly known as Economic Development and Trade Minister German Gref's program, was adopted in 2000. Why was a new version necessary? Late last year, the country's leadership instructed our ministry to draft a new version of the program. We have since analyzed a mountain of information about the country's economic development following the August 1998 financial crash. And we noted some new trends that should be taken into account. In certain areas, we found it necessary to implement measures other than those laid down in the original program. For example, the previous program envisioned a unified system of medical and social insurance; our study shows that the two must be separate. What is more, today we are confronted by an entirely new and extremely important issue - administrative reform.

What trends did you observe?

In the first place, we saw a downturn in economic growth rates. The combined growth rates for the last four years came to 25%, with the rate falling from year to year. In fact, we had expected that the structural reforms undertaken by the government (tax reform above all) would slow down growth rates. Because of the structural reforms, we haven't been able to collect the amount of investments needed to boost industrial production. What is worse, a large part of consumer demand is met from imports. The main reason for that is neither the ruble's real appreciation nor the natural monopolies' increased tariffs; the reason is the low competitiveness and narrow range of our goods. We just don't produce many of the items that we import.

There is a related trend that I would describe as an acute form of Dutch disease. I mean our economy's extreme dependence on the raw material sectors. In 1998-2000, we seemed to have taken a step away from raw materials production to come closer to processing.

Now we have taken a step backward. The fuel and energy sector accounts for about 30% of Russia's industrial output, for more than half of its federal budget revenues and export earnings, and for 45% of its hard-currency receipts. Moreover, Russian investments abroad exceed foreign investments in Russia. Ours is the only transitional economy with such an investment pattern. Why is capital flowing out of - and not into - Russia?

We still have a high inflation rate. You know that it has lately been higher that the government's target figures, and that it is mostly structural inflation. We see a faster rise in the costs of services - from educational and medical to housing services and public utilities. Another cause of capital flight is poor state administration. According to our estimates, businessmen spend 10% to 20% of their time fighting bureaucratic barriers; red tape is causing the country to lose an enormous amount of a valuable resource.

Your study of the prevailing trends shows that our economy is in dire straits. What conclusions did it prompt to the program's drafters?

The first few years following the August 1998 financial crash produced a mechanism for economic growth that diverted resources from the raw-material sectors to the rest of the economy. That mechanism has lately stopped working. The market services sector has been growing increasingly slowly. Over the last four years, it has grown 23%, against a 34% growth in industrial production. This kind of economic structure will not allow us to achieve a yearly growth of more than two to three percent. And if we are to attain an acceptable living standard in the foreseeable future, we must have an annual growth of five percent or more.

How can we attain the necessary growth level?

By diversifying our economy through stimulation of three factors. This involves doing three things: Boosting the export of goods other than raw materials, replacing imports with Russian-made items, and stimulating the new, high-tech economy. Encouraging the export of non-raw material items should lead to higher domestic demand, which is a direct stimulus to economic growth. The replacement of imports with home-produced items will divert capital from the raw material sector to the processing industries; it is also a factor in attracting foreign investments. And if we can get the "new economy" to outdistance the other sectors, we will have paved the way to making our goods more competitive.

Through what measures can the high-tech and processing sectors be stimulated? By slashing the tax burden and the inflation rate?

The range of relevant measures is far broader. In fact their description takes up most of the space in the program. As for the measures you have mentioned, we are studying them. But it is not as simple as that. The government, for example, affirms that axing inflation at a stroke from the present 12%-13% to five or six percent would harm the economy, as this would lead to lower profitability in certain sectors. Inflation must therefore be reduced gradually, bit by bit. To do that, we must, in the short term, maintain a budget surplus, given relatively high prices for our exports. In the medium-term, inflation can be lowered by boosting demand for money.

As for the tax burden, if we just ease it, the raw-material sectors will still remain dominant. If our economy is to get rid of its dependence on the raw-material sectors, tax reform must be pursued in a way that would induce investors to put their money into the processing industries.

Basic Indicators of Economic Forecast

  2003 2004 2005 2008
Rise in inflation, % 10 - 12 8 - 10 6 - 8 5 - 7
GDP growth, % 3,5 - 4,4 4,2 - 5,5 4,5 - 5,7 4,5 - 5,5
Foreign direct investment, $ bn 5,0 - 6,5 6,0 - 7,8 7,5 - 8,5 9 - 11
Increase in citizens' real incomes as % of previous year's 105,7 - 107 106,2 - 107,2 106,4 - 107,4 106 - 107
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