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#8 - JRL 7241
No. 109
June 26, 2003
[translation from RIA Novosti for personal use only]
Russian Economic Policy Must Resemble Chinese Model

On June 25, RF President's economic adviser Andrei Illarionov unveiled to the participants in the seminar organized by the Foundation for Effective Policies the outline of his vision of how Russia could accomplish the lofty task set by Vladimir Putin in his yearly address - to double national GDP by 2010. The recipe is simple - Russia must slash public spending as a ratio to GDP by 20 percent.

At the beginning of his presentation, Andrei Illarionov took his time to explain the dynamics of GDP growth rate in order to accomplish the goal. To double GDP in ten years, the nation has to achieve and sustain its annual growth of 7.2 percent. To do it by 2010, though, we have to maintain a 7.9 percent growth rate yearly. Then, using a variety of diagrams, the adviser clearly proved that so far national GDP has been steadily growing largely due to favorable external economic factors (luck factor), rather than through effective economic policy conducted by the Cabinet (policy factor). According to calculations made by the Institute of Economic Analysis, the lack factor contributed anywhere from 6.4 to 9.1 percent to GDP growth in 2000-2003. The year 1999 was taken as a reference point because, in Mr. Illarionov's opinion, the luck factor that year was zero, but GDP had grown by 6.4 percent only through effective economic policy of the government. He said that if the Cabinet's policy nowadays was the same as it was in 1999, we could have achieved GDP growth rates of 16 percent this year due to both factors, instead of having only 5.4 percent. Accordingly, if the external economic factors nowadays were the same as in 1999, due to the current government policies, GDP growth rate would have been steadily declining - by 2 percent in 2001, by 2.8 percent in 2002 and by 3.7 percent in 2003.

During 1999-2003, at an average annual GDP growth rate of 6.2 percent, the contribution of luck factor was 5.9 percent, and policy factor only 0.3 percent. Frankly, it had been even worse earlier. In 1992-1999, the policy factor was negative, and in combination with unfavorable external economic factors it led to chronic decline of the GDP.

Andrei Illarionov abstained from criticizing the government any further, though, limiting his comments to an appeal to emphasize the importance of the policy factor. "The key to economic growth is competitiveness. The major obstacle in a way of effective competitiveness is excessive cost of economic activity," he explained. Excessive costs normally come from non-market sectors, namely - public and monopoly sectors. The high cost of economic activity and, consequently, poor competitiveness of the Russian economy is also caused by excessive inflation of the ruble exchange rate due to excessive inflow of foreign currency from oil sales that is not used for economic purposes.

The President's adviser thoroughly discussed only one aspect of the excessive costs - an excessive role of the public sector spending in GDP. He said that the international experience provided us with irrefutable evidence that the excessive spending in the GDP public sector negatively influenced the economic growth. Andrei Illarionov used China as an example of a country that had successfully managed to overcome the negative influence of excessive public spending. China had slashed public spending as a ratio to GDP from 35.88 percent in 1979 to 14.32 percent in 1995. As a result, the economy had started growing, and by 2001, the Chinese were able to increase the share of public spending in GDP up to 23.9 percent. Most importantly, they were also able to increase real per capita public spending. His further calculations showed that Russia must follow the Chinese model in order to double national GDP by 2010 (that is reaching 8-percent annual growth). Mr. Illarionov said the percentage of GDP that public sector spending accounts for should be chopped from current 37 percent to between 20 and 22 percent. The resulting GDP growth will ensure the improvement of living standards of the Russian population. Consequently, it will allow the government to increase per capita GDP by 180 percent by the year 2015. And that, in turn, will increase the public per capita spending by 60 percent. Mr. Illarionov refused to indicate which expenses could be slashed first in order to improve lives of Russian citizens, though. That will remain the responsibility of the Cabinet. It's not a secret, though, that, according to expert opinion, about 30 percent of public spending in the government budget are used ineffectively.

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