#22 - JRL 9067 - JRL Home
Moscow Times
February 24, 2005
Russian Bear Ignores Celtic Tiger
By Kim Iskyan
Kim Iskyan was a securities analyst in Russia from 1996 to 2002 and now lives in
Ireland. He contributed this comment to The Moscow Times.
The chances of President Vladimir Putin achieving his oft-repeated objective of doubling the size of Russia's economy within a decade might improve if he looked to Ireland as a source of inspiration. But given its state-driven focus on the short term, the Kremlin seems to have missed the Irish lesson that common-sense economics, consistently implemented over a period of decades, is a far better path to economic prosperity.
The land of shamrocks and Guinness has become the envy of developing nations the world over by increasing GDP fourfold, and has moved from having outhouses in the yard to having BMWs in the yard within a generation. Ireland enjoys one of the highest levels of economic activity per capita in the world, some 20 percent above the European average. Critically, growth has significantly boosted overall standards of living, and the Economist Intelligence Unit recently named Ireland the country offering the highest quality of life in the world.
Ireland is a tiny country at the periphery of Europe, devoid of any natural resources. But its lessons on leaping into the elite club of developed economies -- applicable to Russia regardless of differences in population, oil reserves or economic legacies -- are straightforward: Apply Economics 101 to the real world over the long term.
But don't be deceived, as the devil is in the political will. Just because you know something is good for you doesn't mean you'll necessarily go and do it. Yet decades of emigration and economic decline, raising the real danger of the eventual extinction of Ireland as a country, helped motivate Irish society to bring about lasting change. That Russia could acknowledge the extraordinary depth of its problems -- the ongoing commodities-fueled economic boom notwithstanding -- and muster the political will to create broad-based consensus for a bona fide transformation appears highly unlikely.
Here are some of the basic economic principles behind Ireland's transformation. Economies grow when more people work, thus adding to the absolute size of the economy. But increased productivity, or greater efficiency per worker, is the real long-term driver of economic growth. The most recent chapter in Ireland's growth was fueled by a 50 percent increase in the number of workers in the economy between 1993 and 2003, as unemployment rates dropped and large numbers of women entered the workforce. Far more significant, though, was that starting in the early 1970s, Ireland entered an era of almost unprecedented improvements in labor effectiveness, one brought about through free trade, liberal economics, investment-friendly policies and a healthy dollop of geographic, historic and linguistic good fortune.
On a macro level, a relatively open economy -- largely free from barriers to investment, restrictions on the movement of labor, tariff walls and other distortions -- was a critical ingredient to Ireland's economic boom. Starting in the 1950s, Ireland began to turn away from an import substitution model of growth -- a virulent strain of which contributed to the failure of the Soviet economy -- well before free trade became a development cliche.
For Russia, membership in the World Trade Organization will be the easy part and is de rigueur for any aspiring developing country. Finessing the fine print of international organization bureaucrats is as simple as snowmen in Siberia compared with the enormous challenge of creating an environment that is genuinely supportive of investment. Sustainable long-term economic growth will be elusive without investment, arguably the most important by-product of economic openness.
The economics ministries of most Third World investment black holes -- Russia, unfortunately, included -- can prattle endlessly about how they are "open for investment." Would-be investors need only send cash, and everything will be just fine.
But a necessary -- but not sufficient -- prerequisite for investment attraction is the rule of law backed by a strong judicial system and, more generally, a government based on institutions rather than individuals. The dismantling of Yukos vividly illustrated the bankruptcy of pledges by President Putin to bring about a "dictatorship of the law." Similarly disturbing is the rise in corruption, as reflected in the deterioration of Russia's standing in corruption watchdog Transparency International's Corruption Perceptions Index from 71st in 2002 to 90th in 2004.
Ireland cultivated its political, judicial and economic institutions over a period of decades, and enjoyed a more positive legacy than Russia. But rather than sit back and wait -- and wait, and wait -- for good things to happen, it promoted productivity and attracted investment through, for example, low tax rates. It ensured macroeconomic stability with sound and predictable monetary and fiscal policies. A broad-based partnership between trade unions and industry -- imagine socialism for the common good of both sides of the production equation -- helped restrain wage growth and keep the economy competitive. Meanwhile, a comprehensive education policy, somewhat similar to that of other countries in Europe, ensured a continued supply of globally competitive young workers.
In part as a result of these measures, for an extended period Ireland enjoyed levels of foreign direct investment, as a percentage of GDP, more than double those of China or Eastern Europe. The country is the recipient of roughly a quarter of all U.S. foreign direct investment in Europe. Reversing a decades-long brain drain, Ireland is a net recipient of highly qualified professionals in the global labor market.
Russia, meanwhile, continues to suffer from pathetically low levels of investment, notwithstanding the perception of progress generated by the occasional headline-grabbing deal. Despite some improvement, albeit mostly of a one-step-forward, two-steps-back variety, the investment environment remains poor at best. The recent announcement that foreign investors would be restricted from participating in natural resource deposit bids is just the latest setback for the Russian investment environment engineered by the Kremlin.
Admittedly, Ireland has enjoyed advantages that Russia doesn't. Membership in what is today called the European Union provided for significant investment in infrastructure and other support, and a large market for Irish goods. A small population and landmass has allowed for greater unity of purpose. That English is an official language has been a key attraction for investors. And the 60 million-strong Irish diaspora has supported the home country in myriad ways.
Of course, the Celtic Tiger has its problems. Building from a higher base, growth is inevitably slowing. Prices have risen dramatically, eroding Ireland's competitive position and increasing poverty rates. Urban centers are struggling to support runaway population growth. Social mores are crumbling as Ireland loses its unique identity to creeping Europeanism.
But these are problems that Russia can only aspire to suffer from. The Kremlin looks unlikely to build upon the few strong policy efforts, such as tax reform, that could lay the foundations for sustained growth. Focusing on productivity, as opposed to a Soviet-style concentration on absolute production growth, has been key to Ireland's success. An ongoing demographic crisis and a crumbling infrastructure pose enormous challenges. And a large natural resource base seems more likely to give Russia license to eternally defer genuine Irish-style reform in favor of living off the latest surge in commodities prices, rather than using them as a driver of positive change.
Until recently, Putin arguably enjoyed sufficiently strong support to lay the groundwork to engineer an Ireland-style success story. Instead, the Kremlin has squandered his political capital and will likely have little of real lasting and significant import to show for it.