Moscow News
www.MN.Ru
June 8-14, 2005
Dutch Disease Hits Russia
Economic growth has predictably slowed down due to government policies
By Otto Latsis
It seemed to be something that would never come true: Somewhere an alien Dutch disease was roaming. But now, this is a Russian disease as well.
We Wanted an Easy Life
Dutch disease is an ailment that affects industrial nations excessively engaged in export of raw materials. The disease becomes more acute as the export trade expands due to the soaring prices of the export commodities. Because of huge inflows of export proceeds, Russia's currency is appreciating against the foreign currency that has overfilled the state coffers. A cheap foreign currency means cheap imports, which give importers a competitive edge over domestic producers, who thus get in trouble. The booming oil sector is strangling our manufacturing industries. Today, Russia has all the classical symptoms of Dutch disease.
First, profits from foreign trade are abnormally large. In 2004, its positive balance was nearly equal to the total volume of federal budget expenditures.
Second, the ruble is appreciating against the dollar. The ruble is quickly strengthening; actually it is strengthening faster than at any time in the past (with due regard paid to the ruble inflation). This unwelcome "success" is not due to the stronger export positions of our manufacturing sectors for the simple reason that few, if any, such positions are left: Russia's fuel and energy sectors alone account for nearly two-thirds of our total exports.
The ruble's appreciation has practically nullified the positive effect of the Russian currency's 1998 devaluation. Quantity has grown into quality, giving rise to the third symptom of the Dutch disease: Our entire economy has hit the skids. The first quarter of 2005 saw industrial growth and economic growth as a whole drop to 4% or less, as compared to 7%-8% a year before. The slowing growth cannot be attributed to the long holiday we had in January; February and March saw slow growth as well.
Finally, the manufacturing sectors, which employ the majority of the able-bodied population, suffer the greatest losses.
Again, our economy has all the symptoms of the Dutch disease. Statistics clearly prove this, and it's strange that the government keeps silent about it. However, explaining how things stand would mean admitting the collapse of the poor economic strategy of the last few years. Behind this strategy is a simple calculation: Take it easy, the vast amount of petrodollars will take care of all economic miscalculations, just as it helped mollify the people indignant at the "monetization" of their in-kind benefits. If there is growth without active reform, and if this growth occurs simply on account of high oil prices, then let us do without reform and live off our expensive oil.
However, things are not going as the government hoped. And they simply can't work out this way. Russia's economy could have withstood the pressures of the enormous mass of petrodollars if the government had pursued a proactive policy of growth. Because a dynamic economy needs cash infusions; high demand for investments could have suppressed the Dutch disease. But in order for investment to be revived, first, taxes must be decreased more boldly, and second, entrepreneurs' confidence must be strengthened.
Don't Invest, or You'll Lose Everything
Alas, the Yukos affair conveys quite a different message to entrepreneurs: Don't invest, or you'll lose everything. More and more politicians are suggesting simply spending the Stabilization Fund. Economists have repeatedly explained why it is better to spend it solely on the payment of the foreign debt. The main issue here is not the danger of inflation, nor is it the need to have spare cash for a rainy day, even though this is also important. The main problem is again the Dutch disease. The Stabilization Fund curbs the foreign-currency "flooding" at least to a degree, by not letting into the country the dollars that are essentially unearned. If the locks are opened, however, some people may get higher pay, while others may become jobless as even more enterprises will close down after failing to beat competition on the part of cheap imports.
There is one more point the government prefers not to mention. Direct investments from the Stabilization Fund would be state - not private - investments, signifying de facto rejection of the reform course. We all know from the Soviet times how "effective" it is to spend state, i.e. no one's money. Maybe there is a reason why the long-forgotten talk about changing the courses of rivers has now been resumed. As in those days, these ill-considered projects take no account of payback, because there can't be any. Is state planning once again in the air?
Spending the Stabilization Fund on something other than foreign debt payment and (with great caution) on some infrastructure projects would be merely an attempt to cheat fate by evading a difficult choice. We must admit that there are no easy solutions. And we must understand what country Russia will become if the current tendencies persist.
Suppose we are satisfied with a three to four percent annual economic growth. This is less than seven or eight percent, but then there would be no risk or trouble. Three to four percent is the normal growth rate of the majority of industrialized nations. However, there is a hitch: Labor productivity and wages in our country is one-fifth to one-tenth of those prevailing in the advanced countries. Yet our consumer requirements are as high as theirs. Why not? We defeated Nazi Germany; we blazed the trail into space; we are a member of G-8, and as before, we can brandish our missiles if necessary; furthermore, we know that anyone with our technical education can easily find a job in the Silicon Valley.
If we manage to maintain a yearly growth rate of seven to eight percent (the feasibility of which has been proved over these past years), our development level would come close to that of the United States and Western Europe within the lifetime of one generation. With a growth rate of three to four percent, we will never close the gap. The trouble is not that we are currently a raw-material appendage. Rather, we are a "brain appendage," a source of educated and skilled personnel for other countries. For how long will we continue playing this role? It is hard to tell, considering our fantastic indifference to the fate of education and public health in Russia.
The Dutch disease is already here. To begin with, we have to admit this fact, as there is no getting away from it. Next, we have to realize what the Dutch disease means for Russia. It may not entail a speedy disaster. Unless crude oil becomes cheaper, we might continue to decay for an indefinite time. The present State Duma deputies and government ministers have a chance of retaining their jobs for a long time. If Russia wants to develop, however, it cannot do so by swallowing up the Stabilization Fund. It must seriously decide what it should do and what it should not do. It must be clear on its priorities: Should it, for example, continue to spend heavily on armaments? Or should it start thinking seriously about spending more on education? Or on increasing the average lifespan? In other words, we need a new, fundamentally different social contract, one that would recognize that each of us is an esteemed - rather than humiliated - citizen in our relationship with the state.