Moscow Times
September 29, 2005
Russia Rapped for State Bungling
By Greg Walters
Staff Writer
Russia's "woefully inadequate" government institutions are holding back economic growth and urgent reforms are needed if Russia hopes to keep pace with other emerging markets, the World Economic Forum said in a report released Wednesday.
A day after President Vladimir Putin said Russia was "among the leaders" in global economic growth, the report said Russia's economy was not growing fast enough for average incomes to catch up with Central European levels.
Russia fell five places to 75th in the forum's annual Growth Competitiveness Index, a judgement based on a range of economic indicators and thousands of interviews with business leaders around the world.
Economic competitiveness is being dragged down by a "significant deterioration" in the effectiveness of public institutions, especially the judicial and legislative systems, the report said.
The Russian economy was judged less competitive than rising Asian economies China and India, as well as Latin American powers Brazil and Mexico.
Russia's ranking was helped by factors including economic growth and budgetary restraint, as well as reforms carried out earlier in Putin's presidency. The addition of several new countries, four of which placed higher than Russia, was also a key factor in Russia's drop in the overall ranking.
Institutional dysfunction is the single most important factor slowing Russia's economic growth, World Economic Forum chief economist Augusto Lopez-Claros said by telephone from London.
"If Russia doesn't get its act together in terms of improving the quality of it's institutions ... then the chances of catching up with transitional economies [in Central Europe] are going to evaporate," Lopez-Claros said.
"Far from catching up, Russia is lagging behind."
Several indicators that measure government effectiveness in Russia plunged in this year's report compared with 2004.
Russia fell 20 places -- from 88th to 108th -- in the "protection of property rights" category, making it among the worst out of 117 countries in the survey.
Russia also fell from 84th to 102th in "judicial independence," and from 85th to 106th in "favoritism in decisions of government officials."
The report singles out the smashing of oil company Yukos under billions of dollars of tax bills as one of the most important factors in the rapid deterioration of Russia's institutions.
Russia's oil-driven economic growth would be even higher with the proper institutional reforms, possibly reaching 8 or 9 percent annually, Lopez-Claros said.
"Growing at 6 percent because oil prices are at $65 a barrel is not highly meritorious," Lopez-Claros said.
In his television address on Tuesday, Putin said the country has been growing at an average of 7 percent per year, a rate Russia exceeded in both 2003 and 2004, according to International Monetary Fund figures.
Factoring in 2002's growth rate of 4.7 percent and this year's anticipated 6 percent growth rate gives a four-year average of 6.3 percent.
On the positive side, the report praised the establishment of the stabilization fund as a bulwark against a potential drop in the price of oil. "This important initiative [is] arguably the most important piece of economic legislation approved in the past two years," the report said.
Russia's economy remains far less competitive than that of the Czech Republic, which climbed two places to take 38th in this year's index. Hungary held steady at 39th most competitive, while Poland jumped nine places to 51st.
The report credited Central Europe's rising competitiveness to structural reforms undertaken in order to join the European Union.
China and India, who both have higher GDP growth rates than Russia, ranked 49th and 50th, respectively.
Russia economy was rated slightly less competitive than Indonesia's and one step ahead of Morocco's.
Finland led this year's ranking, as it has for four years out of the last five.
The United States, the world's largest economy, was rated second most competitive, held back in part by the inability of the U.S. government to keep big business "at arm's length."
The most competitive former Soviet republic was Kazakhstan, which joined the ranking for the first time this year at 61st place. The least competitive CIS country was Kyrgyzstan, which at 116th place beat out only Chad in the rankings.
The report said Russia must "urgently" improve the banking sector, especially supervision of banks, and reduce the dominance of state-owned banks over private competition.
The report also called the rise of big Russian conglomerates "a worrisome development, suggesting the emergence of a South Korean-style chaebol form of capitalism." The term chaebol refers to the enormous conglomerates that dominate the most important sectors of the South Korean economy.
The World Economic Forum is a Geneva-based nonprofit foundation that also sponsors a major annual conference of world leaders in Davos, Switzerland.