Russia in 2012: The Challenge of Reforming the Economy without A - - PowerPoint PPT Presentation

Russia in 2012:

The Challenge of Reforming the Economy without A Political Reform

Konstantin Sonin New Economic School CEEI 2012

Road Map

 Short-term  How good are Russian institutions today?  Some politics  Moving forward

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Short-term Outlook

Short-term Looks OK

 Russian economy is recovering in 2010-12:  4% GDP growth in 2010 and 2011  Consensus forecast for 2012 and afterwards: 3-4%  Unless there is a major global financial crisis, Russia will be able to cope

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Russia

80 90 100 110 120 130 140 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 Real GDP levels, Q1 2008 = 100

EE+Caucasus Emerging Europe Turkey Kazakhstan Central Asia Baltics Russia

Russia vs. “Neighbors”

EBRD Transition Report 2011

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Russia vs. Emerging Economies

Growth of GDP in constant prices, % per year. Source: IMF (World Economic Outlook, April 2011).

• 10
• 5

5 10 15 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Brazil China India Korea Russia

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Unemployment

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Source: Goskomstat, CEFIR

I nflation

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Source: Goskomstat, CEFIR

Access to Credit

9

Average interest rates on bank loans for industrial firms Source: Gaidar Institute Firm Survey.

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Normal Access to Credit

10

Average interest rates on bank loans for industrial firms Source: Gaidar Institute Firm Survey.

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EBRD 2011 Transition Report

 Consequences for households: huge  Reduction in staple food consumption

 Russia – 35% of households  Transition countries – 39%  Central Asia – 27%  Western Europe – 11%

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5 10 15 20 25 30 35 40 45 50

Reduced staple food consumption Reduced consumption of luxury goods Reduced consumption of alcohol and smoking Postponed or skipped visits to doctor after becoming ill Delayed payments of utilities

Share of households reporting consumption response to crisis

Western Europe Transition region Russia

Consumption Change

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Data Source: EBRD Survey, Fall 2011

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Long-term and Politics

Next South Korea? [2-years-old slide]

Inc ncom

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per c capi pita, pur purcha hasing pow ng power pa parity.

Sour

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Out utlook

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October

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2009, I IMF. $- $5,000 $10,000 $15,000 $20,000 $25,000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 GDP p per er c cap apita, a, P PPP Russia Korea 11 years earlier

Guriev and Zhuravskaya, 2010

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Growth in Emerging Economies

 Emerging economies may grow faster than developed ones

 accumulation of capital on path to steady state (Solow)  ‘advantage of backwardness’: technology adoption on path to technology frontier (Gershenkron)

 Obstacles to fast growth

 weak institutions that increase cost of investment (North, Acemoglu-Robinson)

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Good I nstitutions

 politically independent courts  efficient law enforcement  non-corrupt regulators

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I nstitutions Worse in Russia

25 50 75 10 Voice and Accountability Political stability and absence of violence/terrorism Government Effectiveness Regulatory quality Rule of law Control of corruption

Korea, % rank in 1997 Russia, % rank in 2008

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Corruption

18 LBR BDI GNB SLE NER CAF ERI AFG TGO MWI ETH MOZ MDG GIN RWA MLI NPL UGA MMR COM BFA LSO HTI TZA GMB BGD ZMB GHA BEN CIV TCD KEN SEN STP TJK MRT KHM PNG LAO CMR NGA KGZ SDN DJI YEM PAK UZB NIC IND VNM SLB MDA CPV IRQ PHL MNG COG IDN GUY FJI VUT HND BOL MAR LKA SYR PRY GEO GTM MDV BTN TON JOR SWZ TKM ARM EGY CHN KIR AGO NAM DZA ALB UKR SLV BIH ECU BLZ TUN SUR COL THA PER DOM AZE JAM MKD DMA ZAF VCT BRA CRI LCA IRN PAN KAZ GRD MUS BLR BGR URY VEN LBN TUR KNA MYS LBY ARG CHL MEX GAB BWA RUS LVA POL GNQ HRV LTU BRB ATG HUN TTO EST SYC SVK PRT SAU MLT OMN CZE NZL KOR BHS ISR SVN CYP ESP ITA GRC TWN JPN FRA BHR DEU FIN GBR BEL AUS DNK SWE ARE CAN AUT KWT ISL NLD IRL CHE HKG USA BRN SGP NOR LUX QAT

Control of corruption Logarithm, GDP per capita, purchasing power parity

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2 4 6 8 10 12 14 16 18 20

Mongolia Albania Czech Republic Slovak Republic FYR Macedonia Slovenia Serbia Hungary Bulgaria Croatia Montenegro Turkey Estonia Poland Romania Georgia Kazakhstan Uzbekistan Kyrgyz Republic Moldova Latvia Lithuania Russia Bosnia and Herz. Ukraine Belarus Tajikistan Azerbaijan Armenia

% of respondents who successfully set up a business

Start-Up Opportunities

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I ndex of Economic Freedom 2011

Category Name Rank Mostly free Estonia, Lithuania, Czech Rep., Georgia 14 - 29 Moderately free Armenia, Slovakia, Hungary, Macedonia, Latvia, Bulgaria, Romania, Slovenia, Poland, Albania, Montenegro, Kazakhstan, Croatia, Kyrgyzstan 36 - 83 Mostly unfree Azerbaijan, Serbia, Bosnia & Herzegovina, Moldova, Tajikistan 92 - 128 Russia 143 Repressed Belarus, Uzbekistan, Ukraine, Turkmenistan 155 - 169

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Hermitage Foundation, 2011

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Doing Business

Doing business ranking 2011-2012

58 67 87 152 47 70 97 111 147 106 164166 30 60 90 120 150 180 Kazakhstan Kyrgyz Rep Mongolia Russia Tajikistan Uzbekistan

2011 2012

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Source: World Bank Doing Business Reports 2011 - 2012

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I nstitutions

Where Do I nstitutions Come From?  Economic institutions are designed and put in practice within a political process  Good institutions might be based, politically

 on mature democratic institutions  on something else [strong central leadership]

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Alternative Model

 Institutions that rely on strong, yet non-democratic political authority  “Institutionalized ruling party”

 Mexico, 1930-2000  communist regimes  China

 Personalistic non-democratic regimes

 Russia  Kazakhstan  Belorussia

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Russia, 2012

 Personalized weakly autocratic regime  Leader in power for a long-time, since 1999  ‘Real’ popularity of leaders is not known

 United Russia, December 2011: 25-35% in Moscow, 35-45% country-wise (49% official tally)  Putin, March 2012: 50+% ?

 No well-organized opposition

 large (by Russian standards) protests  no succession path

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I s Alternative Model Sustainable?

 “Institutionalized ruling party”

 Mexico, 1930-2000  communist regimes  China (“communist regime 2.0”)

 Personalistic non-democratic regimes

 Russia  Kazakhstan  Belorussia  Uzbekistan

 NB: Direction of evolution is not easily predicted

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Jury is out Not sustainable

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Increase in democracy support Economic growth

EBRD Democratic Attitude Survey

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Actual level of democracy (BTI score)

Less democratic countries now support democracy more

Increase in democracy support

Democratic Attitude Long-Term

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Previous crisis experience (post-1990 GDP drop)

Countries with harshest post-1990 crises increased their democracy support

Increase in democracy support

EBRD Democratic Attitude Survey

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New Drivers of Growth

Underemployed labour?

 no, labour market will be tight already in 2012  unemployment is 6.3% - above 5.4% in May 2008, but lower than 9.4% in Feb 2009 (and 14.6% in Feb 1999)

Spare capacity?

 no, all capacity utilized, need new investment

Oil price?

 unlikely: to move from 4% GDP growth to 6% growth, need

• il price to grow by $10-20/barrel every year

Need productivity growth (investment and innovation)

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Key reforms

 Privatization

 improve corporate governance in state companies  create critical mass of further pro-market reforms

 Deregulation and business climate

 Putin: move from 120th to 20th in Doing Business

 External anchor

 WTO and OECD accession

 Macroeconomics: inflation targeting and floating ruble

 foster financial development and inflow of long-term savings from households  increase growth of non-resource sectors and mobility of Russians.

 Pension reform

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Reality Check on Key Reforms

 Privatization

 a major nationalization (TNK-BP) under way right now

 Deregulation and business climate

 not much

 External anchor

 significant progress (WTO) and talks (OECD)

 Macroeconomics: inflation targeting and floating ruble

 not clear what is going on

 Pension reform

 stalled

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Conclusions

 In short run, Russian economy is growing  In longer run, Russia faces serious challenges

 sources of pre-crisis growth are exhausted  need new investment hence need better investment and business climate and better financial sector

 In order to avoid a slowdown, needs substantial reforms



• therwise will grow at 2-4% growth

 if reforms happen 5-6% growth is not impossible  politics makes reforms problematic in the short-run

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