10.02.2007
Strengths and Weaknesses of the Russian Economy
№1 2007 January/March
Vladimir Mau

Vladimir Mau is Rector of the Russian Presidential Academy of National Economy and Public Administration.

The essence of Russia’s ongoing
social and economic transformation is to be found in the
modernization of the Russian economy and its changeover from an
industrial system to the postindustrial model. This presents a
well-known economic problem that Western countries resolved in the
1970s and 1980s. And like the West did previously, we are solving
this task through a transformation crisis.

The problem is that Russia entered
its postindustrial transformation much later than the West. Thus,
we must ensure an accelerated level of modernization in order to
reduce the gap between the levels of development in Russia and the
world’s most technologically advanced countries. In fact, we must
choose an effective model of a postindustrial market and produce a
set of state policy instruments that will ensure its proper
functioning.

Economic theory offers some
well-known recipes for accelerated modernization. Back in the
middle of the 19th century, John Stuart Mill spelt out the key
principles of resolving the tasks of modernization. With reference
to Russia, these principles involve promoting the protection of
ownership (against governmental arbitrariness, in part), human
development and borrowing of foreign finance.

Russian Finance Minister Sergei
Witte, who developed these ideas at the dawn of the 20th century,
focused intensively on stimulating the transformation of financial
savings into investment. To this end, he proposed to “lubricate”
business activity among the general population and to bring in
foreign investment. He insisted on lifting a prohibition for
establishing joint-stock companies with foreign stakes, as well as
on allowing foreigners to own land in Russia. Also, Witte urged the
regional and local authorities to stop putting up obstacles to
business operations.

It might seem that we can draw on
our own experience of modernization – which witnessed the most
rapid industrialization in the first half of the 20th century –
while we develop a market strategy; our politicians (especially
from the left) and even some economists who advocate the
mobilization economic model often support such a stance.

And yet the content analysis of
postindustrial economy makes one skeptical of ideas that originated
in the traditions of an agrarian-industrial society. Postindustrial
society witnesses the rapidly growing technologies and,
consequently, growing consumer demand and increasing opportunities
to meet it. This predetermines much uncertainty around the
tendencies of, and prospects for economic and technological
development, not to mention vague economic forecasts for the
future. Hence, it is impossible to stipulate clear priorities for
each industry. Moreover, any industrial branch or economic sector
may become priority in certain situations. In contrast to the era
of industrialization, concentrated financial resources may fail to
deliver the desired effect. That is why a policy of stimulating
adaptive opportunities of economic agents and their ability to
grasp rapidly changing demand, as well as the ability to react
promptly to those changes, falls into the limelight as opposed to
resource concentration. As a result, priority is shifting to the
sectors related to human development. It is the achievements in
human development that create the necessary conditions for the
postindustrial market.

Discussions of a model for such a
transformation began at the 9th Economic Forum in St. Petersburg in
June 2005, where an approach based on the methodological principles
of historicism was recommended. It specified an attitude of
dirigisme and liberalism from the perspective of special features
or stage of development of the labor forces. However, this type of
formulating is too abstract and generalized. What is really needed
is a detailed set of principles and actions that will enable the
country to resolve the tasks it now faces.

STRATEGY AND
RISKS 
OF POSTINDUSTRIAL
DEVELOPMENT

Elaborating a strategy for
Russia’s postindustrial market involves a clear identification of
the strengths and weaknesses of today’s economic and political
processes in the nation, together with an analysis of all internal
and external factors that determine this country’s
development.

1. Political and
macroeconomic stability
has become a major prerequisite
for the rejuvenation of economic growth and plays a decisive role
for continued rapid growth. It is foolish to believe that stability
once acquired in the past will continue long into the future.
Russia’s economic situation remains rather vulnerable to shocks and
the authorities must continually work to ensure that the situation
does not get out of hand.

The runaway prices of crude oil do
not guarantee macroeconomic stability. On the one hand, the
possibility of a drop in oil prices and the resultant
destabilization of the budget, not to mention the entire economy,
is always a threat. The longer oil prices remain high, the more
painful a later adaptation to change will be. On the other hand, a
favorable market situation may lead to destabilization if it lasts
too long because it may provoke populist decisions that will
trigger budgetary spending beyond the accumulation of revenues. In
other cases, destabilization may arise from a debt crisis on
foreign commercial liabilities, a crisis on the market of consumer
loans, or instability in ownership relations.

A toughening of the government’s
administrative levers expands the opportunities for stimulating
investment activity, but it is important to ensure that newly
created institutions do not exceed the government’s administrative
resources.

To prevent a crisis, Russia needs
conservative budget policies that depend only on resources earned
through an increase of labor productivity, a policy of low and flat
taxes, and careful monetary policies that curb the increase of the
ruble’s exchange rate.

2. Human capital.
The postindustrial era places emphasis on the development of man
and his creative capabilities as a crucial factor in rapid social
and economic growth. This includes, most importantly, the provision
of respectable healthcare and education, together with the reform
of the national pension system, science and other social spheres.
Human capital can play a role similar to that of the railroads
during industrialization, that is, it will serve as an engine that
powers demand for the development of other industries. Russia has
an inherent advantage in this sphere – its human capital is much
more advanced than in other countries that have a similar level of
GDP per capita. However, the situation remains highly
unstable.

The widespread conviction that
Russia enjoys a sizable edge over other countries in terms of human
resources is only partly true (as shown in Table 1, which reflects
Russia’s rankings along separate indexes of economic and social
progress). The situation still looks quite acceptable in the field
of education, but the status of our healthcare is disastrous. In
the meantime, the human potential index is strongly intertwined
with per capita GDP. This means that Russia’s edge is not
particularly impressive and may decrease significantly unless
dramatic measures are urgently taken.

This brings up two possible
versions of Russia’s future development:

  • the economy will be upgraded to
    match the level of human potential, i.e. the human potential will
    be used to speed up a structural and economic
    transformation;
  • Russia’s human resources will
    degrade to a level witnessed in medium-developed
    countries.

 

 

It would be a mistake to claim that the current crisis
in the social sphere was borne out of the crisis of the Soviet
system. This is only partially true, since today’s developments
reflect a crisis of the industrial system as a whole. The current
model of a social state – i.e., a state that spends significant
resources on the well-being and development of its human potential
– no longer works. This model emerged in a radically different
demographic and social situation marked by a growing population
that was predominantly rural and without a system of social
security. All the available models of the social state took root in
the industrial past, at the end of the 19th century. The
demographic scenario was also dramatically different, as there were
more young people than elderly, thus healthcare and other public
services were financed by way of deductions from the former’s
earnings. But today, as the demand for retirement benefits for a
rapidly aging population increases incessantly, a new and vastly
different model of the social state should be
devised.

 

A search for
the best possible model of human capital development can be based
on existing experience to only a small degree since the models that
match today’s challenges simply do not exist. The country that
proves able to build such a modern and efficacious system will
receive huge advantages in the postindustrial world.

 

It is also
important to understand that the modernization of institutions
(rules of the game) has a much greater role than their mere
financing. Pouring more money into the social sectors in the
absence of their comprehensive institutional reforms does not
produce lasting value. On the contrary, it can facilitate the
conservation of outdated methods that have more than once shown
their inefficiency.

 

It is
important to concentrate our intellectual and political efforts on
precisely these issues and to make this vector of development an
unconditional priority for the government, both from the point of
view of political attention, as well as through the concentration
of budgetary resources. Such a crucial step forward can be found in
the national projects formulated by President Vladimir Putin’s
administration.

 

3.
Taxation policy
. Over the past few years, Russia has made
decisive steps to organize its tax system. Taxes were reduced
considerably and their collection improved markedly as a result.
Actually, the rate of non-payment of taxes fell practically to
zero. Introduction of flat taxes (primarily the income tax)
signaled an important step toward forming a modern tax
system.

 

Three
fundamentally important facts should be taken into account before
further developments are made in this sector.

 

First, Russia’s taxation traditions reveal
big differences from the European tradition. In the West, a tax is
something that people are ready (or are expected) to pay to the
state for the services it provides to society. Correspondingly,
this duty may increase or decrease depending on what volume of
services the citizens expect from their government, as well as the
quality of the services provided.

 

Russia has a
totally different tradition in the field of taxes, which dates back
to some degree to the times of Tatar-Mongol rule. Russians
interpret taxes as a fee to the “Tatar khan” (or government) for
his abstaining from intrusions into people’s business during the
year. Any talk of services is irrelevant in this case. People want
only one service from the government, and this is to leave them
alone; they can only bargain about the price of abstaining. That is
why debates on the size of taxes make little sense. Naturally, the
smaller the tax the better, since only one service is at stake and
it does not depend on the price. In other words, a tax increase
cannot be the subject of a social contract.

 

Second, reducing taxes makes very little
sense now, as most of the problems pertain to the quality of tax
administration. If the tax agencies can simply re-compute taxes
from several previous years, and produce amounts that exceed a
company’s revenue, then any discussion about tax rates loses its
sense.

 

Third, the aforementioned problem
demonstrates the significance of a correlation between the tax
system and the government’s ability to make proper use of it. For
instance, the introduction of a flat tax scale derived more from
the Russian authorities’ inability to collect taxes along the
progressive scale rather than from liberal ideological
aspirations.

 

4.
High economic growth rates
play an important role in
reducing the gap that now separates Russia from the most developed
countries. The Russian economy is still registering high, although
somewhat slowing, rates. This slowdown is natural for a transition
from recuperative growth to investment growth. However, arguments
to the effect that economic growth is the most decisive indicator
of the effectiveness of the government’s actions contain inherent
risks. In the first place, they pertain to purely quantitative
parameters and extol growth to the detriment of quality and other
structural shifts.

 

The dangers
that come with an obsession with growth rates are as follows.
First, it tends to neglect the quality of growth and structural
shifts. The package of scenarios for Russia’s social and economic
development that came under discussion over the past twelve months
contains a proposal for doubling GDP through a steep increase of
mineral resource output, partly with the aid of government
investment. This scheme looks dangerous. Along with solving the
political task, it increases the country’s dependence –
economically and politically – on international market fluctuations
and thus prompts Russia to practically replicate the experience of
the Soviet Union.

 

Second, there
is a danger of political falsification. As soon as quantitative
parameters are thrust into the foreground, the entire state
administration begins a rush for “fulfilling and over-fulfilling
the objectives.” This is a well-known phenomenon in China, where
the aggregate GDP of the provinces exceeds the data of national
statistics by a factor of 1.5.

 

Recently,
special techniques for stimulating economic growth have appeared in
Russia’s economic policy – something that has not been seen in the
fifteen years following the collapse of Communism. These new
instruments provide the government with an opportunity for greater
engagement in economic projects, such as work in special economic
zones, investment funds, and concessions. Yet these “strong
medicines” may turn out to be risky. Although they may become an
important factor for speeding up social and economic growth, if
handled carelessly they may fuel a degradation of the political and
legal environment of economic activity.

 

5.
Judiciary, law-enforcement and administrative
institutions.
Political institutions play a key role in
ensuring steady social and economic development. It is even
possible to speak about the declining productivity of economic
legislation when its enforcement is inefficient. In other words, we
have run out of resources for raising economic efficiency and
consolidating economic growth solely within the format of the
economic system and economic legislation proper. As a result,
Russia has approached the phase where political institutions will
predetermine further economic development to a large
degree.

 

In order to
stimulate an economic breakthrough, we must get quality labor and
land legislation, laws on banks and bankruptcies, as well as tax
and budget laws. All these norms and rules must receive
implementation. But this requires efficient governmental machinery,
fair judiciary, and a decent law enforcement system – in a word,
the basic institutions of state power. Not a single law will
produce the desired effects if the state fails to assure its
enforcement, or if the courts fail to defend a citizen whose rights
have been trampled on.

 

There can be
no standard solutions in this sphere. The only conclusion is that
the development of an adequate institutional environment (i.e. a
system of incentives and sanctions) is of greater importance than
increased financing of relevant sectors. The methods of stimulating
economic activity include easing of administrative procedures and
improvements in the conditions for business operations. Russia made
a few steps forward in this area in the beginning of this decade
but eventually the trend came to a halt. And if we take a look at
the World Bank’s research, we will see that Russia has favorable
conditions for opening a business. However, in the terms of
contract implementation it is very vulnerable (See Table
2).

 

 

Source: Business in 2005: Elimination of Obstacles to
Development. Moscow, 2005

 

6.
Affluence of oil & gas resources and its impact on the
economy.
  Today, it is
frequently heard that Russia’s abounding natural resources
constitute one of its basic advantages and the only problem is we
cannot learn how to use them properly. In the meantime, the natural
rent is plagued with grave risks that can be described in the
following ways:

 

– ‘Dutch
disease,’ a growth of the ruble’s exchange rate and declining
competitiveness of national manufacturers, in which import
substitution becomes practically impossible and a country becomes
dependent on the fluctuation of prices for its export
items;

– imports
of commodities prove to be more lucrative than imports of capital
(technologies), while a strengthening ruble demands an ever greater
inflow of foreign currency for solving investment
tasks;


structural shifts tend to be destimulated, i.e. the economic
structure begins to degrade, risking to follow the plight that
befell the Soviet Union, in which the economic system, based on
high oil prices, collapsed after the oil market’s
downturn;

– the
inflow of finance generated by natural resources has a negative
impact on the country’s political system, as the government is
subjected to temptations of populism. It may allow itself to stage
experiments with economic policy and to take unusual and
irresponsible decisions that are compensated for with profuse
infusions of money. The risk of corruption, which becomes
practically inescapable when the government engages in the handout
of the natural rent, becomes more pronounced as
well;

– the
demand for quality education drops, as the mineral resource sectors
typically set forth lower qualification requirements for the
workforce. Their domination in the economy cuts down the demand for
education services, and this may produce a dangerous and enduring
consequence.

History
offers extensive evidence of the latter thesis, beginning with
16th-century Spain. Not a single country (with the exception of a
few absolute monarchies) has been able to make breakthroughs solely
by exploiting oil, gas or precious metals. However, a few
recommendations are called for to confront those risks and
neutralize the vulnerability of energy resource
prices:

– The
Stabilization Fund must be kept intact and not squandered for
populist projects. In theory, this fund may have four functions: it
can be used as a fund for future generations; as budget security in
case of unfavorable market situations; as a tool for controlling
the money supply; and for preventing the economy’s adjustment to
high crude prices (to prevent a repetition of the Soviet Union’s
fate). The latter two functions are especially topical for today’s
Russia.

– A
strategic plan of action in case oil prices collapse. This document
is yet to be drafted, but it need not be made public. The strategic
plan should contain a set of coordinated measures in the field of
monetary, budgetary, customs, liabilities, and structural policy,
and also specify many other issues pertaining to development of the
national economy and its separate sectors should a long-term
decline of oil prices begin.

 

SCENARIOS FOR LONG-TERM
DEVELOPMENT

 

Given the
current condition of state institutions, in addition to the
controversial social, economic and political tendencies witnessed
in Russian society, there are three qualitative models for the
nation’s development:

 

– the
Australian model: presupposes the diversification of an economy
that is initially hinged on the production of raw materials and a
simultaneous maintenance of political institutions of Western
society;

– the
Mexican model: the oil industry dominates the economy, although the
latter is diversified by and large;

– the
Nigerian/Venezuelan model: wherein the economy is pegged to oil,
diversification is insignificant, and political institutions are
feeble.

 

The
labeling of economic models is rather conventional and there is no
doubt Russia will have its own original model someday, regardless
of whether the model is successful or not. Russia will not turn
into Australia, or even Mexico or Nigeria for that matter, yet the
unique experiences of those nations enable us to single out some
circumstances of development and the consequences that should be
reckoned with in the process of elaborating economic
policy.

 

1.
The Australian model.
The experience gained by Australia,
a country rich in natural resources, which was forced to cope with
economic restructuring and the adaptation to large inflows of
migrants, can be very useful for Russia. The export of raw
materials to Japan and Southeast Asian countries provided the
Australians with substantial resources, which they used to
diversify the domestic manufacturing sector and build a modern
postindustrial economy.

If applied
to Russia’s long-term prospects, this pattern of development
implies moves in the following directions:


attainment of high or medium growth rates (the GDP and, especially,
the GDP per capita) that would make it possible to push development
up to the level of the most advanced
countries;

– an
increase of foreign investment that is diversified for various
branches of the industry. The bulk of this investment is no longer
concentrated in the fuel and energy sector. The latter retains a
big share in exports, but its share in domestic production is
gradually decreasing. This is how the model of industrial
diversification through revenues gained from resource exports is
translated into practice.

 

Depending
on market prices for energy resources, the balance of payments on
current operations is either close to zero or moves into the red
due to the intense activity of foreign investors. The ruble
continues to strengthen, which is made up for by growing labor
productivity thanks to foreign and internal investors. The
government abides by a conservative investment policy, which
includes restrictions on overburdening the budget. The share of the
budget in the GDP remains at a much lower level than in most
developed countries and inflation does not exceed 3 percent
annually.

 

Reform
focuses extensively on political institutions and on upgrading the
efficiency of the social sphere (in education and public health),
as these very sectors offer answers for progressing along the road
to development. The development of political and social
institutions is oriented at the standards of modern democracy, and
conditions for business resemble those of developed countries, and
occasionally are even more lucrative in some areas (for instance,
in terms of its less stringent labor laws). The judiciary system is
free of political pressure and the authorities energetically fight
corruption. This pattern of development lays the groundwork for
gradually creating a common economic space between Russia and the
EU, lifting tariff and non-tariff trade barriers and creating a
common market.

 

This is
the most dynamic model, and to make it feasible the government
needs to conduct an active policy in building state institutions,
restructuring the entire subsidized sector of the economy and
raising the efficiency of budgetary spending.

 

2.
The Mexican model
presupposes high growth rates due to the
development of the fuel and energy sector and related industries.
If the price of crude remains at a consistently high level, growth
rates and investment activity may be substantially higher than
under the Australian model. The inflow of foreign direct investment
is also high, but these funds largely become concentrated in the
fuel and energy sector, and a handful of other sectors.

 

This model
envisions a moderate diversification of the economy since the
investors pay major attention to energy resource production.
Hydrocarbons dominate in the structure of exports and account for a
big percentage of the GDP. Diversification, although positive, is
rather slow due to the threat of Dutch disease. Raw materials make
up the bulk of exports, but the share of other industries –
metallurgy, chemistry, and other ecologically unsafe branches, as
well as agriculture – may see growth.

 

Trade
balance shows a steady surplus, and the situation is the same with
the balance of payments, although its surplus decreases
continuously. This does not pose serious problems, however, unless
the energy sector’s role experiences a dramatic tailspin in the
global economy.

 

There is a
high probability of an increase of the government’s role in the
economy, primarily in two directions. First, the state may build up
investment activity by investing in general-purpose infrastructure,
as well as in the transportation of energy resources. Also, it may
invest directly in those branches of the economy that private
businesses find unattractive. In this case, the mechanism of
private-state partnership takes on a key role as a mechanism of
combining investment activity on both sides. Second, the government
may work to protect domestic producers from foreign competitors.
Reducing competitiveness for some domestic producers serves to
enhance the positions of proponents of protectionism, and the
government will have to resort to it sooner or later. Some sectors
of the national economy (most importantly, agriculture and
foodstuff producers, as well as some types of machine-building
sectors) will be closed off from foreign competitors and this will
produce a further reduction in their competitiveness.

 

In this
model, the economic activity of the state collides with objective
political and administrative barriers, as the country’s ability or
inability to considerably improve the quality of state
institutions, including the administrative and judiciary agencies,
will become a key problem of increasing economic
efficiency.

 

As for the
political regime, it will most likely develop in the
“one-and-a-half party” format in this situation, meaning that
democracy as such will remain, but one of the political groups (or
parties) will considerably increase its influence and constantly
win elections. As it is clearly seen from the experience of Mexico,
as well as Italy and Japan after World War II, such models can
ensure rather successful economic development even in spite of some
side effects (like high corruption levels). On the other hand, the
energy resource sector’s domination will have an adverse effect on
the stability of the “one-and-a-half party” system, bolstering the
illusion of reliability and steadiness and thus undermining the
responsibility for and quality of decisions taken.

 

The
absence of significant social reforms constitutes a typical feature
of this model; the availability of finance perpetuates the status
quo in these sectors and does not give rise to loud social
protests. Various segments of society will remain in a neo-Soviet
condition and will not support the emergence of a social/economic
market.

 

To sum up
the characteristics of the Mexican model, let us underline two
possibilities for Russia’s development. First, the model is
vulnerable to internal and external shocks. It can function
smoothly if the situation on the global markets is favorable for
Russia, but a long, drawn-out fall in oil prices may trigger a
heavy or even systemic crisis. Its severity will depend chiefly on
the price of products within the energy resource industry. The
longer the oil boom continues, the greater the structural
dependence of the economy (internal production, first and foremost)
on infusions of “easy money” and, consequently, on the supply of
cheap imports. The risk of replicating the plight of the Soviet
Union becomes a real threat at this point. Secondly, the
implementation of this model will block any opportunity to make a
breakthrough into the postindustrial system and to catch up with
the most advanced countries in terms of development. This is the
side effect of dropping a resolute modernization in the social
sphere.

 

Events can take yet another turn. If oil
prices remain high for a long period of time, the very economic
process will impel a strengthening of political institutions, an
ongoing democratization, and the bridling of corruption.

 

In summarizing the Mexican model, it
guarantees a relatively stable economic development at moderate or
high rates without structural changes in the economical, political
or social spheres, thus setting up conditions for immediate
economic and political stability, given the absence of external
shocks. But the vulnerability to shocks and the barriers it
contains for a postindustrial breakthrough remain very serious
problems for this model of development.

 

3. The Nigerian model
identifies the development of a country that has abounding natural
resources and uses them amid advantageous foreign trade. It implies
conservation in the economic and social sphere against the
background of dominating patterns of lackluster development. Growth
rates under this model depend fully on what is happening on the
international market of energy resources, which are the only tools
of making hard currency revenues necessary for the solution of all
other economic, social and political tasks. Thus, growth rates will
decrease over the medium term even though the prices of exported
commodities may stay at high levels. This is due to the quality of
economic policies and, correspondingly, the overall level of
economic efficiency, which will worsen as long as the economy –
pegged to oil resources – gains strength while crude oil brings in
ever-larger hard currency revenues.

 

This scenario raises the probability of
two tendencies in policy-making in general, and in economic
policies in particular. In the first place, it signifies the
strengthening of authoritarian trends. Large fuel and energy
resources easily lend themselves to concentration in a trust, thus
laying the groundwork for an authoritarian regime. The availability
of vast financial reserves unrelated to a growth of labor
productivity opens up the way to a system of government that does
not bother to learn about the opinions of the taxpayers. The second
tendency is related to the growth of populism in economic policies.
Inexpensive financial resources are instrumental in buying
political support through budget infusions and staging newfangled
experiments in the economy.

 

Conditions of this kind make government
investment a crucial factor for supporting high or medium rates of
economic growth. Foreign investors treat such countries rather
skeptically and invest money almost exclusively in the fuel and
energy sector or in related industries. This produces an unenviable
situation that includes a sharply deteriorating balance of payments
on current operations, a gradual ebbing of fiscal and monetary
policies, and a transition to a policy of budget deficits. As a
source of government investment, the budget deficit acquires the
role of an accelerator for economic growth, but this only worsens
the economic situation in the country.

 

The result is classical forms of
macroeconomic populism, evidenced perfectly well in Latin American
countries; economic policies showed ominous signs even at the
industrial stage of development of the labor forces. Virtually all
the countries that acted on such prescriptions failed to bridge the
gap that separated them from the highly advanced states, while
others (like Argentina) widened the gap sharply. In those cases, a
brief period of economic growth gave way to dire economic and
political crises. Any withdrawal from such a populist model has
always proven to be painful and has typically involved some sort of
a military coup.

 

This means that the Nigerian scenario
presumes a steady reproduction of political instability.
Development along this path naturally leads to a deepening of the
crisis of political and legal institutions with attendant high
corruption levels and degradation of the social sphere. The latter
gets the leftovers of government finance, while any allocations it
may receive have a strong populist taint.

 

LIMITS TO GROWTH

 

Let us stress once again that whatever
model of social, economic or political development is chosen for
Russia will depend on its ability to build up-to-date social,
economic, and political institutions. However, the progress of
these sectors is heavily dependent on the rates of economic growth
over the medium term (about two decades). Recall that the level of
a country’s economic development (measured in GDP per capita)
correlates with the status of society’s social, political and
economic institutions.

 

Projections have been made for Russia’s
development on the basis of three types of averaged annual growth
rates:

 

Option A: Annual growth rates at
3-percent minimum rate, which generally corresponds to the average
global rate;

 

Option B: Annual growth rates at
5-percent growth, which fails to solve the task of doubling the GDP
but exceeds the averaged growth rate of the most developed
countries and hence helps to balance economic development (the task
of catch-up development). This growth rate seems to be the most
suitable from the perspective of in-depth structural reforms in the
economy and the social sphere;

 

Option C: Annual growth rates of 9
percent at the maximum, which is somewhat more than what is
required for doubling the GDP over a decade.

Calculating the different models is
based on an assumption that countries having similar levels of
economic development (estimated against the GDP per capita) also
require comparison in other realms of activity, including economic,
social and political life. More importantly, the most economically
developed countries have the most developed systems of political
institutions. In other words, this projection is based on a theory
that the achievement of certain levels of economic development will
keep pace with changes in other parameters of economic, political
and social life.

 

 

Whatever model is used as the basis for
calculations operates the rate of growth of the GDP in both the
absolute and per capita expression. To make international
comparisons simpler, the GDP at purchasing power parity was
selected as the main parameter. This method enables a researcher to
analyze the target conditions and disregards fluctuations within a
specific period of time. One important feature are the instruments
that take account of general global trends that are linked to
global economic growth regardless of the situation in each
particular country. In other words, the attainment of a certain
level of GDP per capita does not require a straightforward use of
current data on a similar country but envisions corrections
reflecting the shifts that result from global economic development.
Chart 1 shows the dynamics of development over 20 years under each
scenario. Also, it relies on a supposition that growth rates,
compared to the level of development of certain countries and
falling into a specified range in 2003, were steady.

 

The results of this calculation point to
three conclusions that are important for understanding the
tendencies of and prospects for Russia’s
development.

First, even a 9-percent
growth rate over a period of twenty years will not allow Russia to
exceed the level of economic development that any of the advanced
countries in the world had in 2003.

 

Second, the Nigerian
model is not anywhere in sight even considering the prospect for
very low GDP rates. To slide into a degradation of that scale, a
country must struggle through chaos and this is scarcely possible
for a country at Russia’s level of social and economic
development.

Third, even low growth rates shown in
Option A will eventually place Russia at the level of EU
member-states, albeit the ones at the bottom of the EU list. Under
Option B, the country will achieve the levels of Norway and
Ireland, the two countries having the biggest GDP per capita in
today’s Europe.

 

A more scrupulous quantitative analysis
of long-term economic growth factors produces a result unexpected
at first glance. It shows that the quality of institutions does not
improve automatically over time. This is to say, there is no
statistically meaningful correlation between the quality of
institutions and the time factor. But steady economic growth always
improves the quality of institutions (like the institution of
ownership). Global tendencies show that revenues do not grow
anywhere without improving the institutional environment. Expansion
of modern democratic institutions always correlates with growing
revenues, which proves once again the thesis running through this
article. It stipulates that improvement of the institutional
environment is a fundamental prerequisite for resolving the tasks
of accelerated modernization Russia is faced with today.