Russia in Global Affairs

How stable is the world economic situation? Answering this question in the mid-1990s, most politicians and analysts were optimistic – both developed and developing countries were showing high growth rates and a large group of states had opted for a market economy rather than a planned one. Current processes in the world economy give many reasons to worry. In the late 20th century, and at the dawn of the new millennium, the growth rates of the three major groups of countries – developed, developing and transition – drew closer together and stabilized.

This means that the gap between them is being maintained rather than bridged and that their development levels cannot be evened out. On the contrary, these groupsof countries will continue following their diverging paths and will gradually drift apart.

Nervous Growth

What is happening in the developed world and is there any reason for the panicky forecasts the press is regularly making to scare the layman? Generally, it is safe to say that the group of developed countries is in “good shape.” By the end of 2002, it has become clear that the U.S. has overcome last year’s recession. The 1991-2000 upsurge in America was one of the biggest and longest in its history and was not interrupted by a customary recession in mid-decade. It was based on mammoth investments and the “peace dividend” (the result of the end of the Cold War) – a factor that, coupled with other developments, allowed the U.S. to achieve a balanced budget for three years running. The recent stock exchange crash “pierced” the speculative “balloon,” but the invested resources did not vanish and will surely produce a growing economic effect. Despite the economic problems of 2001, the U.S. has markedly raised its defense and security spending. (It should be noted that these expenses are not budget losses – they stimulate a growing demand.) Now that the crisis is mostly in the past, the U.S. will get new tangible opportunities for consolidating its role in the world.

Generally, the developed world is emerging from the past two years’ stagnation (only Japan is still facing chronic problems). Most likely, in 2002-2003 the U.S. will remain in the lead and the euro zone countries will advance more slowly. According to the IMF world economic outlook for 2002-2003, the real GDP indicator in the developed world will grow 2.7-2.8 percent. The current real prices for basic commodities imported by the developed countries from the developing world are lower than the prices in 1990. The developed countries’ budgets are balanced better than ever. Thus, the 29 countries that account, by IMF estimates, for nearly 56 percent of the world GDP may well expect a return to cyclic growth [1].

Of course, today’s growth rates are lower than expected, but there is no direct threat to development. As usual for a country emerging from a crisis, it is not absolutely clear which industry will be playing the role of a new locomotive of growth and what exactly will serve as the basis for a future upsurge. It is important, however, that the postindustrial society is no longer dependent on a limited number of industries.

Yet the developed world is getting nervous – something unheard of in the 1990s. Mainly external rather than internal factors lie behind this. In economics, we have the stability of oil imports, oil and gas prices, as well as corporate scandals and protracted stock exchange upheavals that, as a rule, precede a crisis, rather than occur at the stage of transition to growth. Investors’ instinctive desire to find shelter in safer regions – actually, to go home – is augmented by the feeling of conflict in the political sphere (the Middle East, Iraq, the Balkans, the threat of terrorism). Unsettled global problems, such as pollution, climate changes, poverty and a growing drug trafficking, also cause unease.

The developed world’s main internal problem is the weakening of the middle class. In Europe, this boosted the spread of right-wing, racist and anti-immigrant attitudes, something which was manifested most vividly during the recent parliamentary elections in France and the Netherlands. The sense of anxiety grew stronger due to the complex integration processes compelling the Europeans to actively look for ways and means to adapt themselves to the new way of life. The totality of these factors compels the leading powers to increasingly concentrate on their own problems and show less interest in world development processes. Attempts to combine budget austerity measures (especially in the EU) with social security programs for their own poor and destitute, and Europe’s growing involvement in the U.S. and NATO operations to maintain stability (in the Balkans, Asia and elsewhere) do not help stimulate an inflow of resources to the developing world. In the wake of September 11, the “caution syndrome” in respect to other countries is increasingly manifesting itself, especially regarding long-term investments in war risk zones. Today, the West seems to be more concerned with safeguarding its own way of life and is developing all by itself, moving away from the rest of the world.

Oil is a Delicate Business

The oil-exporting countries, especially the OPEC member-states, that combine some features of the industrial countries with many of the developing nations, stand in a category by themselves. They are distinguished by a relatively high per capita income (in the Arab world) and, largely, by the existence of their own stable income sources. At the same time they are characterized by monoculture production and export, underdeveloped processing industry and services, mostly archaic political systems, big government outlays, export of capital (in some cases, its flight) and limited development opportunities. Income fluctuations there are so great that their growth patterns are rather peculiar and differ from both developed and developing countries [2]. As a rule, these countries do not borrow from international financial organizations, but they are burdened with private debts.

At the post-crisis phase, the developed countries need stable oil prices, and the lower they are, the better. In the 1990s, the OPEC countries’ revenue totaled nearly $120-160 billion a year. The 1998 plunge to $104 billion was followed by an upswing to $250 billion in 2000 and a gradual decrease to $175 billion in 2002 [3].

Price and revenue fluctuations lead to serious shifts in the trade and payment balances of both oil-exporting countries (including Russia) and oil importers. They affect cyclic processes in the developed countries and may also aggravate crises – for example, in Argentina and Brazil which are facing balance of payment and debt settlement problems. Each oil price upsurge affects the poorest countries as well. This again points to the drawbacks of the oil spot market from the viewpoint of development. It is also evident that stability at home (ensured by budgets, foreign trade balances, etc.) in some big groups of leading countries is based on a shaky balance between the interests of exporters, major importers (and their companies) and traders. An intricate swinging mechanism with an accidental function (oil price) is implanted, as it were, in the process of global growth.

High oil prices do not last long and oil’s role as a development factor is not a perpetual one (earlier this function was performed by rubber, copper, etc.). In 1991-2000, when the arithmetic mean price of a barrel of Brent crude was some $19, world economic growth reached nearly 3 percent of the real GDP. In that period, the annual rate of oil consumption grew by 1 percent on average, totaling 12 percent. Forecasting the future, one should assume that oil prices higher than $25 a barrel will stimulate energy saving processes. A decrease in world oil production and consumption can be expected due to natural price factors and special measures taken by the OECD countries to reduce their dependence on oil imports. Thus, the forecast of a 1.5-2 percent growth rate of world demand for oil looks to be too optimistic [4]. The oil-exporting countries will lose the chance to develop and modernize if their high earnings are consumed, exported or used for aims other than accumulation.

An Elusive Goal

Over the forty years since most of the former colonies had become independent, experiments with the development of the poorest countries have yielded meager results. Every decade the world community has to write off their debts and invent new forms of aid. In the 1990s, the sustainable development of the poor and poorest nations remained an unattainable goal [5].

The UN 2000 Millennium Declaration pledged “to cut the number of people living in absolute poverty by half” by the year 2015, but it did not specify the means and ways of achieving this goal. The efforts made by the UN and developing countries at various international conferences in 2002 to restore the level of aid have yielded doubtful results. The International Conference on Financing for Development, held under the UN auspices in Monterrey, Mexico, ended in the U.S. and EU promising to increase their official aid to the developing countries during the coming decade by a further $50 billion. This is an important result, though in reality it merely restores the past years’ level of aid. The UN goal to make the developed countries allocate 0.7 percent of their GDP for aid is still elusive.

The World Summit on Sustainable Development, held August-September 2002 in Johannesburg, can be considered successful, especially with regard to some ecology-connected projects. But organizationally and financially, its results have not changed the world situation and no new model of development is discernible yet [6]. The Johannesburg Declaration states, “The ever-increasing gap between the developed and developing worlds poses a major threat to global prosperity, security and stability” [7].

In the 1990s, there was a unique chance to use the resources saved by ending the confrontation between two ideological camps for development purposes, but that chance was lost. These funds helped the developed market democracies to advance further. But a number of countries (above all, in Africa and Asia) that were at the growth stage suffered immense losses in terms of accumulated human and administrative capital in local armed conflicts. The politically motivated liquidation of White farming in Zimbabwe is a glaring example of how a nation is destroying with its own hands the requisites for its own development. The “Black re-allotment” launched by Robert Mugabe has thrown the country and the region at large back for decades (Zimbabwe used to be the leading food supplier for the neighboring countries). Moreover, the limited resources of the international community are diverted from development needs to post-conflict rehabilitation (Bosnia and Rwanda). The “disaster areas” have a depressive impact on the neighbors – the fact that many conflicts remain unsettled hinders long-term business planning. Major infrastructure projects are unrealistic in a setting of terrorist threats, territorial disputes or uncertain property rights.

In the 1990s, Official Development Aid (ODA) from the developed countries was shrinking rapidly. There was a feeling of “fatigue” resulting from preceding attempts to booster development. All these attempts failed because of local corruption and the inability of a number of countries to duly use the aid they had received. (The most striking example is the massive payments to Palestine that had simply been turned to ashes by the renewed destructive conflict.) Between 1990 and 1998 (except for 1996 – see Diagram 2), Official Development Aid (practically, grants) amounted to $45-60 billion, whereas in 2000-2001 it plummeted below the 1985 level – to some $35 billion. (In relation to the donor countries’ GDP, ODA decreased from 0.35 percent to 0.22 percent.)

A search for models of involving foreign aid and capital in the economic development of countries with emerging markets continues. The main stress is on cutting debts, developing a market economy and urging more aid. But any aid will prove senseless without effective mechanisms for utilizing it.

Private Capital and Growth in the 1990s

In the mid-1990s, there was an impression that the increased inflow of private capital from the OEDC countries to the developing world would help them make a major breakthrough. In the period between 1991 and 1997, the developing countries had much higher growth rates as compared to the industrial nations. This served as the basis for an optimistic assessment of the positive impact of globalization, particularly more liberal financial activities and the information revolution, on the growth dynamics.

In reality, however, the general economic boom was based on the rapid growth of a few leading developing countries, the recipients of the bulk of direct investments used in the period up to 1997 to boost their development. Those were some Latin American countries (Argentina, Brazil, Mexico and Chile), Central and East-European countries (Poland, Hungary and the Czech Republic) and Asian countries (Korea, Malaysia, Thailand and Singapore), as well as China and Hong Kong [8].

Some components of this financial influx were unstable. For example, private loans varied from $90 billion to –$0.7 billion a year.

Source:World Bank, 2002.The gross annual inflow of private investments increased from $30-45 billion in the late 1980s to almost $290 billion in 1997-1998. True, the growth of private investments in the 1990s reflected three important additional factors as compared to the 1980s. Those factors were: the steep investment upsurge in China, privatization in Brazil and Argentina, and the emergence of a group of transition countries in Central and Eastern Europe and the CIS (27 countries) as an object of investment.

Diagrams 2 and 3 show that the inflow of net resources to developing countries sharply decreased together with ODA at the height of the Asian crisis in the late 1990s [9]. At the same time, savings are being taken out of developing countries on a large scale, and this is done mostly by the local political and business elite, rather than by international companies. The most mobile portfolio and banking capital makes it possible to greatly increase financing for a short time, but its outflow may become an instrument for escalating crises, which actually happened in the past decade. It became clear that it was too dangerous to rely on portfolio investments. This is why direct investments have eventually become the main instrument for promoting development in the developing countries. One should not forget, however, that private capital is extremely sensitive to real and potential risks and cannot compensate for the slack efforts of the developing countries’ own governments and business communities.

Studies show that guaranteed property rights, black market restrictions, wider political freedoms and anti-corruption measures facilitate economic growth. The world of poverty is still characterized by a limited inflow of resources from outside, the ineffective use of home resources and continued conflicts that dash the achievements of stabilization periods. According to UNCTAD data made public in October 2002, the volume of direct investments worldwide has decreased by 27 percent this year. Specifically, investments in Africa have dropped from $17 billion to $6 billion.

How Stable Are the Leaders?

The past decade experience has shown that it is not enough to ensure growth for a period of time – it is more important to sustain it over a longer perspective. The developed countries are distinguished by their ability to keep up a high development level despite wars and crises. A group of countries that are leaders in their regions – developing, transition and even developed states – should be analyzed in this connection. Just like locomotives of growth, they de facto establish stability standards and their banks play the role of dependable “near abroad” for their neighbors. If growth is impeded in the leading regional countries, this invariably results in a general slow-down, a loss of momentum in the reform process and social and political instability.

For example, the economic collapse and unsettled political problems in Indonesia had seriously affected the development of South-East Asia at large. The crisis had affected the “tigers” – Thailand, Malaysia, South Korea and Singapore – countries that demonstrated impressive growth rates in the past. Grave crises also hit Argentina, Brazil and Turkey – the lead states in growth rates in the 1990s. The drama of the 1990s was in that countries with a big growth potential and considerable administrative and human resources (the Balkan states, for example) had fallen victim to crises and conflicts.

The countries with a medium level of development (Russia’s neighbors in rating lists) are characterized by a per capita GDP indicator within a range of $4,000 to $12,000. A new threat to world economic progress is in the offing – the lost hope for catching up with the first-echelon countries. Analysis of 15 states that play a very important role in their regions (excluding North America, Western Europe and Japan) amply shows that if there is no growth even in the countries accounting for some 33 percent of the world GDP, there is hardly any sense in talking about large-scale global progress. In these countries, mean annual GDP growth rates fell from 6.3 percent in 1994-1997 to 4.6 percent in 1998-2001. But, in a way, these are cunning statistics: if Russia, India and China are counted out, in the remaining 12 leading states on various continents GDP growth rates dropped much lower – from 4.8 percent to 1.85 percent. Between 1998 and 2001, Russia alone stepped up its development (even in the default year). In China and some other countries growth has slowed. India and Egypt have preserved their growth rates. China, whose weight in the economy of the developing world is immense, is building up an illusion of remarkable progress achieved by combining the concentration of resources with a gradual liberalization of commercial activities.

Many key countries, primarily Argentina, Turkey and, possibly, Brazil, have gone or are going through an acute crisis. Israel and Mexico are in recession.

It is the countries with a medium level of development that had a chance to make large-scale foreign loans. Today they are going through all the hardships of indebtedness. As Joseph Stiglitz, a Nobel Prize winner, has aptly remarked recently, “we still do not know how to manage crises.” [10] Among other things, regional trade, labor migration and investor confidence also depend on the positive dynamics of these countries. Regional and civil conflicts intermitted with economic upheavals make up a motley picture, in part reminiscent of the situation that obtained a century ago.

Modernization by Strict Rules

Gradual stabilization in the transition countries (28 states in Europe and Asia without China and Vietnam, by IMF criteria), especially the four-year growth period in Russia, has relegated their problems to the background. The special analysis made by the International Monetary Fund in 2000 showed that in the 20th century there was no radical change in the alignment of states in the world arena [11]. Specifically, the socialist industrialization in the former USSR did not affect Russia’s position in relation to most of the developed countries in 2000 as compared with 1900. True, its lagging behind the leading industrial countries in terms of per capita GDP increased.

Central and East European countries are reintegrating into the West almost from the same conventional starting position they occupied in the first half of the 20th century (40-45 percent of per capita GDP compared to Western Europe) [12]. In the past century, the developed countries grew faster, increasingly breaking away not only from the poorest nations but also from the “second-echelon countries.” China and Taiwan became champions in moving up the conventional ladder. Japan and Korea also climbed up visibly. At the acceleration stage, all these countries were distinguished by the concentration of resources, a high (30 percent and higher) GDP accumulation rate, export orientation and “reforms from above.”

In Russia, modernization issues began to be increasingly discussed as the protracted transition crisis was overcome and the direct consequences of the 1998 financial collapse were surmounted. For the first time in history, this country has found itself bordering to the east and to the west on states having considerably higher growth rates and characterized by sustainable management and purposeful economic strategies (such as integration into the EU). The list of negative consequences of the 1998 crisis is topped by a huge foreign debt, a lack of trust in financial institutions on the part of the population and businessmen, a low accumulation rate (18 percent against the world average of 23 percent) and a low capitalization of even leading Russian companies. But the main thing is a low rate of development of the middle class, a limited access to resources and a rent-oriented behavior of participants in the accumulation process. In this context, a discussion has started on the problems involved with catching-up development, advantages and disadvantages of an industrial policy and the like.

The 1990s defined the character of the economic and political systems that have emerged in the transition countries. The latter can be divided into several groups passing through different stages of development. Slovenia, Poland, the Czech Republic and Hungary are European leaders in shaping market institutions and in economic growth rates. The Baltic states are closer to them. But a big group of countries are finding themselves in an increasingly precarious situation resulting from external and civilian conflicts, hapless economic policies and other factors. Many post-socialist states have found themselves in the group of least developed countries by one of the UN criteria (a per capita GDP indicator less than $800, etc.). These are: Albania, Bosnia, Moldova, Azerbaijan, Armenia, Georgia, Tajikistan and Kyrgyzstan. Even Ukraine is closer to that group.

Russia, Kazakhstan and some other countries stay apart because their economies started growing despite the immense problems, the uneven development in the past and the inadequate institutional base. Today, Russia and the more advanced group of countries are facing similar problems: there is some growth, there is a market now recognized by the EU and there is social and political stability. What remains to be done now is to develop an effective market economy and modernize it by hoisting it up to the level of West European countries (from a $5,000-10,000 per capita GDP indicator to $15,000-20,000 in the foreseeable future). The admission of Central and East European countries to the European Union will give them new markets, strict financial rules (with respect to budget deficits and the like) and grants for regional development.

The physical aid of international financial organizations, such as the IMF, is gradually becoming an insurance policy rather than a supporting pillar for Russia. The emphasis on the role of private capital in IMF programs and on (somewhat belated) institutional development amply shows that the developed world considers the transition to a market economy in Eastern Europe actually completed. This means that the transition countries will increasingly be treated as normal states with a medium level of development (or developing nations). The poorer states are also gradually dissolving in normal international categories. The special “transition” status is increasingly losing the content common for these countries. As for competition on commodity markets, even in the 1990s the new transition economies did not enjoy any privileges as a “prize” for giving up their planned economies.

There is nothing wrong in a “catching-up” economy or in exploiting a country’s natural or acquired advantages to speed up its development. Moreover, each country defines its model of development all by itself on the basis of available resources and the interests of major stock holders and the political and financial elite. If a country moves toward integration on the basis of foreign capital (the Hungarian variant), this is also an eventual choice. If a model of development based on integrated business groups happens to win in Russia, this will be its own choice. To be sure, this option does not guarantee a rapid and large-scale modernization either because any investment in that case should primarily be in corporate interests. It should be noted that new international accounting standards and WTO competition rules, such as possible establishment of ecological and labor standards, may lead to the actual division of labor in the world. Indeed, environment pollution and labor super-exploitation are the “Marxist” past of the industrial countries. They are not ashamed of that past, yet they do not recommend it to others, primarily for ethical reasons. By this token, however, the world’s stiffer competition rules lead to a new situation where, as distinct from the era of “wild” capitalism, economic growth and activity will be regulated by a complex (and expensive) system of rules. Understandably, this will greatly stiffen the demands on business activities as compared to the current regulations.

Modernization by new rules is quite possible in the transition countries, but this will not be easy to do. Hoping for foreign aid or capital investments as the main factor of growth is futile. Modernization has always been a result of strenuous home efforts, the use of inner resources and favorable external factors.

World economic development in the 21st century is hampered by general political instability, by local and civil conflicts that dash past development results. Many key countries in different regions are in the grip of crises. Accordingly, this hinders the evening-out of economies. Some countries’ ability to develop faster than others (demonstrated quite recently by Taiwan and South Korea, for example) is much more limited today. The current development paradigm does not resolve major problems of world development, but it has no alternative today. Various groups of countries with different levels and models of development are facing their own problems. They are addressing them by employing their own methods and they are largely going their own way. It seems the world convergence resulting from globalization processes was overestimated during the economic boom in the 1990s and the information revolution. Balanced and sustainable development is slipping away so far. No catastrophe threatens the world, but there is no real hope that serious problems will be resolved shortly. This will only happen when humankind realizes global interdependence and mutual responsibility. The world’s common rules of the game have been established for the nearest future and modernization opportunities will be translated into reality by the country that will find definite ways of using its own national resources.