This report from the UK think tank Chatham House looks at stability versus growth in the Russian economic system.
How is it possible for the directors of the Russian economy to pursue an orthodox stabilization policy with a great measure of success and yet to have achieved so little to stem the growth slowdown? This paper examines the reasons for the divergence in economic management.
Russia’s economic management is currently praised for its achievement of macroeconomic stability. Inflation has been brought down; the budget is in surplus; national debt is low; and the reserves are ample. At the same time, there is much criticism of the failure at present to secure more than very slow economic growth. The macro-stabilization of 2014–18 was of a conventional, ‘liberal’ kind. Public spending was cut, and a budget rule was introduced that (so far) has weakened the link between increases in oil prices and increases in budgetary expenditure. The austerity campaign was harsh. Pensioners, the military, regional budgets and business all lost out, but in reality put up little resistance. The austerity drive was facilitated by the autocratic nature of the regime. The growth slowdown dates from 2012, and cannot simply be blamed on falls in the oil price and sanctions. Rapid growth in 1999–2008 consisted in large part of recovery from the deep recession of the 1990s and the initial development of a services sector. These sources of growth are no longer available; investment is low; and the labour force is declining.
The Western world also has a slow growth problem, but at a higher level of per capita output. In Russia, private investment and competition are inhibited by an intrusive and corrupt state. If the rule of law were in place, the economy would perform better in the long run. That would require a profound reform of formal and informal institutions. The leadership wants faster growth, but has powerful incentives not to embark on systemic reform. Even the pragmatic ministers of the ‘economic bloc’ of government, who understand the problem, share this interest in maintaining the status quo. Growth is thus being sought through a highly ambitious programme, in 2018–24, of ‘national projects’, state-led and largely state-financed. This is already running into difficulties. The contrast between successful stabilization and a (so far) unsuccessful growth strategy illustrates the difference between policymaking within a given system and reform of that system. Systemic reform brings with it more potential unintended consequences than do changes in policy. In the case of Russia, movement towards a rule of law could destabilize the social and political system. It is therefore unlikely to be attempted.Read Full Report