Friday, February 10, 2017

Possibilities for Boosting Russian Economic Growth Rapidly Disappearing, Inozemtsev Says

Paul Goble

            Staunton, February 10 – Russians are so accustomed to blaming falling oil prices, sanctions and domestic repression for the declining rate of economic growth, Vladislav Inozemtsev says, that they do not see that the real causes are elsewhere, are doing little to address them and so face slow growth as far into the future as the eye can see.

            In a new article, the Moscow economist says that if the diagnosis most Russians give for their problems were correct, Russia’s situation “would not be as critical as it is today” and as it is becoming.  In fact, the country’s problems lie in an “extremely specific” pattern of sectoral development (

            In most rapidly developing countries, “at the foundation of ‘the economic miracle lies a rapid growth in the industrial segment,” with industrial production rising much faster than GDP. But “in Russia everything has taken place in just the opposite way.” GDP has outpaced industrial production, and no new industrial branches were set up when they might have been.

            This is the first reason why “economic growth in Russia was and remains unstable: we depend not on the size of production or this or that set of goods but on prices for raw materials.” But it is not the only cause, Inozemtsev continues.  The upsurge in growth in the first decade of this century was in fact “atypical” for Russia.

            That decade, he says, was “not only a time of ‘oil abundance’ but also a period of the stormy development of spheres which up to then had been missing” in the Russian economy, spheres characterize by the absence of earlier offerings and “the almost complete inattention to them from the state.”

            Between 1999 and 2007, Inozemtsev points out, Russian GDP rose by 77 percent, but the communications sector rose ten times, banking rose 6.7 times, retail trade increased 4.3 times, and the construction sector by 2.1 times.  By 2008, these occupied respectively the following shares of the country’s GDP: 18.7 percent, 16.3 percent, 5.2 percent and 5.1 percent – for a total of “almost 60 percent” of GDP.

            Of course, these rises were helped by the inflow of oil money, “but it is incorrect to suppose that all this money could have provoked economic growth in the absence of branches in which they were ‘used’ in a productive way thereby transforming them into corresponding services or goods.”

            One important point needs to be kept in mind, he says. Unlike most developed or rapidly developing countries, these sectors in Russia were “exclusively ‘consuming’ rather than producing.” That is, their earnings went to foreign producer “for the simple reason that almost everything which guaranteed this growth was made outside the country.”

            If Russian firms had begun to produce items for these sectors, that could have had a powerful impact; but they didn’t. “In Russia,” the push that their initial growth represented “has remained without serious consequences.” There was definitely a market for such goods; but Russian firms did not move in to produce them.
            It also must be remembered, Inozemtsev says, that in the first decade of this century, “the secret of Russian economic growth consisted not so much in prices for oil in that Russia and the world lived in the same social realities and Russia sought to catch up with its competitors who had gone ahead.”

            But for that to continue, three things “at a minimum” are needed, and “not one of them is present” in Russia today.

            First, “initial borrowings must provoke the development of domestic production.” Second, Russia must recognize that the world has “essentially changed” over the last two decades and the focus now is not on computers or mobile devices but on pharmaceuticals, biotechnology and the Internet.

And third, “a contemporary economy requires connectivity among its various segments, and this imperative will only intensify.” Instead of moving in that direction, Russia is closing itself off, restricting networks, and making such interconnections electronic and personnel ever more difficult, precisely the opposite of what the rest of the world is doing.

 Because Russia is not addressing the real causes of its lagging development, “one should not be surprised” that Moscow is now predicting that growth will not exceed one percent annually through 2030. But what one should be surprised by is that “even the economic development ministry doesn’t seem interested in trying to understand the causes.

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