Reading

3. l. Read the text and answer the questions.

1. What have the principal changes been in Russia since the start of transition?
2. Do you think that Russia’s economic rebound is mainly due to favourable external conditions? Prove your point of view.
3. What can you say about the situation in manufacturing?
4. What does the author mean by ‘new’ and ‘old’ economy?

Russia in the World Economy: What Role and What Strategies?

Riccardo Barbieri

This article summarizes a presentation given at the Morgan Stanley Dean Witter amp; Co Conference “Russia: 2000 and Beyond,” held in Moscow.

Economic growth taking central stage. Russia’s GDP is down to about 60 % of its level at the start of transition. On a per capita basis, it is equivalent to 10 % of the average EU level, or 30 % adjusting for PPP (World Bank data for 1998). Whilst it may be argued that today’s output is of higher quality than at the start of transition, the dramatic fall in the standard of living of Russian households suggests that reducing this gap should be the overriding goal of economic policy. In fact, President Putin recently argued that Russia should aim for real GDP growth of 5-10 % over the coming years. Judged against the dismal performance since the beginning of transition, this looks like a very tall order.

Faster capital accumulation is needed. Some Russian economists have been arguing that industrial production could rise by 25 % simply by using spare capacity. However, part of the Soviet-time capital equipment has become obsolescent and appears to be of little or no economic value at present without significant revamping. Mr. Putin’s ambitious growth targets would thus seem to require a much higher rate of capital accumulation than anything seen in recent decades.

Ongoing recovery due largely to turnaround in external conditions. Russia’s economic recovery since early 1999 has exceeded by far even the most optimistic expectations. The steep devaluation of the rouble and prudent monetary and fiscal policies have played a crucial role. But, the recovery also owes a lot to the turnaround in global conditions: the global economy has recovered more strongly than expected by most forecasters following the Russian crisis in August 1998, and oil prices have more than doubled since the beginning of 1999.

Greater internationalization is called for. Most economists believe that Russia’s recovery would be vulnerable to a drop in energy prices and that it won’t evolve into a proper expansion unless profound economic reforms are implemented. While I agree on the importance of these reforms, I also believe that Russia cannot achieve its growth targets without increasing its integration into the world economy. A further opening up to trade and investment relations with non- CIS countries should be a key policy goal, especially considering Russia’s need for capital and know-how, as well as the trend toward globalization in the world economy. But, what is Russia’s current position in the international division of labour? How can it be leveraged given the country’s comparative advantages? How should economic policy be oriented in order to achieve these goals?

A declining position in manufacturing. At the end of the 1980s, the USSR was the largest world producer of energy and intermediate manufactures, notably steel. Its foreign trade was mostly concentrated in the Soviet block, although the USSR was expanding its oil and gas exports outside of that area. Today, Russia’s share of world output is much lower, especially in manufacturing. In the steel industry, for instance, Russia is only the fourth-largest producing nation after China, Japan and the US.

Russia is largely an energy exporter. An analysis of Russia’s foreign trade reveals that, although oil output is down to approximately half of its soviet-time level, Russia is largely an exporter of energy and metals, while it is a heavy importer of foodstuff and machinery.

Presence in the “new-economy” is marginal .The panel on the “new economy” at our conference in Moscow provided a very encouraging picture of rapidly growing activity and investment in the Internet and e-Commerce. Internet penetration is rising, and there are interesting new ventures, particularly in the B2B sector.

“Old economy” industries in need of profound restructuring. While Russia’s relative specialization may well remain concentrated on energy and metals, there is a need and scope for a recovery in large-scale manufacturing. I found a recent study by the consulting firm McKinsey particularly enlightening in its microanalysis of selected sectors of the Russian economy. It shows that a significant share of capacity in the steel and oil industries can be revamped, but it also argued that many obsolete plants should be simply shut down.

But, cost competitiveness is a big plus for Russia. According to the McKinsey study, even after revamping, Russian steel plants would be less productive than US plants, let alone state-of-the-art Japanese plants. However, the potential gains from restructuring are substantial. Moreover, Russia can count on much lower input costs than its international competitors.

The labour cost advantage is huge. The rise in world energy prices and the rouble devaluation have made Russia hugely competitive in terms of energy and labour costs, respectively. Labour incomes will have to catch up in the coming years, but the high rate of hidden unemployment suggests that if the labour market becomes reasonably flexible, then Russia’s cost advantage could be maintained for a relatively long period of time. We estimate that, in euro terms, Russia’s hourly wages are generally less than 10 % of German wages. This is a level that, among the countries surveyed by the US Bureau of Labour Statistics, can only be found in the poorest developing countries.

Human capital should be put to use. Technology is usually applied in order to save labour. But, the production of technology is labour intensive. Low compensation for clerical and skilled labour can be a powerful competitive advantage in an era of increased communications. The same applies for scientists. One of the key findings from our Moscow conference was that a small elite of export-oriented software companies is indeed emerging in Russia. The challenge is now to make this a broader phenomenon. In my view, promoting entrepreneurship, the repatriation of scientists and intellectuals, fair competition and free trade in the technology sector should be among the overriding policy goals of the new Russian government.

Leveraging the energy sector. The industry is burdened by a lack of new field development, low productivity, organizational inefficiencies and administrative and tax constraints. A greater involvement of foreign companies through FDI and production sharing agreements looks like the most promising avenue for a resumption of growth in this key sector. Productivity gains would be substantial. If production resumed rising, it could find export opportunities even under the assumption of an unchanged market share in world exports. Indeed, net world oil imports are expected to rise bv 75% by 2010.

Foreign direct investment would be another important vehicle to achieve faster economic growth. Russia should aim to attract not only capital, but also advanced technology, organizational methods and know-how. On an engineering field trip organized by our colleague Gideon Franklin back in January, we found that most foreign manufacturing multinationals involved in Russia are moving very cautiously, transferring existing old capital equipment from other world locations and mostly investing under joint venture arrangements. In order to induce greater foreign involvement, a more stable macroeconomic environment could be created, as well as a more transparent and secure investment climate.

In sum, we see restructuring existing industries and developing the “new economy” as the priorities. Russian manufacturing plants are generally obsolete, products can be less than appealing and, in some cases, don’t have a market in the industrialized countries. However, there is scope for revamping some of the existing capacity, and energy and labour costs are extremely low. Russia could not only satisfy more of its consumption needs, but also become a medium-sized exporter in the global arena.

A viable open economy as the overriding goal of economic policy. The debate on Russia’s transition process and on its policy priorities has been going on for years now, but has failed to build a consensus on an overall policy approach. I believe that the international trade and supply-side approach that I have briefly sketched here has the advantage of pointing to priorities and concrete actions for the coming months and years. Once Russia gets on a sustainable growth path, critical issues such as income distribution, welfare, pensions, tax arrears, non payments and so on should become less acute and, to boot, more amenable to genuine reform.

100. 2. Decide whether these statements are True (T) or False (F).

1. Russia’s GDP is equivalent to the average EU level.
2. Spare capacity is a good help to rise industrial growth in Russia.
3. Russia’s economic recovery was beyond the expectations due to the monetary and fiscal policy.
4. The rise in the world energy prices and the rouble devaluation have made Russia less competitive in terms of energy and labour costs.
5. As the production of technology is labour intensive there are no export-oriented software companies in Russia because of the lack of scientists and intellectuals.
6. Only the foreign direct investments can solve many Russian economic problems.