The economic choices facing Russia

President Putin’s target of doubling Russia’s national income by 2010 requires that the economy grow by 7-8 per cent a year. Since the collapse of 1998, Russia’s economy has been growing at an average of 5-6 per cent a year. So it needs to grow faster, though not much faster, to meet Putin’s target. But Putin has not told us how this is to be done, wisely, since no President can make faster growth happen.

In fact, few countries now have growth ‘targets’. This is because most economists no longer believe that growth can be directly brought about by government. Rather it is a by-product of good institutions and policies. Government’s job is to create the conditions in which growth happens spontaneously. The most important are: sound macroeconomic policies, assured property rights, the rule of law, a good education system, moderate taxes, and openness to foreign competition. The fact that China and India grow faster than Russia is because they have more growth-friendly institutions and policies, not because they have higher growth targets.

It is true that, in the short-run, a country’s growth can fall below its growth potential because there is not enough aggregate demand in the economy. Is this true of Russia today? The belief that Russia suffers from inadequate demand is the basis for the expansionary budgetary policies proposed by Eugenie Primakov and Georgiy Boos. Boos, for example, believes that Russia should now be running a budget deficit. Macro-economic policy, they say, should reflect the state of the economy, and not be governed by inflexible rules.

These Russian ‘Keynesians’ have a point. Today all the ‘best’ countries are running budget deficits to boost faltering growth rates. . In the 1980s the Reagan deficits led America out of recession: today’s Bush deficits are doing the same. Why should Russia not follow in their footsteps? With inflation falling, foreign exchange reserves rising, but with official unemployment still at 9 per cent should not the government be boosting spending rather than cutting it?

From the macro-economic point of view, the answer is certainly not. Far from ‘under-heating’, the Russian economy may well be ‘overheating’. This is not because there is too much aggregate demand, but because there is too much demand in one place. Wealth and incomes are heavily concentrated in the energy sector and its derivatives. This sector is the main engine of growth and, because it controls the banking system, it is also the main engine of credit creation, A fall in the price of oil will cut economic growth, but not the growth of money, leading us back to the ‘inflationary recessions’ of the mid 1990s. This situation has come about because, despite a decade of reforms, Russia has not come close to achieving a broadly-based growth of incomes.

The liberal answer (endorsed by the IMF) is that the sustainable growth rate can be raised only by pressing on with banking reform, reducing corruption and government interference with business, reforming the natural monopolies, securing Russian membership of the WTO, and so forth. These steps are necessary. My doubt about the liberal programme arises from the liberals’ extreme suspicion of government. Having seen the disastrous effects of the state trying to do everything, they now want it to have as little to do with the economy as possible. But state spending on education, health-care, pensions, infrastructure, even on defence has an important role to play in achieving balanced, and hence sustainable, economic growth. This truth should not be denied simply because in the past the state did huge harm, and in the present may be too corrupt and incompetent to do much good. An economy as lopsided as Russia’s is destined to swing between boom and bust, and never achieve its growth potential.