Standards are more important than size

What effect does government have on the growth of the economy? The orthodox view in Russia seems to be: overwhelmingly bad. Andre Illarionov, chief economic adviser to the president, says that to meet Putin’s target of doubling Russian GDP by 2010, government spending should be halved from 36 to 18% of GDP. It is difficult to say how much of this view is derived from economic theory and evidence and how much from the fact that the Russian government is corrupt and incompetent.

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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.

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Russia’s oil stabilization fund is good news

The global oil situation is particularly interesting at the moment. At $30 a barrel of crude, the oil price stays high even though world demand is low. The previously fashionable view that the American seizure of Iraqi oil resources would break OPEC and send the price of oil plummeting has turned out to be nonsense. Even with improved security, it will take 5 years’ investment to get Iraq oil fully on stream. And the American economy is now recovering strongly. So the price of oil should stay high, or even go up, in the foreseeable future.

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Security before Prosperity

Amidst all the Iraq-dominated news and comment, one question little asked is: what effect will the warlike turn in international relations have on globalisation? Till quite recently, it was widely assumed that increasing economic integration was inevitable. Technology and economics, it was said, were welding the world into a single unit. The challenge was to develop institutions to manage the problems of interdependence: financial crises, growing inequality between rich and poor, environmental damage, disruptive trade flows, the traffic in narcotics, and so on. In those rosy days, national security seemed less important. America had ‘won’ the Cold War, removing the danger of major interstate conflict. The main question for Russia was how to fit into a Western-led global economy and security system, with as little damage to its pride as possible.

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A Blind Faith in Capitalism is Being Rocked

Today, capitalism is under attack for the first time since the fall of communism. Three reasons are mainly, and coincidentally, responsible. First, bear markets rule in the three main stock exchanges of the world. Whenever a lot of people lose a lot of money, they blame business. Second, a wave of scandals has hit the United States, affecting some of its best-known companies – Enron, Tyco, WorldCom. Scandals and bear markets are connected: Dubious accounting practices that are submerged in a tide of prosperity are ruthlessly exposed when the tide recedes.

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