15 years of Russian economic reform bring forth mixed results

The Russian economic reforms kicked off 15 years ago. The reforms were intended to achieve the best results possible. What are the results?

On the face of it, Russia’s economic seems to be doing fine though a debate whether the 2006 GDP growth totaled 6.8% or 6.9% continues sporadically. The figures look, without doubt, impressive, compared with the “modest” 3%-4% of GDP growth posted for the U.S. economy.

However, it is too early to rejoice at the news. Modern Russia falls behind the world’s most developed countries by 3-4 times in terms of GDP per capita. Russian GDP has not yet caught up with the 1990 levels while GDP of the Western countries grew by a minimum of 20% over the same period. As a result, the “reforms” have only made the gap grow wider.

Statistics disguise failures

Economic success presented in the form of statistics is a tricky thing. This kind of economic success largely stems from the high world prices of oil, natural gas and other primary commodities. Industrial growth has little to do with such statistics.

Take a look at data released by Rosstat, Russia’s central state-run statistical agency. In 1990, industry accounted for 38% of GDP per sector, while services accounted for 34.5%. In 2004, industry accounted for 28% of GDP, while the share of services totaled 56%. The share of services is on the increase in many world economies. As regards the Russian economy, the trend could seem perfectly normal too if not for one significant difference. The increase in Russia’s services is largely based on a variety of agency transactions, real estate dealings and other trade activities. Meanwhile, construction and agriculture contracted by more than 3 times.

In 2005, production output exceeded the 1991 levels only in three sectors of the national economy, namely oil and gas production (by a mere 11%); paper and pulp industry, and publishing (by 6%). On the whole, the current figures for Russia’s manufacturing industry amount to only 45% of the 1991 levels.

In the meantime, the manufacture of tractors declined approximately by 14 times; the manufacture of machine tools declined by 11 times; the manufacture of spinning machines declined by 50 times; and the manufacture of looms contracted by 127 times. Only 2 machine-building transfer lines were manufactured, compared to 57 built in 1995, a disastrous year for the Russian economy. According to available data, almost nothing has changed for the better in 2006.

The Russian government keeps talking about its intentions to build innovation-oriented economy in the country. The plans are more than welcome. The question is: Have the government officials drawn up a proper plan for introducing innovations into the economy? Consider the following data: only 32 aircraft and 95 helicopters were built in Russia in 2004, compared to 500 and 300, respectively, built in 1984. Why do they need innovations for?

The area of application of innovations has been shrinking, that is the main danger. No other country but Russia features the development of innovational economy accompanied by the degradation of traditional sectors of machine building. This kind of degradation renders all the efforts aimed at building a “new economy” totally pointless.

After having built a rather primitive economic model, the government is also pursuing a questionable financial policy, to put it mildly. The Stabilization Fund and foreign reserves keep growing steadily. In the meantime, about 40% of the population lives below the poverty line, according to official statistics.

This country seems to be splitting in two. Some people enjoy being in the lap of luxury. About 15% of the population appropriates 57% of all incomes, while other people can hardly make both ends: 85% of the Russians accounts for 43% of cumulative incomes. This income gap may result in serious social turmoil. The situation poses a potential threat to the economy too since the lack of large-scale demand hinders industrial growth, which is restricted by imports anyway. Demand gives rise to supply in a normal market-based economy. In Russia, demand usually results in an unprecedented price increase.

By all appearances, even Russia’s most successful entrepreneurs feel pretty skeptical about the prospects for business and life in this country, while the state is either unable or unwilling to give them a hand. Capital flight continues uninterrupted until the present day. Meanwhile, the government requests that the West make investments in the Russian economy.

Fighting poverty the American way

Let us take a look at the way the issue is addressed in the U.S. In 2005, 20% of the wealthiest American families accounted for 50% of accumulative personal incomes, a record figure since 1967. The profits of corporations are on the increase while medium and low incomes of the population decline. A drop in income is not substantial though the situation is a matter of concern for American society. Economists, the media and the public alike consider it as a threat to U.S. national security.

The issue is being actively debated by U.S. Congress. No one in the U.S. objects to the growth of well-being of rich Americans. However, everybody is against the impoverishment of medium-income and low-income families. Please pay attention that a family whose monthly income totals $800 is considered poor in the U.S. In comparison with a $30 or even $100 monthly income of many Russian families, the sum looks pretty huge…

U.S. government has already drawn up plans to deal with the dangerous income gap. We can be rest assured that the measures will be effective.

A state where the majority of the population lives below the poverty line cannot be prosperous. Populist rhetoric aside, most Russian politicians choose not to touch on this sensitive issue.

There is one more reason behind the problem outlined in this article. Unlike the governments of the “golden billion,” the Russian government is shirking responsibility for the implementation of most important socioeconomic processes. The government seems to be unaware of the fact that potentially efficient Russian producers of manufactured goods should be given systematic and well thought-out support. There is no point in saving up for a rainy day because it is already here. The government should tackle Russia’s social and economic problems right now, without handing them down to future generations.

Arguments and Facts

Translated by Guerman Grachev

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Author`s name Dmitry Sudakov