Interfax IA, August 23, 2005, No. 2:52 p.m.
Andrei Klepach: By Making a Fetish out of Growth Rates We Underestimate Actual Economic Problems
Mr. Andrei Klepach, Director, Department for Macro-Economic Forecasts, Russian Ministry for Economic Development and Trade, told in his interview to Interfax’s special correspondent. Alexei Uvarov, why Russia’s economy cannot grow in the next few years at such rates as required doubling GDP over 10 years, what challenges the Russian economy would be confronted with, and what suggestions are made to reverse the tentative slowdown trend.
Andrei Nikolaevich, what’s your idea of Russia’s economic development in the next three years?
We believe Russia’s GDP will increase by 5.9% in 2005, and this is a moderately conservative estimation, but, taking into account positive results achieved in June/July, it may grow by 6 or more percent. Nonetheless, our conservatism is justified, the risks of expanded capital flight, continued recession in oil production and domestic car making being high. GDP growth for 2006 is predicted at 5.8%, for 2007, at 5.9%, and for 2008, at 6.0%. These forecasted parameters (for 2006/2008. – IF) may be called very optimistic. What does this optimism rest on? In particular, we rely on optimistic hypotheses concerning investment climate improvement and capital flight reduction. The plan is that net capital flight will not worsen, and, moreover, as early as in 2007, net capital inflow may appear, due both to a sharp spurt in foreign investments and loans and to hindering Russian capitals’ flight. Secondly, we suppose there will be no competitiveness failures in key industries, e.g. car-making. As is known, automobile production dropped noticeably in 1H05; however, we expect a minor increment in annual results, which would be largely accounted for by assembling of foreign-brand cars, though. Business is looking better in other branches of engineering, and we hope for more substantial production increase there. So close attention to engineering is explained by the fact that, even though its share in the industry is equal to approx. one fifth, this particular sector, together with communications, information technologies and trade, should pull off general economic growth rates, making up for the slowdown in oil production and metallurgy. Production is on the decline in the light industry but we expect it to stop falling. The food industry is expanding though rather slowly, which is explained, among other things, by weakness of the agricultural sector. That’s why the hottest line to growth acceleration is via recovery of the domestic engineering industry, so much more that investment growth rates are expected to be rather high. But there are also some problems related not only to severe competition on the part of imported equipment. For instance, the prospects for energy equipment production greatly depend on how successful the industry will be reorganized, with RAO UES of Russia to be abolished in 2007, and on whether or not we manage to prevent investments into the power industry from falling during the transition period. Natural monopolies are a factor of major importance for economic growth, but so far they have hindered rather than promoted development, judging by their draft investment programs. That is not the case that natural monopolists’ rates are not high enough. The reason is weakness of the strategic component of their programs, the lack of a long-term horizon, which concerns, first of all, Gazprom. There is a growth potential in engineering but it is unstable so far. The growth forecast for the entire industry is 4.6%, 4.7% and 5.1% for 2006, 2007, and 2008, respectively. These forecasts are also moderately optimistic. If we proceed from a pessimistic scenario, we will hardly reach 4%-4.5%.
What does it take to reverse the slowdown trend?
Public investments as part of federal target programs and the investment fund are the most essential growth lever available to us now, which is a decisive one in reversing the trend from restraining to promotion of growth. In fact, a boost in public investments is one of the key factors that may replace the slowdown trend with the acceleration trend. Of course, if public investments squeeze up private ones, it is needless to speak about growth acceleration with them. On the contrary, in Russia public investments create conditions for increase in private ones. They work not only by developing the transport infrastructure but also, which is most important, by supporting establishment of the innovation system, by reviving the domestic aircraft and aerospace industry, by assisting Russian companies and centers in joining global alliances and international cooperation. If we try to shut down the public investment policy and all of the joint state-to-business projects, we will not achieve a GDT growth rate that is higher than 5.2%-5.6% a year, even in an optimistic scenario of enhancing domestic businesses’ competitiveness, according to estimates of the Ministry for Economic Development and Trade. So far, a draft long-term financial plan incorporates a trend towards reduction in public investments, from 2.3% to 1.7% of GDP, after 2006. However, these parameters are subject to adjustment before approval by the Government of the Long-Term Financial Plan in December. According to our estimates, to achieve targeted GDP growth, i.e. at least 5.9%-6.0% a year, investment costs, including resources of the investment fund, should not go below 2.3% of GDP.
Or course, the contribution of these investment costs into GDP growth depends not only on their scope but also in efficiency of programs and structure of investment costs. This year, much has been done to re-format federal target programs and to improve their efficiency. Currently, more than a half of investment costs are accounted for by federal target programs that address top-priority social objectives or national security issues. However, the contribution of these costs in economic growth is minor. At the same time, programs aimed at developing the transport infrastructure and high-tech/knowledge-intensive activities, which make rather a significant contribution to GDP growth, account for less than a half of investment costs so far. In the near future, we need to push up the share of this core of federal target programs that shape a new ‘non-petroleum’ engine of the economy. These should be handled differently from the way they used to be dealt with, including undertaking of obligations to fund then for at least 3 years as part of the Long-Term Financial Plan.
What kinds of programs are they?
These programs include a civil aircraft equipment program, the Russian aerospace program, a transport system upgrading program, including a new sub-program for export of transport services. In addition, there is a group of high-tech defense-related programs, in particular, the national technological basis program and chemical weapons destruction program. In 2007, the Ministry of Science and Education is going to submit a new program on top-priority dimensions of scientific and technical research.
Do you have any idea of the developments after 2008?
I can say that 2008/2010 will be breakthrough years. Firstly, it will become clear by that time how well we will be able to adapt to the oil industry’s ceasing to propel economic growth, and secondly, a number of new challenges will arise in 2008/2010. In particular, steps should be taken to implement the pension reform because the Pension Fund deficiency will aggravate, and balancing it within the federal budget, while maintaining significant budget surplus, will be impossible, in my opinion. We will have either to consent to a zero federal budget surplus or to take some other pension reform related steps. Secondly, with Russia’s accession to the WTO, we should adopt new institutional rules of the game, learn to grow in a much more open economy and severe competition. Thirdly, new relations will be built within the Single Economic Space and the CIS: greater integration is likely with some countries, with simultaneous distancing from others and dealing with them as if there were non-CIS foreign nations. The imbalance in our economic competition with China will become more obvious in 3-4 years, with rapid elimination of differences in living standards and our worsening lagging behind China in car making and electronics. Fourthly, at this point we may lose our current positions on the global armaments market, unless we take urgent steps to develop our defense industry in the near future.
So the situation may be much tougher in terms of competition than we can imagine now. It does not mean that we are in for significant perturbations in 2009/2010, though I cannot rule it out that growth rates may crumble due both to the above structural factors and to a certain market slump that is quite probable to occur by 2010. A ten-year cycle in global markets DOES exist, is accompanied by recurrent commodities price falls and may have adverse implications for Russia’s economy, unless its reliance on the raw materials industry is overcome. Let me reiterate that we are entering a transition period when we will have to shape new growth sources, while fitting in new institutional rules of the game and a new global alignment. This is not a short-term process. I think it will last till 2010 or so and may result in growth rates being even lower than our optimistic forecasts in this period. Our major task is to have another economy shaped by 2010, which would enable us to achieve steadily high growth rate of 6%-7% a year.
According to your Ministry’s forecasts for 2006/2008, is it realistic to speak of GDP doubling in 10 years?
The Russian economy is not in a position to double GDP by 2010. Average growth rate was equal to 6% a year 2001/2005. 1999 and 2000 are recovery years when the economy was making up for the collapse. We can speak about a modern economic growth, which actually reflects new price proportions, a new structure of growth sources, starting from 2001. Therefore, to double GDP over 10 years, from 2001 to 2010, our growth rate in the remaining years should be equal to 8.4% a year. The problem is that we cannot play figures. Neither liberal policy proposed by Illarionov (Presidential Economic Advisor. – IF) nor intervention policy, even though we are not really talking any intervention policy, can lead to soaring growth. To this end, we should create quite a different economic structure, another business level in terms of its competitiveness and another level of economic institutes. Doing all of this during a couple or even three years is impossible, though the Governmental policy ultimately targets to address these particular problems.
By making a fetish out of growth rates, we underestimate actual quality problems Russia’s economy is starting to experience. Our economy is now at the turning point when a drastic slowdown, rather than a boost in growth rates up to 8% or 12% is probable. Russia’s GDP increase by 5.2% in 1H05 is a result of not just statistics and temporary braking but a trend. If we fail to overcome this trend, by “we” I mean not only authorities but also business itself, we will be unable to grow by more than 5.0%-5.5% a year in the next few years. Of course, a steady growth of 5.0%-5.5% is also a very good result against the background of Europe’s decelerating economy but we really need higher rates to address our internal problems and not to lose the competition with China and India.
The reasons for this slowdown have been discussed many times already. We have exhausted our current growth engine of a booming oil sector, which has pushed off our economy and secured high growth rate in recent years. No matter how high oil prices are, $25/bbl, $30/bbl or $50/bbl, the oil sector cannot grow as rapidly as it used to do before – it is obvious to everybody – even if we ease up the tax burden.
We have not completely shaped other sectors capable of supporting economic growth of 8%-10% a year. The only sector that enjoyed steady growth in recent years, by 20% and even more percent, is communications and IT. The share of this sector in GDP is some 3%, and 5%-6% together with high-tech engineering. The oil and gas sector that cannot grow as fast as it used to do accounts for some 26%.
The question is: what will underlie high growth rate? What sector, rather than policy, will drive it? What do we have a growth center? Production of electronics that fuels growth in Taiwan, Korea, and now China, which produce store elements, processors, and mobile phones worth of dozens of billions of dollars a year, does not exceed $80 million in this country. Difference in shares is by 50-70 times, and this is a competitive market where not much depends on the state.
Even though forecasts are relative, we need a long-term, 10-15 year forecast of economic, scientific and technological development both for the entire Russia and for macro-groups of its regions, including the picture of development and origination of new promising markets and lines of business.
If we are willing to drastically address the challenge of growth rate acceleration, even though we understand this cannot be done in a couple of years, we should prioritize restructuring of the scientific and technological sector of the economy, education, launching of investment projects, which would allow the shaping of considerable economic growth centers. Clearly, all of these problems cannot be addressed using the treasury, i.e. the budget, only. We need many-times higher level of foreign capital inflow, a new financial structure of economy, new institutional regulation tools and, first and foremost, quite a new level of the teamwork between authorities, community and businesses. But the teamwork cannot emerge in a vacuum – it should be built around projects supported and implemented by both the state and businesses. When low public investments and expenditures stop to restrain economic growth, some other, more fundamental barriers will become more obvious – efficiency of our work, management quality in private companies and state-owned entities, and our ability to creatively realize the freedom we have.
