4 April 2006. Minister of Economic Development and Trade of the Russian Federation, G.O. Gref spoke at the 7th International Scientific Conference "Modernization of Economy and the State", held by the State University - Higher School of Economics with participation of the World Bank and International Monetary Fund.
Theses of the speech at HSE conference
Dear colleagues, friends!
Organizers of the HSE conference always manage to precisely identify most burning and interesting topics for discussion. Although the conference is called scientific, consequences of such discussions rapidly pass on to the practical area. It makes today?s discussion most valuable, as it allows hearing qualitative judgment of the reputable experts and scientific elite of the country on such an important topic.
Evgeny Grigorievich Yasin in his speech «Economy modernization and the state» has performed serious analysis of the role of the state in the national economy. To what extent could state officials interfere in economic processes? Which instruments should the state use to correct market gaps? In which questions should the state take full responsibility? In general, I agree with the author of the speech, but let me present my own point of view.
I assume that today nobody doubts the fact that the state should in full provide for laws and contract terms fulfilment. State is also responsible for providing of targeted social protection. These two issues, I think, are the only ones in the list of economic areas where the state plays unquestionably dominant role. All other elements of state participation in national economy should be regarded with great caution. When making any decision, the main criterion should be assessment of how this decision will affect competitive potential of Russian business.
Legislative initiatives should also be adopted taking into account business competitive potential. That could be facilitated by openness of laws formation via regular contacts with citizens and business society representatives.
When talking about reforming of institutions where the state plays key role, I would not address once again the most important short- and medium-term Government priorities. They have been widely discussed from different platforms recently and in general certain consensus of opinions has been reached.
What I would like to address in greater detail is one of the most complicated reforms, the need for which is long-felt since long ago. I'm talking about social sphere - about education and health care sectors.
Within the framework of structural modernization of those spheres, it's high time to spread positive experience accumulated in certain regions to those where the situation is much worse. Such approach based on positive examples will allow forming positive attitude to social reforms. Realisation of this idea presupposes organizational, methodical and financial assistance to the regions-participants of the project.
The main task of modern primary and secondary professional education is to prepare competitive staff that meets labour market requirements. To achieve this goal it is necessary to improve educational standards, introduce roll numbers based financing, make the compensation dependant on end results, provide for formation of educational parks and develop optimal organizational legal forms for transition of educational institutions into such parks.
As far as general education is concerned, main efforts should be aimed at forming preparatory system for professional education that would adopt best foreign experience and reproduce innovative education technologies. Thus, it is crucial to create sufficient motivation for teachers' professional development, and to elaborate and secure in contracts with management staff reward scheme dependant on quality of pupils-training and to introduce roll numbers based financing of schools.
Developing of pre-school education would, first of all, guarantee equal start conditions for children from different families and thus would help to form larger and better human resources for national economy; second of all, it would allow parents, primarily, mothers to get back to work and as a result to improve living standards of families with children. With this view it is important to increase the number of children covered by the system as well as to provide for close cooperation with school education. So it is necessary to separate financing of children accommodation at pre-school institutions and financing of their education that would allow creating prerequisites for increasing of non-state sector presence in this sphere, targeted financing of children from lower-income families from municipal budgets.
With regard to health care sector, the necessity of increasing the quality and affordability of medical care via transition to providing most types of medical care through the system of compulsory medical insurance has been stated more than once. Those mechanisms have already been known for several years. Firm consensus of opinions has been formed and we should use it.
Among the most important issues I would name the following:
- developing and implementation of medical and clinico-economic standards of medical care for most common diseases;
- introducing of single-channel financing scheme;
- launching of additional medical insurance programmes that would combine state financing and co-payments of citizens;
- developing efficiency indicators of health care institutions.
It is necessary to create reward scheme for medical institutions and medical personnel; to develop patients filing system and information exchange scheme between participants of the CMI (compulsory medical insurance) system; to introduce calculation of reimbursement for hospital care based on number of treated patients while for ambulatory care on number of registered citizens; to make salaries of medical personnel dependant on end results of their activities.
In terms of legislative control of economic institutions the best barometer of the level of state interference in the economy is active involvement of private business representatives and citizens in the process. And the main criterion should be impossibility to balance economic agents? interests by means of market forces.
However, there are spheres where state could and should carry out active economic policy. If to step back from economics with its ideal markets of goods, labour and capital, it becomes clear that in everyday life "invisible market hand" doesn't always work. Or it takes it too long to start working properly.
In today's Russian economy there exist such "problem knots" where we can't rely only on market processes to untie them. However, we should always observe the clear borderline between "untying of the problem knots" and "state entrepreneurship".
I would mark three of such areas, on which the state, if we want to provide for stable economy development, should focus its efforts today, including via concentration of financial resources.
First. Industrial infrastructure development. This is a traditional area where the state plays key role. Payback period of infrastructure projects is usually very long and they do not carry direct economic profit for the initiator of the project. At the same time they give a powerful impulse for the regional economic development.
The fact that the state is the main customer of the infrastructure projects should by no means restrict private business. All over the world businessmen participate in such projects through mechanisms of public-private partnership (PPP). Now we have created the basis for developing such mechanisms. In particular, there has been organized Investment Fund and the process of application reviewing has already started.
The laws allowing concluding concession agreements have been adopted. By launching of this instrument we intend to increase competition level in infrastructure industries (for example, public utilities or transport service) that would encourage stabilisation and tariffs reduction.
Carrying out infrastructure projects with the help of PPP mechanisms allows combining state financial resources with business management technologies that would produce cumulative effect.
The second sphere where the state could influence current market processes is the development of innovative sphere and export support. Innovative sphere and focus on export (that means global competitive ability of Russian goods) are the basis for long-term stable economic development. The state could and should reduce risks for economic agents, working in these spheres.
In these spheres we also managed to introduce instruments that encourage business activities. First of all, I would like to mention creation of special economic zones, in particular, zones for technology implementation.
Number of submitted applications for the contest - 72 applications from 47 constituent members of the Russian Federation - proves that such instruments are in great demand at the moment! After selection it was decided to create four zones for technology implementation and two zones for industrial production.
Supporting mechanisms for small innovative business are also being actively developed. At the moment we are carrying out 40 projects of creating business incubators in 33 constituent members of the Russian Federation. 12 business incubators are to be opened in the first half of 2006. Completion of those projects would allow accommodating on favourable terms and providing required consulting support to hundreds of new innovation companies.
Work is also conducted on establishing 6 regional public-private venture funds (they start operating in the 3rd quarter of 2006). Their joint capitalization might well reach 2.5 bln rubles.
Moreover, at the moment we are working in conjunction with the Ministry of Education and Science on developing mechanism of stimulating venture funds activities via establishing so-called "Fund of funds". This mechanism is being created in order to attract experienced professional venture capitalists and at the same time to minimize opportunities for government officials to make decisions on particular investment objects.
The third area of direct state interference in the economy is specific for Russia. During years of state-planned economy, there has been build up rather strong technological and scientific stock in certain industrial spheres. But in modern market situation old, traditional for "soviet management" economic mechanisms do not work any more and "new businessmen" so far fail to undertake such major projects.
In this situation the state could act as a link between old, inefficient, isolated enterprises and new efficient owners. Today though the state is virtually a shareholder of many technologically tied but isolated assets, it can neither manage them efficiently nor find a buyer for them because of their low efficiency. Thus, we are not even -spending', but simply loosing extensive scientific and technological potential.
I would like to emphasise that my words do not imply any protectionistic measures. I?m just talking about imposing common order in managing and developing of the prospective scientific and technological basis.
Active state economic policy in above mentioned spheres, in the first place, guarantees rapid increase of Russian companies' competitive potential that creates basis for long-term stable growth.
Actually, competitive potential of Russian companies and their ability to rapidly satisfy changing customers' demands is closely connected with the problem of high inflation rate which is now being widely discussed. Taking into account, how acute this problem is I will dwell on it in greater detail.
Without disputing significant influence of the monetary factors on consumer prices growth rate, I would like to note that an important contribution to inflation in our country is made by locally monopolized or artificially closed by taxes markets. The major problem of today is price jumps on specific commodity groups ? as a rule it happens where local monopolies are very strong or price influence of natural monopolies subjects is significant.
Another fundamental reason that Russian companies fail to flexibly react to changing consumers? demands is the low quality of socio-economic institutions and underdevelopment of industrial infrastructure. That is why long term measures aimed at stimulating economic growth and reducing inflation are actually the same.
If with regard to increasing transparency of monopoly markets and improving business climate we could freely move ahead - it's still a long way to go, in terms of conducting tight monetary policy we should be very careful. Unfortunately, we already had negative experience of excessive earmarking. Let me remind the last example.
In summer 2004 due to excessive earmarking in the Stabilization Fund, decrease of money supply in nominal terms began (August to February - by 9%). As demand for cash money continued to grow (by 11% over this period) the entire burden fell on the banking system resulting in panic withdrawal of deposits from banks in July. In this situation the Central Bank of Russia had to cut the rate of statutory reserves two times from 7% to 3.5%. After that in the fourth quarter of the year there happened unequalled injection of liquidity in the economy (monetary base increased by 30.2%). It gave rise to inflation in the first half of 2005. The result proved to be the opposite.
This lesson urges us to consider tightening monetary policy with great care or, at least, not to regard it as the only tool against inflation.
As a conclusion of my speech I would like to repeat the key point, which should be taken by the government as a guidance when making decisions. Any step made by the government should be thoroughly analysed with regard to increasing competitive potential of the Russian business. This very principle should determine the role of the state in the economy. Competitive potential of Russian companies - means competitive potential of our country!
