Long Live Reform
- By Peter Westin
- Jan. 17 2002 00:00
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This could not be farther from the truth. The nature of structural and institutional reforms -- which involve a high degree of learning -- is that they cannot be achieved overnight and proof of implementation is not necessarily visible in the short run.
Nevertheless, last year's record speaks for itself. The government took initial steps to reform the natural monopolies and made major improvements to political and economic institutions. Russia now has one of the most favorable tax regimes in the world with income tax at a flat 13 percent and profit tax at 24 percent. The recently adopted Land Code demonstrates the authorities' commitment to strengthening and securing private property rights, and should also go some way in assisting development of credit markets, as land can now be used as collateral.
Furthermore, efforts were made to stimulate entrepreneurship by reducing the number of licenses required and introducing a "one-stop shop" for the creation of new businesses.
In short, in the past two years the current administration has probably implemented more reforms than Boris Yeltsin managed in his nine years in power.
Last year, GDP grew by roughly 5.2 percent after staggering growth of 8.3 percent in 2000, and 5.4 percent in 1999. The economy also showed itself to be highly resilient to external shocks. 2001 was a year when emerging markets in general experienced difficulties, world oil prices fell, and the global economy slowed considerably. Most macroeconomic forecasts made for Russia at the beginning of 2001 had to be revised upward as the economy outperformed expectations.
The op-ed piece also makes reference to the fact that in 2000 Russia received an additional $25 billion and in 2001 an additional $32 billion purely as a result of favorable conditions on the world markets, and concludes that if the policies initiated by the government of Yevgeny Primakov had been continued, GDP would have grown by 15 percent in 2000 and 2001. It is true that the Primakov government behaved commendably in tightening
fiscal policy and continuing fiscal reform. However, little was done to improve institutions and implement structural reforms, and to achieve 15 percent GDP growth a shock therapy approach would have been needed that would have been politically impossible. During Primakov's term the economy was benefiting mainly from the positive effects of the 1998 ruble devaluation.
Favorable external economic conditions did boost capital inflow in 2000 and 2001. But should Russia apologize for this? If you find $100 lying on the street, should you just leave it there? If you pick it up you have a number of options for how to use it. In the past two years, the country has used the available resources more efficiently than in previous years. Companies in the natural resource sectors, as well as the machinery and equipment sector, made significant investments. And estimates suggest that capital flight in dollar terms has stabilized. Furthermore, Russia is servicing its debts in full.
So what can we expect for 2002? This year GDP is likely to grow by 3.5 percent. Although this is lower than last year's 5.2 percent this should not be considered a failure. More important than achieving high growth rates is to establish the basis for long-term sustainable growth.
Continued work on reforming natural monopolies and institutional improvements, as well as implementation of legislation passed last year, will decide the country's fate. Russia will definitely face a lower world oil price this year and thus will be a hostage, so to speak, of the economic policy it pursues. In fact, one could argue that high oil prices merely allow the government to delay on implementing unpopular reforms, and in this respect a high oil price may be worse than a low one.
The so-called oligarchs and their influence will also be a decisive factor this year. These powerful individuals' influence has diminished in comparison with the Yeltsin era. However, advancing structural reforms will involve treading on the toes of some of these business moguls and their clout should not be underestimated. Furthermore, as the oil price falls the politically powerful oil companies are likely to seek favors from the authorities.
The macroeconomic fundamentals should remain strong in 2002, and there are signs that the economy is gradually becoming more diversified. With further progress in improving corporate governance and combating corruption, investors are likely to return.
As the Russian stock market is still considered by most investors to be dominated by oil and the oil sector, positive reform dynamics will be a key factor. The current momentum in economic reform seems to be driven by a genuine understanding in government of what needs to be done.
How long will it last? That is up to the country's policy and decision makers. The window of opportunity is wide open.
Peter Westin is senior economist at Aton Capital and author of "The Wild East: Negotiating the Russian Financial Frontier." He contributed this comment to The Moscow Times.