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. Last Updated: 07/27/2016

Russia's Vital Statistics: Do They Add Up?

Few statistics have caused greater alarm in Russia than the report that industrial production has fallen 26 percent in the first five months of this year. It has prompted a flurry of finger-pointing at the highest levels of government, led parliament leaders to call for emergency economic measures and prompted President Boris Yeltsin to unleash his harshest criticism yet of his prime minister. By last week, Yeltsin had taken matters firmly into his own hands, signing more than a dozen decrees designed to stimulate the economy through tax cuts, elimination of export quotas and resolution of inter-enterprise debts. But many economists and government officials believe the industrial production figures are wrong. They say the State Statistics Committee, or Goskomstat, does not measure the country's growing private sector and the black market economy. Economists point to other Goskomstat economic indicators that show growing consumer spending, stable real incomes and a burgeoning private sector and services industry as evidence that the economy is in better shape than the industrial production figures indicate. "The situation is schizophrenic, with the consumer market stable and the production of industry declining," said Sergei Pavlenko, the director of the government's Center for Economic Reform. The panic gripping the top echelons of government illustrates the Soviet-era emphasis Russian politicians still place on industrial production, even though it has been declining as a percentage of total Gross Domestic Product, economists said. Yury Yurkov, the new director of Goskomstat, standing virtually alone in defense of his agency's work, said in a recent interview that the industrial production figures are correct. But he agreed that the health of the manufacturing sector does not tell the whole story. He said economic reform has always envisioned a sharp decline in Russia's bloated manufacturing sector. "I estimate today's situation as a serious industrial crisis, but a crisis of traditional Soviet industry," said Yurkov, who was appointed in November. "The nature of the crisis shows that reforms are quite successful." The industrial production data shows that output from defense and heavy industry have fallen sharply. But sectors producing some consumer goods, like refrigerators and washing machines, and building materials such as cement and brick, have fallen more slowly during the four months of 1994 ending in April compared with the same period last year. "We have always wanted the consumer to dictate production," Yurkov said, indicating that this is what has begun to happen. While production falls, consumers continue to buy. For the four months ending in April, Goskomstat reported that the sale of non-food items, such as televisions, cars and furniture, grew 2 percent when adjusted for inflation.Consumer spending stayed about even despite an overall 17 percent contraction of Gross Domestic Product -- the total value of goods and services produced. "Clearly, consumption and the standard of living have not declined by anything approaching the reported decline in GDP," said World Bank chief economist Charles Blitzer. The spending was paid by a 20 percent increase in Russians' real household incomes in April compared with one year ago, adjusted for inflation, the economic reform center said Wednesday. "If many factories haven't been paying salaries for three months, how do people live?" Yurkov asked rhetorically. His answer is that people are leaving the industrial sector for the service sector and working second jobs even while they are on the payroll of bankrupt enterprises. In the four months ending in April, The service sector has grown to about 49 percent of the total economy, from 42 percent at the end of 1993 and less than 20 percent in the Soviet era. The concurrent growth in incomes lifted many Russians out of poverty. Goskomstat figures show the number of people officially under the poverty line fell to 10.7 percent of the population in the four-month period ending in April, from 24.4 percent at the end of 1993. But Goskomstat's most interesting statistic does not appear in the report. With a little math, one can derive a figure for unofficial retail sales and services -- the black market economy constituting kiosks and untaxed trade -- that was first calculated at the end of 1993. Yurkov, said it is imprecise. Since there is no way to gather unofficial sales data from the economy, Goskomstat works backwards, estimating the sales figure from consumption. Every month, the agency gathers data from the spending of 40,000 families. Although the formulas are complicated, Yurkov said the data shows that people purchase about 40 percent more products and services than companies report selling. The data is then adjusted upwards by about 40 percent.For the four months ending in April, total retail sales were 56 trillion rubles (about $29 billion), of which 23.3 trillion rubles were estimated to be unofficial. Another 2.4 trillion rubles were estimated to have been produced in unofficial services. With the economy shrinking, this unofficial production made up almost 20 percent of the GDP, compared with 13 percent in 1993. Because registered companies are not producing these products, the difference comes from imports, highlighting the real problem in Russian industry: Not that it is producing less, which is to be expected given the reforms, but that so far it has not been able to produce what people want. "By the summer of 1994, there will be a huge gap between the real purchasing demand and the real potential of Russian industry to supply customers," Yurkov said. Surrounding the industrial production figures is a much larger debate about whether they are real at all. "Many experts believe that the real decline in production is lower than that registered by the State Statistics Committee," Deputy Prime Minister Alexander Shokhin said last month. From Alexander Livshits, the president's economic adviser, to Jeffrey Sachs, a Harvard economist, there is general agreement the industrial production statistics are flawed by Goskomstat's inability to measure the private sector. Missing the growth of the private sector has been a problem endemic to countries making the transition to a market economy, Sachs said in an interview. "The experience in all of Eastern Europe is that the official GNP numbers and the official industrial production numbers greatly exaggerate the overall decline of the economy," Sachs said. GNP, or Gross National Product, is GDP plus income from Russia's foreign investments, minus income earned by foreign entities in Russia. As evidence, Sachs says Polish economists are going reviewing their figures showing 20 percent GNP declines in the first two years of reform. "Polish experts are now saying it's probably 5 to 10 percent, at most," Sachs said. Consumer spending stayed about even despite an overall 17 percent contraction of Gross Domestic Product -- the total value of goods and services produced. "Clearly, consumption and the standard of living have not declined by anything approaching the reported decline in GDP," said World Bank chief economist Charles Blitzer. The spending was paid for by a 20 percent increase in Russians' real household incomes in April compared with one year ago, which is adjusted for inflation, the economic reform center said Wednesday. "If many factories haven't been paying salaries for three months, how do people live?" Yurkov asked rhetorically. His answer is that people are leaving the industrial sector for the service sector and working second jobs even while they are on the payroll of bankrupt enterprises. In the four months ending in April, The service sector has grown to about 49 percent of the total economy, from 42 percent at the end of 1993 and less than 20 percent in the Soviet era. The center also reported that while employment in industry shrinks, jobs are being created in hotels and the finance and insurance industries. The concurrent growth in incomes has lifted many Russians out of poverty. Goskomstat figures show that the number of people officially under the poverty line fell to 10.7 percent of the population in the four-month period ending in April, from 24.4 percent at the end of 1993. But Goskomstat's most interesting statistic does not even appear in the report. With a little math, one can derive a figure for unofficial retail sales and services -- the black market economy constituting kiosks and untaxed trade -- that was first calculated at the end of 1993. Yurkov, who explained how to calculate the figure, acknowledged that it is imprecise. Since there is no way to gather unofficial sales data from the economy, Goskomstat works backwards, estimating the sales figure from consumption. Every month, the agency gathers data from the spending of 40,000 families throughout the country. Although the formulas are complicated, Yurkov said the data shows that people purchase about 40 percent more products and services than companies report selling. The data is then adjusted upwards by about 40 percent.For the four months ending in April, total retail sales were 56 trillion rubles (about $29 billion), of which 23.3 trillion rubles were estimated to be unofficial. Another 2.4 trillion rubles were estimated to have been produced in unofficial services. With the economy shrinking, this unofficial production made up almost 20 percent of the GDP, compared with 13 percent in 1993. Because registered companies are not producing these products, the difference comes from imports, highlighting the real problem in Russian industry: Not that it is producing less, which is to be expected given the reforms, but that so far it has not been able to produce what people want. "By the summer of 1994, there will be a huge gap between the real purchasing demand and the real potential of Russian industry to supply customers," Yurkov said. Surrounding the industrial production figures is a much larger debate about whether they are real at all. "Many experts believe that the real decline in production is lower than that registered by the State Statistics Committee," Deputy Prime Minister Alexander Shokhin told a news conference last month, reflecting the attitude of many government officials. From Alexander Livshits, the president's economic adviser, to Jeffrey Sachs, a Harvard University economist, there is general agreement that the industrial production statistics are critically flawed by Goskomstat's inability to measure the private sector. Missing the growth of the private sector has been a problem endemic to countries making the transition to a market economy, Sachs said in an interview. "The experience in all of Eastern Europe is that the official GNP numbers and the official industrial production numbers greatly exaggerate the overall decline of the economy," Sachs said. "The decline of the old sectors is pretty real but the income of the new sectors tends not to be counted." GNP, or Gross National Product, is GDP plus income from Russia's foreign investments, minus income earned by foreign entities in Russia. As evidence, Sachs pointed out that Polish economists are now going back and reviewing their figures showing 20 percent GNP declines in the first two years of reform. "Polish experts are now saying it's probably 5 to 10 percent, at most," Sachs said.