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. Last Updated: 07/27/2016

Stimulating a Recovery




This June, President Boris Yeltsin signed three decrees on the housing-construction industry, stipulating tax breaks, credits, the purchase of housing by installment, the completion of unfinished buildings and the issuing of housing certificates. As Yeltsin himself acknowledged, these measures should have been taken two years ago. The task now is to make up for lost time.


In the summer of 1929, the Great Depression began in the United States. It was characterized by the faltering of the financial system, a crisis of nonpayments and other problems that have now become familiar to Russians. By 1932, industrial output had fallen by 50 percent, wages had fallen by 40 percent, and the number of unemployed had reached 17 million: In short, it was an economic collapse that may have been even more precipitous than the one Russia now faces. However, by the onset of World War II, America had completely pulled out of its crisis.


This American experience holds more than a little interest for Russia in its present situation. The key to escaping the crisis was President Franklin Roosevelt's New Deal, an integrated government program of financial regulation, industrial modernization and social measures. The "locomotive" of this new course was the construction of roads, bridges and airfields, which significantly reduced unemployment and reanimated investment.


Today, Russia desperately needs a similar anti-crisis program, and Russia's anti-crisis locomotive should be housing construction. A roof over one's head is a basic human need, but today only a small percentage of Russian citizens have more or less adequate living conditions. The great majority of the population experiences constant discomfort, and 20 million people still live in communal apartments, dormitories and barracks. Approximately 300,000 military families are without their own homes. Seventeen million Russians do not have the minimum five square meters of living space. More than 2 million people live in buildings that are decrepit or worse. The mobility of the population is impeded and this complicates the problem of unemployment. In short, this housing shortage has become an important factor in the country's present crisis and is a seriously destabilizing force.


In order to achieve even a modest allotment of housing for all Russians -- one room for each person -- the amount of housing in the country, presently 2.5 billion square meters, would have to be increased by 50 percent. Even without taking attrition into account, we would have to build a square meter of housing space per person per year, roughly the same rate of construction as in the United States, Germany and -- in recent years -- China. Taking into account the replacement of old housing, this figure increases to about 1.4 square meters per person per year -- about 200 million square meters a year.


Considering that even in the relatively active years before the current crisis, housing construction proceeded at only half this rate, the task before us now seems quite daunting. But it is not hopeless.


The main limiting factor in housing construction is the lack of financial resources. In addition, high inflation deters long-term investment. However, given the existing potential resource base, these problems can be overcome within the framework of the market.


We propose the following mechanism. Deposits by natural and legal entities in an investment bank can be converted into an equivalent amount of living space at the prevailing market rate. Further deposits would be added to the "balance." At any time, the depositor could withdraw his or her savings, reconverted into money at the price of housing at the moment of withdrawal. This would provide the best protection for the deposit against inflation.


With the present, relatively low incomes of Russian citizens, the government must play a fundamental role, acting in cooperation with private enterprise. The President's decrees will make a valuable contribution toward assuring such cooperation. Discounted credit and government guarantees will attract significant deposits from those who are not in need of housing, but are interested in acquiring housing bonds and certificates. These certificates will act like a parallel currency, more stable than the ruble or even the dollar.


The resulting investment climate will attract foreign and Russian investors, bringing back some of the funds now on deposit in foreign banks and stimulating the populace to take part in the financing of housing construction. At present, at least 20 percent of all wages are frozen in the form of hard currency hidden away at home or of bank deposits that are not playing a role in stimulating the economy.


The size of the housing industry in the Russian economy, as in other countries, is quite large -- 13 percent of the workforce is occupied in the construction and maintenance of housing. Approximately 20 percent of all investment goes to the construction of housing. These figures could be doubled if the housing industry was stimulated.


The experience of countries around the world has shown that the beginning of growth in the housing-construction industry is a sure sign of an economy coming out of a crisis, even if this growth comes while the economy as a whole is still in decline. Stimulating the construction of housing is capable not only of taking the country out of the current investment crisis but also of easing inflation, by taking a significant portion of excess cash out of circulation. It will have a beneficial effect on the entire economy. Moreover, and not unimportantly, it is a platform around which both the left and the right in Russia can unite, leading to an important reduction of social tensions.





Viktor Belkin is a senior researcher at the Institute of National Economic Forecasting. Vyacheslav Storozhenko is a director of the Academy of Construction Investment and Economics. They contributed this comment to The Moscow Time