Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

'Fair Fight' Can Right Economy, Study Says




Turning around the Russian economy may be as simple as setting the rules for a fair fight.


The prescription for success by consultants McKinsey & Company, which released a one-year study Tuesday, is to level the playing field of business and let the best take out the worst, aiming to double output in 10 years without much pain.


After a decade of decline, Russian industry is less than a fifth as effective as the world's best, but even the worst reform nightmare - major unemployment - could be avoided by starting changes where job creation would outpace cuts from slimming down.


"Russia is currently entangled into a vicious circle," McKinsey said in the look at 10 sectors, from software to steel. "The most productive companies are often the least profitable.


"The priority is to level the playing field in the high growth potential sectors," it said.


Economic growth could hit 8 percent annually if foreign investors jumped on board, though not without change. The oil industry, for example, within 10 years could double output or shrink so Russia became an importer.


Reforms have created an odd world between communism and the market. There is often competition, but the worst players are subsidized so that they will not fail and will not fire anyone.


McKinsey said a number of pieces of common wisdom about Russia reform were wrong.


-Russian equipment is not all bad. A large majority of plant equipment, 75 percent, could be 65 percent as effective as the world's best with better management and limited investment.


-Russia's most loudly denounced defects, such as corruption and poor corporate governance, are not its main problems. They pale in comparison to the effect of the unequal playing field of indirect subsidies which keep bad companies afloat.


-Last year's ruble devaluation has not put Russia on the road to competitive success - rising industrial output should be seen as a one-off response to increased import prices rather than the start of a prolonged recovery. McKinsey's proposal is relatively simple - industry by industry, clean up the rules and remove anti-market price supports, focusing on wider goals of lower, stable and equal tax laws, a land code and cutting red tape.


Start where growth opportunities are best, such as oil, light industry and retail, because there the bugbear of unemployment can be avoided. New employment from expansion will outpace layoffs from productivity gains, it said.


"Overall, output growth should exceed productivity growth in these sectors, resulting in employment growth, which is what happened in Poland," it said.


Eventually the worst problem will have to be faced - 7 percent of the total workforce could be put out of work at heavy industry that should be closed or slimmed, and unemployment in one-industry towns will outstrip new job creation.


But it said it was better to target aid than blindly fund industry.