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. Last Updated: 07/27/2016

A Postindustrial Strategy

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The central aim of Russia's current and medium-term economic policy is to create the conditions for rapid economic growth while restructuring the country's economy along postindustrial lines. This means tackling the problems of catching up with advanced economies -- of a nature similar to the problems Russia faced a century ago, only back then in the context of the industrial epoch.

There has been a new turn in the debate regarding the mechanisms needed to achieve sustainable economic growth. In 2000, when the government's strategic program (or the so-called Gref Plan) was being prepared, three main growth strategies were put forward: (i) dirigiste (increasing the regulatory and redistributive role of the government through direct involvement in investment); (ii) liberal (the drastic reduction of the budget as a share of GDP); and (iii) institutional (development and enforcement of "rules of the game" that will encourage business and investors to work in Russia). In its program, the government opted for the third of these approaches. However, actual developments in economic policy and the behavior of business have raised further questions.

The government was faced with three alternative models for its relations with business. First, an active state industrial policy; second, enhancement of the role of conglomerates of the countries' largest enterprises (financial-industrial groups or vertically integrated companies); and third, the development and strengthening of the institutions of a modern market-based democracy. These three alternatives are structurally related to at least two of the three above-mentioned growth strategies. However, whereas the discussion in 2000 was somewhat abstract and based on economists' theoretical understanding of preferred developmental paths, now conclusions are drawn on the basis of a close analysis of actual economic trends in Russia.

Two specific trends are discernible. First, the government is more or less consistently implementing its institutional reform plans and is focusing its efforts on improving the business climate. At the same time, the pace of formation of vertically integrated groups of companies has been stepped up; these financial-industrial groups consist of various enterprises and banks, and many have begun to increase their investment activities.

An active state industrial policy requires the identification of priority sectors of the economy and promotion of investment in these sectors, as well as significant expansion of state demand and its use as a key factor for increasing business activity. Furthermore, it needs real appreciation of the ruble to facilitate the import of machinery and components, as well as the possible support of "import-substituting" industries through the imposition of tariffs. The development of integrated business groups is seen as a central part of this model as these groups can be used as instruments for conducting such an industrial policy.

The main drawbacks of this model are that in a postindustrial economy it is fundamentally impossible to pick "winning" industries as priority targets for support, and the cost of making mistakes is high; in addition, the low level of effectiveness of state investments has been demonstrated repeatedly in practice. Furthermore, financial-industrial conglomerates have a tendency to put their interests before those of the wider public; they will need fiscal incentives to develop chosen sectors and may lobby the authorities to substantially restrict competition from foreign companies.

Under the other model, the government redoubles its efforts to attract private investments to both export-oriented and import-substitution sectors of the economy. This is pursued through the government's macroeconomic, institutional and foreign policies. Macroeconomic policy, unlike the model described above, is targeted at curtailing real appreciation of the ruble and decreasing the burden of the budget on the economy (although increasing the size of the budget in absolute terms). At the same time, efforts are stepped up to provide incentives for investors, both general (reducing the tax burden, removing bureaucratic barriers to doing business, improving the effectiveness of the judicial system, etc.) and specific (such as creating free economic zones, concluding production sharing agreements, etc.). And lastly, measures are taken to expand Russia's involvement in relevant international organizations and to harmonize the country's business legislation with that of other market economies.

In reality, these two economic policy models are not entirely incompatible. When actually put into practice, they can to a certain extent be combined, neutralizing certain drawbacks and making the most of their respective merits. For example, under certain circumstances it could be expedient to use government demand as an instrument for stimulating economic growth -- as long as it is not founded on "fiscal populism" and is not linked to the monetary authorities providing loans to the budget. Moreover, it goes without saying that the actual course of events is not determined exclusively by government decisions and that these decisions are circumscribed by the state of the Russian economy.

It is highly probable that the expansion of vertically integrated groups will be one of the features of the country's development in the immediate future, and that they will play an important role both in investment and in the political arena. This means the government should develop macroeconomic and institutional policies to support and encourage investment by financial-industrial groups, while at the same time curbing their monopolistic powers. The authorities have sufficient levers to deal with this.

If developments do indeed follow this scenario -- as seems highly likely -- three policy areas will be of particular significance.

The first is the consistent implementation of a liberal foreign trade policy, and WTO accession is a key element in this. Openness of the market to competition from foreign companies is one of the principal means for counteracting the monopolistic tendencies of major Russian companies. It is no accident that certain of these companies have stepped up their efforts to oppose Russian entry to the WTO. However, progress toward this goal does not mean the complete rejection of all forms of protection for domestic manufacturers -- for example, protection that can be achieved through exchange rate policy measures.

Second is the implementation of fundamental reforms in areas that are not directly related to the economy, but which have a huge (sometimes even decisive) impact on economic activity. The most important of these are: the judicial system, reform of government machinery (including law enforcement agencies) and military reform. Positive changes in these areas affect the overall business climate (above all by reducing transaction costs), as well as forestalling attempts by major companies to place state institutions under their control.

Third is to conduct specific policies to stimulate entrepreneurship. Central to this is anti-monopoly policy and the promotion of competition. Deregulation issues (lowering administrative barriers to doing business), as well as stimulating innovation and the small and medium-sized business sector are particularly important for this.

All these factors contribute to the creation of a favorable postindustrial institutional environment. These three target areas taken together are the main priorities in the government's social and economic policy for the next few years.

Vladimir Mau is head of the Working Center for Economic Reform under the Russian government. This comment is excerpted from his "Economic and Political Results for 2001 and the Prospects for Strengthening Economic Growth." The full article is available at www.iet.ru.