6 May 2016

Russian Economic Reforms: Lessons and Challenges

Location 32 Lincolns Inn Fields, Room B13. Speakers | Vladimir Mau.

On Friday, 6th May, the Dahrendorf Forum hosted Vladimir Mau for a lunchtime talk at the London School of Economics, entitled “Russian Economic Reforms: Lessons and Challenges’. The event was chaired by Cristian Nitoiu, the Dahrendorf Postdoctoral Fellow for the EU-Russia Working Group.

Professor Vladimir Mau is a prominent Russian economist. He has advised successive Russian governments on the implementation of economic reforms since 1991. Since 2002, he has served as Rector of the Russian Presidential Academy of national Economy and Public Administration.

His talk at the LSE extracted lessons for future policy from Russia’s recent economic history. Mau avoided commenting on the geopolitical dimensions of Russia’s economic situations by arguing that Russia’s economic malaise was unrelated to the present Western sanctions regime.

Four phases of economic growth since 1991

Russia has experienced four phases of economic growth since 1991: Post-communist decline (1991-1999), ‘reconstructive growth’ (2000-2008), recession (2008-2009), stagnation (2010- present).

The simultaneous eruption of three types of crises caused the severe economic turbulences after the collapse of the Soviet Union.

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Post-communist decline

First, the Russian crisis in the 1990s constitutes a belated structural crisis of a post-industrial economy (similar to that Western Europe, the United States, and Japan experienced in the 1970s). Dr. Mau sees Russia as a developed economy that only bought time with high commodity revenues in the 1970s, but ultimately cannot not escape post-industrial structural change.

Second, it was a crisis of post-Communist transition. Russia responded with ‘Washington Consensus’-style policies (liberalisation, macro-economic stabilisation, privatisation). In the absence of any historical precedent, however, at the time vigorous debate raged on the correct sequence of these reforms and continues to this day. For Russia an additional difficulty was the lack of any living memory of pre-Communist experience as opposed to Eastern Europe, where Communism had been an external imposition on liberal market-democracies.

Third, it was a real revolution in the sense that fundamental politico-economic transformations occurred in an environment of state collapse. The state was incapable of collecting tax revenue and reducing spending. Monetary policy degenerated to the political instrument of a printing press. Hiking inflation caused demonetisation of the economy.

‘Reconstructive growth’

By 2000, orthodox macro-economic stabilisation policies based on the historical experience of Latin America succeeded in restoring equilibrium. Between 2000 and 2008 Russia experienced a spectacular recovery with annual growth rates of 6-7%. Demand and political stability resulting from the large-scale introduction of economic legislation drove this ‘reconstructive growth’ phase.

Recession and Stagnation

In 2008, however, the global Great Recession hit Russia severely. Credible recovery has yet to materialise. Tumbling oil prices compound Russia’s structural problem of adapting to the post-industrial age. Almost a decade after the crisis growth rates remain sluggish.

Medium term structural reforms

In the medium-term, Dr. Mau recommended the following structural reforms. Their attainability becomes more complex with increasing order.

      1. Disinflation
      2. Fiscal policy (maneuver, procedures,
        network, rule)
      3. Export-oriented import substitution
      4. Financial sector sustainability
      5. Deregulation, including for small and medium-sized businesses
      6. Improving the efficiency of the internal market by increasing business activity, developing competition, reducing the size of the public sector
      7. Special measures to attract private investment
      8. Increased flexibility of the labour market
      9. Structural reforms in the sectors of human capital
      10. Security of person and property
      11. Development of international integration, diversification of exports
      12. Efficiency of public administration system

Long-term intellectual reform

In the long-term, Dr. Mau sees Russia’s experience in the past quarter-century as indicative of continuous trends. A comparison of Russia’s pre- and post-Communist growth rates shows the ‘reconstructive growth’ period (2000-2007) only compensated the previous decline (1991-1999). Overall, however, present Russian growth rates stagnate at the highest Soviet level.  Historically, since 1850 at different points in time Russia’s GDP has consistently been only 50-60% of that of France or Germany. In light of this, Russia should aim at a national annual growth rate that is the same as (or higher than) the global average.

Russian GDP/capita as a share of GDP in France and Germany

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Major economic crises are first and foremost intellectual challenges. They question the prevailing consensus of mainstream economics. A real crisis cannot be explained by the cyclical boom and bust, but requires a doctrinal paradigm shift.

For example, in the first years of the Great Depression policy-makers applied the old remedies of fiscal austerity and deflationary monetary policies to maintain Gold Standard parity. Only with rise of Keynesian demand-side economics could the crisis be overcome.

At present, the persistence of stagnation rather than robust recovery in most developed economies (including Russia) indicates that economists are in need of a re-think. Modern economic growth is a relatively new phenomenon that has only emerged in the past 250 years. Perhaps developed economies are entering a new era, where stagnation, not growth is the norm.