Transcript Remarks on Strategy 2020, Russian Academy for the New Economy

Remarks on Strategy 2020, Russian
Academy for the New Economy
Gerard Roland,
University of California Berkeley
Introduction
• Very impressive document outlining economic policies
in a large number of areas.
• I will formulate remarks on the main orientations and
formulate ideas for discussion.
• When thinking about economic policy, easier to
identify wrong policies than to formulate right policies.
• When formulating policies, difficulty of distinguishing
between “ideal policy” and optimal policy in a given
context taking into account political constraints,
institutional inertia, culture and ways of thinking,
administrative capabilities, etc…
Introduction
• When thinking about enhancing long run growth,
improvement of institutions is the first thing that
comes to mind given both economic theory
(fundamental importance of institutions for
growth) and reality in Russia (bad institutional
record). Report highlights some of the main
institutional weaknesses.
• However, it is important, when trying to
formulate policies that can work, to see what can
be done given the existing realities and historical
inertias.
Basic growth framework
• Useful to look at growth in the light of growth theory.
• Growth depends on 4 things: growth of labor force,
capital accumulation, human capital accumulation and
total factor productivity (TFP).
• Growth of labor force severely limited due to
demographics and migration difficulties.
• Capital accumulation constrained by savings and
difficulty of attracting foreign investment.
• Human capital is a relative strength that can be used.
• Total factor productivity is the most important force of
growth. It has been high especially in the early 2000s
but can be significantly improved.
Total factor productivity
• Total factor productivity is residual. Typically
composed of:
– Technological innovation
– Improvements in allocation of resources
– Institutions.
• Innovation and institutions are partly separate
(innovation efforts possible without
institutional improvements) but also highly
complementary.
Historical strengths and weaknesses of
Russian economy
• Useful to look back at Russian economy in the
beginning of 20th century at the times of Count Witte
and Stolypin (interesting source: Miller, 1927, The
Economic Development of Russia. 1905-1919).
• Pockets of industrialization with rapid expansion of oil,
steel, railways and heavy industry. Vigorous
development of agriculture (!), strong exports of
energy, natural resources but also agricultural
products.
• Coexistence of minority of modern urban, industrial
centres (St. Petersburg, Moscow, Kiev, Kharkov, Vilna
and Riga, Baku) with large pockets of backwardness
and rural poverty.
Historical strengths and weaknesses of
Russian economy
• Growth of industry relied a lot on foreign
investment and Western technical assistance.
• Centralized state apparatus with strong
repressive arm, very efficient secret police
crushing anarchists and forcing Bolsheviks to
innovate organizationally to survive.
• Push Northwest towards Baltics and
Southwest in Balkans and Caucasus exploiting
decline of Ottoman empire.
Historical strengths and weaknesses of
Russian economy.
• Constants in Russian economic development:
– Huge territory with diverse geography and transport
challenges
– Low population density
– Inequality of development related to these factors given
scarcity of resources with small pockets of concentration
of development and backward areas
– Importance of natural resources to support economic
development
– State centralization and authoritarianism
– Long history of serfdom and little tradition of private
property of land.
• Build on the strengths to further development and
robust growth.
Strategy for growth
• Importance of formulating a few policy priorities on
which resources can be concentrated to obtain success.
• My impression: report too negative on energy sector.
Wish to diversify exports is welcome but not easy to
implement.
• Russia will be for a very long time one of the world’s
major suppliers of gas and oil. Middle East is so
unstable that Russia’s role is likely to increase as major
supplier in all of Eurasia. Should become China’s major
supplier. Its natural reserves are tremendous if one
takes into account permafrost reserves.
The energy sector
• Important to go beyond narrow view of the energy
sector as only provider of export revenue with volatile
prices depending on world market.
• Just as energy was fundamental to the world economy
in the 20th century, in the 21st century, energy
technologies play always greater role:
– technology to exploit, store and transport natural
resources
– technology to increase efficiency of energy. The latter will
become more and more important. Electricity sector in
Russia is very obsolete for example.
• Given preponderance of energy sector in Russia,
potential for innovation in technologies of energy use
and exploitation.
The energy sector
• Given the existing human capital, there is
potential for high tech developments in the
energy sector.
• Several conditions need to be fulfilled for this to
work:
– strong connection to science via research universities
– Geographic concentration of high tech scientists,
engineers and entrepreneurs
– Access to finance and to venture capital
– Absence of institutional barriers
– Efficient infrastructure to operate.
– Links to manufacturing and ease of operating with
international supply chains.
How to address credibility and scarcity
of resources.
• Huge problem of credibility when it comes to
Russian state apparatus.
• Predatory behavior of bureaucrats towards
small and medium entrepreneurs repeatedly
denounced but seems difficult to overcome.
• Risk that ideas for institutional reform are not
believed and that no effect ensues.
• Report mentions trade-off between inertial
and progressor scenario.
Development of Free Economic Zones
• In principle, development of a few well-located
free economic zones (FEZ) with well-thought
institutional design has the potential to create
virtuous circle and contribute significantly to
Russia’s growth.
• There exist special economic zones in Russia
already but it is not clear that they have been
well-designed nor that the potential they can
represent for Russia’s development has been
even remotely exploited.
Development of Free Economic Zones
• No need for restriction of sectors or government
definition of which high tech sector should be
developed.
• Importance of strong institutional independence from
the Russian government (like Hong-Kong for China).
Russian government should not be present. FEZ should
be quasi-independent without any controlling hand of
central government (authoritarian controlling
tradition). Condition for credibility which is in turn key
for investment and attracting FDI.
• Concentration of scarce resources (talent, know how,
finance, good governance) helps create condition for
high tech take-off.
Development of Free Economic Zones
• Creation of top world-level research universities with
large endowment attracting talent from best
universities in the world. No interference from
Academy of Sciences.
• Source of endowment and financing of FEZ can be
energy rent
• Create environment friendly to start-ups, foreign firms
investing in the zone. Free-trade zone for import and
export.
• Create infrastructure for high-tech manufacturing and
tax advantages for labor.
• No tariffs on goods produced in Free Economic Zone.
Development of Free Economic Zones
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Spillover effects are plenty.
Possible expansion of FEZs.
Better credibility and trust from foreign investors
Technological spillovers
Competition effects domestically and internationally.
Better domestic support for market-friendly
institutions and for market economy
• Elite network creation
• Better integration in global trade and manufacturing
chains.
• Reverse brain drain.
Comparison with the Chinese
experience of SEZ
• The Chinese experience with Special Economic Zones was a
huge success but had a different objective: start the
creation of an export-oriented manufacturing sector.
• Conditions were created (infrastructure, labor supply,
infrastructure, friendliness towards FDI) to make it a
success.
• Objective with Free Economic zones in Russia should be
development of high tech start-ups based on innovation
and improved institutional framework.
• Many “science parks” and special high tech zones are a
failure because they lack presence of top science
institutions and top talent, do not have incentives for
entrepreneurship but too many incentives for rent-seeking
for government subsidies.
Comparison with the Chinese
experience of SEZ
• It is necessary to study better the successes and
failures of special economic zones across the
world as well as the Russian economic
experience.
• Basic principle: easier to achieve localized than
nation-wide success because of concentration of
resources and provision of different institutional
framework, less need to deal with other issues
(country scale, social problems).
• Success can then be emulated later on a larger
scale based on the local experiences.
Energy prices
• It does not make sense to keep prices below
world prices. Report has some good ideas for
reform.
• Buffering social consequences of high prices is
best done by lump sum allocation of a given
energy at low price and sale of quantities
above at market prices.
Role of monetary policy
• In my view overemphasis in report of role of monetary
policy for growth.
• While high inflation is not conducive to growth, one
has to be flexible on monetary policy especially in view
of current world economic environment.
• Another element that is neglected is the BalassaSamuelson effect. In case of emerging market
economy like Russia, it is likely to be non negligible
especially given the big TFP increases in the 2000s.
• Dutch disease issue in the 2000s has been exaggerated
in Russian press.
• I do agree with preference for inflation target rather
than exchange rate target.
Lessons from other countries
• Vietnamese enterprise Law could be imitated, making
enterprise registration one window quasi-automatic
process without checks by regulatory agencies. Was a
huge success. Given bureaucratic meddling, success
would be less but it is worth trying. Is important
complement of policies to promote competition.
• Chinese meritocracy in government can probably not
be imported given lack of meritocratic tradition but
elements of fiscal federalism can:
– Make local governments residual claimants on part of the
tax base (different possibilities: decentralize certain tax
appropriations, fiscal contract with central government
over income taxes, …)
Lessons from other countries
• Study the success of Brazil.
• What happened in Kazakhstan? Why the
institutional improvement?
• Learn from some of the advantages of German
technical education (Realschule plus
apprenticeships)
• Experience of Singapore and Hong-Kong in
fighting corruption (little hope here
unfortunately, like Berlusconi proposing
crackdown on tax evasion).
Agriculture?
• Nothing in the report on the role of agriculture.
• Before communism, agricultural exports from Russia were
booming.
• Some land is of very high quality.
• Communism completely destroyed agriculture and
transition did not revive it. Agriculture is one of the areas
where transition reforms were the most botched.
• There is room for entrepreneurial activity in this sector and
it should be given more attention. Can be revived in a
thoroughly modernized way despite very imperfect
transport infrastructure system and confused legal
situation. Agro-food entrepreneurship should be actively
encouraged. Very important for quality of life and living
standards.
Other remarks
• Alcohol issues seems understated in the health chapter.
• Impossible to deal in a satisfactory way with higher
education system without dealing with the Academy of
Sciences and the separation of research and teaching.
• E-passport for workers could become be abused and
create shackles
• Inconsistency between emphasis on lower social
expenditures and claims of more pensions for middle
class.
• The fiscal chapter does not discuss enough allocation
of tax authority between levels of government.
• Discussion of the experience of oil reserve fund would
be useful.
Other remarks
• I agree with strong emphasis on housing policies. I did
not understand all aspects well (why ownership is
typically of houses, not of apartments)
• Big improvements possible in housing construction
with potential welfare effects, together with
improvements in energy use. Big potential for
competition in this sector.
• Investigate earned income tax credit as a way of
helping the poor. Better than means-testing.
• Banking. Developing of online banking can reduce
transaction costs but also reduce size of informal
economy.
• Retail services can be vastly improved.
Conclusion
• While the report is very thorough on all fronts
and I agree with many of its conclusions,
important to handle the institutional question
heads-on in a realistic way given the credibility
problem of the Russian state apparatus.
• My proposal is to investigate thoroughly idea of
Free Economic Zones in all aspects and propose
it as a flagship for an experience that must
succeed. State leaders can get credit while not
feeling too threatened by it.