Transcript 2010 -Russia casestudy

Back in the USSR
• The Soviet, centrally planned, system began in the USSR in
the 1920's.
• In the early decades the system of planning allowed the
emphasise to be on capital goods production and created
quite high levels of economic growth.
• However by the 1980’s the Soviet Socialist economic
system with its inherent features, like state monopoly of the
means of production, severe regulation of all aspects of
economic activity, and its equality of income distribution
failed to provide efficiency and improved living
standards.
• Russia started its transition to a market economy in the
late 1980’s due to economic factors, regardless of any
politicians’ ideas or wishes.
• The goal of the radical reforms was to create a new
economy based on competition of enterprises, incentives
for employees and freedom from the control of
bureaucratic state administrative authorities.
Transition to a Market
• The low level of efficiency of Russia’s economy greatly
affected the nation’s living conditions. By the end of 1991 the
consumer goods market could not function.
• For example, to buy a television set, a washing machine, a car
or a carpet the people had to wait their turn for several months
or even years. In supermarkets often only empty shelves
could be seen, the shops sold goods in exchange for special
tokens that proved to be very often useless. People from
provincial towns had to go to the capital (Moscow) to buy
foodstuffs, like sausage or butter, etc.
• Under those severe conditions economic reforms began. The
first step taken was the liberalisation of prices for consumer
goods and services and a centralized system of resource
distributions was abolished.
Transition to a Market
• The prices of goods and services were to be determined
by market forces, not set by the State.
• Mass privatisation of State and municipal enterprises
was started.
• By 1994, 70 percent of Russia's large and mediumsized enterprises were privatised along with about
90 percent of small enterprises.
• The reforms were designed to encourage personal
initiative and individual ownership of businesses.
• Commodity and stock exchanges were introduced.
What were the effects of the
reforms?
• The reforms were largely introduced as ‘shock therapy’.
They were designed to move the economy quickly
towards a market system. While it was recognised that
the ‘shock therapy’ was going to cause some initial pain,
it was supposed to bring relatively quick positive results.
• In 1992, the first year of economic reform, retail prices in
Russia increased by 2,520 percent. A major cause of
the increase was the decontrol of most prices in
January 1992, a step that prompted an average price
increase of 245 percent in that month alone.
Inflation in Russia
While
Inflation
has declined
it is
still around
7.2%
in 2009.
Economic Growth in Russia
Recession increased
unemployment
Increasing underemployment
• Underemployment is a major
issue in Russia. Many people
run their own businesses
because they can not get jobs
but do not earn above a
subsistence income.
• Underemployment rose from
2.8% in 1993 to 16.7% in 1994
but has since declined to 5%
adding to the 9.9%
unemployment rate in 2009.
• Less than a quarter of the
unemployed receive benefits.
Real Wage Growth
Increased income inequality
• The move to a market system has increased
income inequality and especially in the mid-90’s
the level of poverty.
• The gini co-efficient rose from 0.26 in 1991 to
0.41 by 1994 and was 0.40 in 2005.
• The proportion of income, which belongs to the
20 % of the richest people in Russia, was 32.7%
in 1990 rising to 46.6% in 2005.
• The proportion of income, which belongs to the
20% of the poorest people in Russia, was
9.8% in 1990 declining to only 6.1% in 2005.
Quality of Life
• The quality of life declined in Russia in the 1990’s with
recession, rising unemployment, hyperinflation and
declining real incomes.
• The percentage of the population living in poverty rose
to 34% in 1992-3.
• The average life expectancy fell from 69 years in 1990
to 64 in 1994. For men it was even worse falling from
64 in 1990 to only 57 in 1994.
• Suicide rates also increased along with crime rates
and the level of mental illness.
Quality of Life
Exchange Rate
• The high inflation led to a
loss of purchasing power
and a decline in the value of
the rouble.
• In 1991 there was 0.17
roubles to a US$ by 2002
it took 32 roubles to get 1
US$.
• A loss of value of 188
times its purchasing power.
• It improved to be 24.5
roubles to a US$ in 2008
• But declined again in 2009
to 31.8 due to the GFC.
The Putin Reforms
• President Putin has been responsible for the greatest
improvements for the Russian economy and the people of
Russia.
• His main reforms have been:
 A Labour Code was adopted that more securely protects the
right of employees.
 The government has adopted a Tax Code that has created a
more favorable business climate.
 The Government has paid particular attention to changing the
tax system to reduce tax avoidance and evasion.
The Putin Reforms
Social programs to increase and
speed up the payment of pensions,
allowances, and salaries to
employees engaged in the public
sector.
 In the mid-nineties delays were often
6-12 months.
For this extensive modernisation of
the economy, the government intends
to create and guarantee a favourable
investment and business climate, to
have predictable and stable
macroeconomic policy and to realise
structural reorganisation of the
economy.
What have been the effects?
By 2007 Russia had achieved:
 Economic Growth at 7.7%.
 Unemployment has fallen to 6.2%
 Inflation has declined to 11%.
 Real wages have risen 15% a year (2000-7).
 Real Pensions have increased 15% a year (20007).
 Real Income per capita has increased 10% a year
(2000-7).
 The budget was a surplus.
 The current account was a surplus of almost $74
billion US in 2007 but is expected to move
towards a balance by 2010.
The Success Story
 There has been a major increase in foreign direct
investment into Russia since the reforms began. Many of
these ventures are joint ventures, between Russian and
foreign firms.
 Foreign investment has risen considerable since 2006 with
69% going into exploration and mining of fossil fuels (mostly
oil).
Where to now?
 The Russian Government is risking the gains they have
made by reducing their budget surpluses in 2008-10.
Allowing for the gains they have made from high oil
prices in recent years – these could easily turn into
deficits.
Where to now?
 The success of President Putin’s policies can be shown
by economic growth and living standards rising.
 The Government has introduced Capital Adequacy
requirements for banks to increase the security of the
banking system to encourage savings and investment.
 According to regular public opinion polls the President’s
policies to deal with crime, corruption, and poverty are
supported by the people.
 Crime and corruption still remain major issues.
 There are still many challenges facing Russia. Much of its
recent economic success has been due to rising world oil
prices (its major export). This has provided tax revenue to
the government and also spurred spending and growth.
 Declining oil prices may slow the economy down and create
budget shortfalls.
 Inflation and relatively high unemployment still remain
problems.
Dmitry Medvedev?
 Due to constitutionally mandated term limits, Putin was
ineligible to run for a third consecutive Presidential term.
 In March 2008 Russia elected a new president – Dmitry
Medvedev
 Putin was then nominated by the latter to be Russia's
Prime Minister
 Policies are likely to keep following the same pattern –
 The government has created state owned monopolies in
the key economic sectors, eg, oil, gas.
 They have secured the country's natural resources and
key economic sectors from private interests, whether
foreign or local.
 The Government aims to attract private foreign
investment into both minority investments into state
controlled monopolies and into direct foreign owned
enterprises.
The Impact of the GFC
The Global Financial Crisis has had a major impact
on the Russian Economy.
 Falling oil prices have drastically reduced national
income and government revenue.
 Unemployment has risen to 9.9%
 Economic growth has fallen by 10.1%
 The rouble lost 20% of its value in 2009.
 Russia has gone from a budget surplus of 3.6% of
GDP to a deficit of 6.8% of GDP.
The Impact of the GFC on
Poverty in Russia
Where to now?
• The Russian economy should recover quickly
by 2011 - if oil prices average over $70 US a
barrel.
• The lower rouble will help Russian
competitiveness.
• Strong fiscal stimulus from the government
should cushion the worst effects of the
recession.
• However many of the underlying problems of a
narrow export base and inefficient industries
remain.