Illarionov on Russia's Future

Russia Will Not Enter the Top Five Economies By 2020 On Its Current Course

Andrei Illarionov

Yezhednevniy Zhurnal

June 27, 2007

Apparently the intoxicated air of the White Nights and black-tie riverboat dinners played cruel tricks on some of the participants in the recent Petersburg Economic Forum [June 8-10, 2007]. The sheer volume of inaccuracies, distortions and absurdities uttered at the form could only invite humor.

A high bar was set by former president of the World Bank James D. Wolfensohn, who asserted that “since 1995 Russian GDP has increased by five times, after declining by 50% from 1991 to 1995.” One would think that for the former head of the respected international organization there could be no secrets in the statistical data of the world’s countries. But apparently there were.

If the current head of the board of directors of Citigroup has a problem accessing the Internet, then perhaps he could inquire with the statistical department of his own bank, turn to his colleagues at the IMF, or as a last resort take an interest in the work of the Russian Federal Statistical Service. Anyone there would be glad to answer him precisely: from 1991-1995 Russian GDP declined by 34.6%, and from 1995-2006 it grew by 55.6%. It may be that James Wolfensohn is, as [Russian Minister of Economic Development and Trade] German Gref has called him, a friend, but the truth is more valuable.

The switching of concepts in the speech of the Russian President was much more refined: “In the first quarter of this year direct foreign investment in the Russian economy rose by two and half times compared to the previous year. And accumulated foreign investment reached $150 billion.” The listener might have gotten the impression that the last figure related to the direct foreign investment that was mentioned in the first sentence. But that would be incorrect. The $151 billion figure was the total amount, as of April 1, 2007, of all foreign investment - not only direct, but also portfolio (investment in equities and shares totaling less than 10% of a company’s total capital, and the purchase of bonds, notes and other promissory paper), as well as other investments (such as trade credits and credits to the government).

The only true indicator of a country’s attractiveness for investment is direct private investment. As of April 1, 2007 it totaled $73 billion in Russia. This is a significant amount. However, if we compare it with the size of the Russian economy, it looks rather modest - only about 7% of GDP. Not including direct foreign investment in energy the figure is even smaller - just 4.5% of GDP. By way of comparison: in Ukraine accumulated foreign investment exceeds 19% of GDP; in Latvia, Lithuania and Poland it is 25%; in Georgia, 42%; and in Estonia it is 59% of GDP.

Proclamations of a macroeconomic type opened a whole new frontier of humor. “If 50 years ago 60% of world GDP originated in the Big Seven countries, today it is the opposite: around 60% of world GDP comes from countries outside their borders,” continued the Russian President. It is true that in 2006 the share of the Big Seven countries totaled 41% of world GDP. But it is also true that 50 years ago the Big Seven produced not 60% but 51% of world GDP. Hence the reduction in their share of the world economy over the past 50 years declined from 51% to 41%, or by one-fifth - not nearly as sharply as depicted in the Russian President’s speech.

Of course, one could gloat over the decline in the weight of the Big Seven in the world economy. But it would be worthwhile to first consider how the place of Russia itself has changed in the world. In comparison with the Big Seven, the relative weight of Russian GDP over the past 50 years has declined from 12.1% to 6.3%, and in comparison with world GDP it has fallen from 6.2% to 2.5% - that is, by two and a half times. Now that is a shift of a truly tectonic nature. And it is hard to argue with the President when he says that “the world has truly changed, literally before our eyes.”

But even these pronouncements paled against the forecasts. Mr. Wolfensohn “promised” that “the economies of Russia and the developing countries will grow 20 times by 2050, while the developed countries will grow by only 2.5 times.” Even if that could happen, a better illustration of the embellishment “We too ploughed” [TN: said of someone who makes overly much of his modest contribution] could hardly be found. That the economies of China, India and other developing countries may reach the size of the current Big Seven economies has not been a secret to anyone for a long time. The challenge this presents to Russia would be well worth considering.

But there was no time for such considerations in Saint Petersburg. Otherwise the predictions of a twenty-fold growth rate in the economic prospects of Russia could hardly have come to light. For a country with a population that is shrinking at the rate of Russia’s, a 20-fold increase in GDP would require a 25-fold increase in GDP per capita. How could this be achieved even theoretically, if in all of world history there has never been such a rate of growth for a country with a population of more than 1 million souls? The world record holders for economic growth rate, which have come to symbolize “economic miracles”, look much different: over 43 years, the growth rate in Japan in per capita GDP was 10 times; in Korea - 12 times; in Taiwan - 13 times; in China - 17 times.

If one were to rely on the official forecasts of the World Bank and IMF, then even extrapolating a continuation of the unprecedented high growth rate of the past few years for the world economy, the GDP growth rate in the developing countries by 2050 is unlikely to exceed 8 times, while that of the developed countries would be five times.

The height of pseudo-scientific futurology was achieved in the presentation by Russian First Vice-Minister Sergei Ivanov: “By 2020 Russia’s GDP will place it in the top five economies of the world”, and “Russian per capita GDP in terms of Purchasing Power Parity (PPP) will amount to $30,000 on the basis of 2005 prices.” First Deputy Prime Minister Dmitriy Medvedev agreed with this assertion.

Alas, the promises made by the candidate-successors [to President Putin] will never come true. And not just because in order for the per capita GDP per person in Russia to reach $30,000 it would have to reach 50% of the per capita GDP of the most developed countries of the world (especially the U.S.), which has never happened in 150 years of Russian history. And not even on the doubtful basis of extrapolating a constant high growth rate for Russia and low growth rate for Europe.

The problem is that higher economic growth rates require a completely different institutional environment. The growth rate depends not only and not so much on the volume of investment - international or domestic - as on the condition of social and government institutions - private property rights, division of government powers, freedom of mass media, independence of the judiciary, civil rights, political rights, and legal order.

World history knows of not a single case in which a country not having energy revenues and being unfree (in the sense of political rights, civil freedoms, legal order and defense of property rights) achieved a GDP of even $17,000 per person. For countries with energy revenues the insurmountable barrier has been somewhat higher, but is nonetheless far short $30,000.

Alas, present-day Russia is just such an unfree country, and the situation with its key social and governmental institutions excludes the possibility of its entry into the group of the most developed countries.

The Russian economy might have grown more quickly on account of its oil industry, but as a result of the government’s breakup of Yukos, and other swindles, the annual growth rate in oil extraction has fallen from 13% to 2%. The Russian economy might have grown more quickly on account of its gas segment, but independent gas producers are being crushed by Gazprom, which has increased production over the past eight years by only 0.6%. The Russian economy might have grown quicker on account of its manufacturing sectors. But not a single sector of Russian manufacturing (with the exception of gas) has to this day exceeded the production levels achieved even in the time of the Soviet Union. For example, Russian machine building is now only one-half what it was in the time of the Soviet Union. So perhaps we should consider as an economic success for 2020 not the entry of Russia into the group of the top five economies of the world, but simply the resurrection of the volume of machine building to the level seen in 1990.

Russia nonetheless still has a chance to become a developed, attractive and respected country. But for this to happen much has to be done. Including a lot that will directly contradict what is being done by current forecasters of our “bright future”. Russia has a chance, if it is ruled not by lawlessness but legal order. If all our citizens become genuinely equal before the law, if the judiciary deals with criminal conduct irrespective of whether it is by an entrepreneur, an officer of the FSB, or the son of a First Prime Minister. If government companies can refrain from stealing the property of others, strangling independent producers, and in the end are de-monopolized. If billions of dollars stop flowing from the pockets of Russian taxpayers into endless national project boondoggles, “miracle-weapons” and government “nanotechnologies”.

Russia can save its historical chance if the current political path, being pursued by both Vice Prime Ministers, is curtailed. But Russia has no chance if it continues on this path.