UNFORTUNATE CAPITAL

0
15

An interview with Yegor Gaidar

Yegor Gaidar, economist and former prime minister: “We propose directing oil and gas windfall revenues into reinforcing the foundations of a savings-based pension system. For this purpose, we consider it advisable to use revenues from the privatization of state assets.”


Yegor Timurovich Gaidar, director of the Transition Economy Institute, discusses the greatest risks in Russia’s current economic policy course.

Question: Your latest research report makes some rather grim predictions, noting that the influx of petrodollars is threatening to decline. When might these threats become reality?

Yegor Gaidar: Our country’s financial position is stable. All the leading analysts believe that. I don’t see any serious risk factors over the next three years – nothing to cast doubt on Russia’s financial and economic stability. We have learned some lessons from the Soviet Union’s collapse – we understand that oil prices are unpredictable and we should be prepared for various scenarios in the oil market. The Russian government is behaving more sensibly than the Soviet Union, which never built up any currency reserves. In the medium-term future – the timeframe covered by the three-year federal budget for 2008-10 – I don’t see any serious problems.

However, there are some fundamental economic questions facing Russia. One of them involves demographic changes due to decling birthrates in a post-industrial society. For our country, the roots of this problem go back to the late 1920s, when the USSR decided to pursue a socialist industrialization strategy. At an unusually early stage of economic development, women were sent out from the peasant household to work in factories and industrial plants. Birthrates started declining rapidly. That leads to a fundamental problem: a rapid reduction of the workers-to-pensioners ratio.

Question: Does this mean that Russia will have to take a long-discussed and extremely unpopular measure – raising the pension age?

Yegor Gaidar: Raising the pension age is an unpopular measure, certainly. But it wouldn’t solve the problems – only postpone them for three or four years. What you need to understand is that in strategic terms, there are four alternatives. First: abandon the pension system. If the average pension falls to less than 15% of the average wage, the pension system can be regarded as dead. Second: drastic, radical tax increases – not just a 5% rise, but doubling taxes. But that relies on the assumption that everyone would actually pay their taxes, and that the shadow economy wouldn’t expand. Third: emission financing, or destroying our own financial system. The fourth option is what we propose: accelerated introduction of a superannuation savings element into the pension system, while we’re still receiving windfall revenues from high oil prices.

Question: And is the second fundamental problem related to oil revenues?

Yegor Gaidar: Russia’s dependence on commodities markets is nothing to be ashamed of. Norway, the world’s most developed country, is in a similar position. That goes for Australia and New Zealand as well. Why should we shoot ourselves for that? But commodities markets are peculiar. Raw materials prices can fluctuate across a broad range. In real terms, oil prices have risen and fallen within a ten-fold range over the past 50 years. What does that mean? A country has its infrastructure: hospitals, universities, armed forces. Imagine that the country’s revenue source shrinks ten-fold. How can the government explain to doctors, teachers, and officers that the money has dried up? The Soviet government was unable to do that. The state collapsed.

We learned some lessons from the past, and established a Stabilization Fund. The idea expressed in the president’s budget address – supplementing this with a Future Generations Fund – is a sensible idea. But any demagogue will tell you in 20 seconds how foolish it is to invest the money in highly-liquid financial assets, arguing that the money should be spent within Russia instead. If the demagogue is right, it’s hard to understand why in Norway – although it has a decent civil service known for being corruption-free – the public still doesn’t trust officials to invest money intended to maintain the pension system’s stability in specific investment projects. Alberta and Alaska, which have the reputations of a province and a state with decent bureaucracies, still trust their bureaucrats to direct only 4% of funds into investment projects, preferring to keep the rest in the money markets. Do we have any grounds for believing that our bureaucracy isn’t corrupt, and that it would be all right for us to entrust it with the distribution of pensioners’ money?

Oil export revenues are unstable and unpredictable. What’s more, their share in the GDP is declining over the long term. Oil and gas output isn’t growing as fast as GDP. As economic development continues, GDP figures calculated on the basis of parity purchasing power and GDP figures calculated on the basis of the current exchange rate draw closer. The richer the country, the smaller this gap will be. Ours is closing rapidly. This means that oil and gas exports are contributing a decreasing proportion of GDP.

Our oil and gas reserves are not infinite. The authorities predict that oil output will start to decline from 2021, and gas production will stabilize from 2030. This in itself is sufficient to require a serious discussion of the problem concerning the long-term trend of oil and gas contributing a decreasing proportion of GDP. In order to maintain the pension-to-wages ratio at least at the current level, we will need major amounts of additional revenues: 3-4% of GDP, according to our calculations. What we have is a long-term trend of declining revenues from our budget’s most important revenues source: oil and gas. What we propose is a policy aimed at a non-catastrophic solution to this strategic problem.

Question: You said recently that the most important element here is the privatization of Russia’s largest companies.

Yegor Gaidar: We propose directing oil and gas windfall revenues into reinforcing the foundations of a savings-based pension system. For this purpose, we consider it advisable to use revenues from the privatization of state assets – primarily the assets of state-owned corporations which are listed on stock exchanges. The state should obtain the best possible prices for them, and direct the money into ensuring the pension system’s stability. We’re talking about all Russian citizens, including the pensioners of today. According to our estimates, this issue is worth about 70% of GDP. That’s a minimal figure – we didn’t count land, forests, urban real estate – only the shares of state-owned enterprises listed on stock exchanges and the value of assets owned by state enterprises, not reflected in financial markets yet, but potentially liquid.

Question: For example, 51% of Gazprom shares.

Yegor Gaidar: This doesn’t mean that we’re proposing to sell that package immediately. There’s still some time to spare, no one’s rushing things, no one’s saying that it needs to be done right now. It can be done over the next 20 years. There are some assets that the state isn’t managing in the best way. And there’s no other way to solve the problem of the pension system’s stability.

Question: What do you think of the Finance Ministry’s taxation policy?

Yegor Gaidar: The taxation system requires cautious handling. Russia carried out in-depth tax reforms between 2000 and 2002. The international financial community regards these as some of the most successful reforms in the second half of the 20th Century and the start of the 21st Century. But there was an obvious problem from the start. Success generates problems. For a long time, my colleagues at the IMF refused to admit that there is a correlation between the introduction of a flat-rate tax scale and a rise in tax collection percentages. Their arguments weren’t entirely devoid of common sense. Essentially, they argued as follows: there must not be a fashion for the idea that tax reforms can be carried out on the assumption that you know the Laffer curve (the correlation between tax rates and tax collection percentages).

When we developed our tax reform proposals, we didn’t include increased collection percentages in the calculations – but in practice, it did happen. This has made Russia’s finances more stable. But tax reform planning should not assume that this is guaranteed to happen. After one tax cut has produced additional revenues for the treasury, it becomes too tempting to assume that revenues can be increased by cutting taxes, every time. I’m not against tax cuts. But I do know economic and financial history, and I understand that if you want low taxes, you should be prepared to take measures to restrict state spending.

Question: But Finance Minister Alexei Kudrin has said that he might consider tax cuts after 2008.

Yegor Gaidar: Alexei Kudrin is a wise man. If he says that he may consider such proposals, it means that he will be prepared to consider them at the specified time.

Question: How likely is it that the authorities will start to move toward implementing the macroeconomic strategy you propose?

Yegor Gaidar: In the long term, I think it is very likely. The problem of pension-to-wages ratio is unavoidable. It will only become more and more acute. This may become apparent a year from now, or two years, or five years. The longer the government takes to make a decision, the more it will cost Russia. I don’t see any other way of solving the problem.

LEAVE A REPLY