IDEAS FOR THE PRESIDENT

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Four models for the future of the Russian economy

A team of experts has developed four models of Russia’s future: Rentier, Mobilization, Inertia, and Modernization. Different options for economic management and state action offer a number of possibilities affecting economic growth, social stability, and the role of the private sector.


Several teams of experts – including some of Russia’s strongest economists, political scientists, and sociologists – will deliver a presentation to the two senior deputy prime ministers, Dmitri Medvedev and Sergei Ivanov, on May 16: setting out national development scenarios for the next eight years.

The team headed by Igor Yurgens, VP of the Russian Union of Industrialists and Entrepreneurs, has developed four models of Russia’s future.

Rentier

The first scenario is known as Rentier. It assumes that Russia’s accumulated oil-and-gas revenues will be spent. The emphasis is on social spending: raising state-sector wages and pensions at a rate exceeding the economic growth rate.

Rising incomes will provide a development impulse for the consumer goods sector. Competition in the retail market will increase. State-sector workers and other low-income groups will feel more confident; this will make it possible to relieve social tension and enhance social stability.

Yet this scenario also has its negative aspects. Social spending will be increased to the detriment of economic development. GDP growth will slow. Russia will fall even further behind the developed nations in terms of technology and industry. Corruption will not decrease; it might even grow. Private companies will continue to hide in the shadows. Economic restructuring will be postponed. Moreover, social spending will be vulnerable: if raw materials export prices fall, state-sector wages and pensions could decrease drastically.

The strong side of this scenario is that it’s very likely to be implemented. It wouldn’t require much effort on the state’s part; no need to restructure the system of government or carry out reforms. And ordinary citizens, tired of the transformation period, would gladly support the Rentier plan.

Mobilization

The new administration will not resign itself to the option described above; it will declare that we should make Russia a modern state which produces its own aircraft, ships, and cars. In the Mobilization scenario, the state actively increases spending on large-scale projects. It builds roads and railroads, invests in hydrocarbon production and transport, invests in the metal sector, and revives the defense industry. The state increases its presence in the economy, continuing to take over private companies.

Other countries would see Russia as a force to be reckoned with, since it will build up its muscles in the sectors which influence global processes most strongly.

Economic growth would even accelerate, temporarily, thanks to extensive state investment – but then it would decrease, since it wouldn’t be supported by domestic demand. The authorities would restrict social spending, asking citizens to tighten their belts. And the situation could become disastrous in sectors deprived of state attention, due to a lack of investment.

The danger in this scenario is that the state’s spending might be ineffective, since the state isn’t usually regarded as the best distributor of money.

Inertia

The Inertia scenario continues the present situation. On the one hand, the state plans and launches large-scale projects; on the other, it gradually raises state-sector wages and pensions by using money from the Stabilization Fund. The authorities act pragmatically and flexibly, combining both the Rentier and the Mobilization scenarios.

The economy is modernized sector by sector. For example, rearmament for the Russian Armed Forces is used to modernize the defense industry; and the state modernizes the high-tech sector by establishing a nanotechnology corporation. But the national economy never moves away from its focus on raw materials exports. Economic growth remains dependent on changes in energy prices.

Reforms are carried out continually, but without any substantial successes, since they are launched without thorough analysis and discussion. And they are implemented by the “old-style” state apparatus.

Modernization

Modernization is the most desirable scenario. Rather than taking over the tastiest morsels of the economy, the state relies on the private sector. Taxes are cut. Local government is developed. Small and medium-sized business is given more freedom.

The state retains only the obligation to develop infrastructure – and this work should be contracted out to private companies: funding provided by the state, but spent by the private sector. This is a question of the state trusting business owners.

The economy grows rapidly. To promote this, the state administration system and the judicial system are reformed; anti-corruption efforts are intensified. Government bodies and state agencies become more transparent to citizens; state officials and civil servants are held accountable for their actions and face harsher penalties for misconduct. And in order to prevent ill-considered decisions on social policy issues, they are subjected to broad public debate. These measures are predicted to reduce stratification between the richest and poorest social groups to a ten-fold income gap.

Although this is the most difficult scenario, it would also be the most advantageous for Russia.

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