An interview with presidential economic advisor Andrei Illarionov

Presidential economic advisor Andrei Illarionov has stirred up the public again by criticizing the economic policy of the authorities, although presidential aide Igor Shuvalov announced earlier that the state will allocate additional funding as promised, regardless of world oil price movements.

Presidential economic advisor Andrei Illarionov has stirred up the public again by criticizing the economic policy of the authorities, although presidential aide Igor Shuvalov announced earlier that the state will allocate additional funding as promised for new social programs in healthcare, housing construction, and wage rises for state-sector workers, regardless of world oil price movements.

Arkady Dvorkovich, head of the expertise directorate at the presidential administration, supported Shuvalov. According to Dvorkovich, implementing the policy initiatives recently announced by President Putin will not ruin the economy – on the contrary, it will ensure continued economic growth.

Andrei Illarionov was the next to speak. According to Illarionov, in the first half of 2005 the impact of the state’s economic policies on economic growth amounted to minus 9% of GDP.

This is a substantial figure, even in comparison to 2004, when Illarionov estimated that the government’s actions had cost Russia 4.5% of GDP.

What is the reason for such a rapid decrease? This question opened our interview with presidential advisor Andrei Illarionov.

Andrei Illarionov: It is not a big secret now that the country changes its economic course. The turn happens not only in the economic policy but also in the national economic discussion and dominating economic thinking. A radical turn in the direction of movement appeared not yesterday and not the day before yesterday. Its first signs were manifested back in 2000-01 in the program of electric energy sector reforming according to Chubais. The shape of this turn grew more obvious for broad public in 2003 after beginning of the “YUKOS affair.” Year 2004 became “the year of a great turn” in the main components of the economic policy. In 2005, this turn receives political legalization and ideological substantiation. Direction of the movement leaves no doubts. The turn is made towards the state capitalism and populism. This is a model of economic development fundamentally different from that creation of which was declared officially in 2000.

The current turn is not only a mistake. It incurs the most difficult consequences. In the 20th century, Russia already paid a huge price for experiments of the authorities on the nation. Our compatriots suffered such losses from actions of the totalitarian state in the years of the Soviet power and from populism of the new Russian authorities in the 1990s (very often mockingly called “radical liberal reforms”) that the entire Russian society seemingly received a very powerful vaccine from incompetent state interference for decades.

It seemed that the necessary lessons were learned.

Alas! The evolution of our economy shows that this is not so. Powerful blows were delivered on the most important social institutions composing the basis of modern development like equality of running business, superiority of the law, judicial system, budget policy and stabilization fund. Retreat and mistakes in some directions of the economic policy were until recently balanced partially by actions in the macroeconomic field being acceptable in general. However, now even this policy is sacrificed. Budget proposals being discussed and implemented now show that memory of the authorities has been short.

Question: What is the reason for your concern in the budget for 2006 that everyone calls “budget of development?”

Andrei Illarionov: I am concerned not only and not as much about the budget for the next year as about evolution of the budget process in general and changing of the role and place of the state in the economy in public perception. In the last five years and a half fundamental positions of the economic authorities changed radically. What was started a few years ago and implemented, although inconsistently, was practically fully stopped by now.

The basic principles of a modern successful economic policy are well known. Taxation should not suppress economic activeness. If it is excessive (like in contemporary Russia) it should be lowered.

Strategic success is achieved only in circumstances of open economy and not behind the protectionist fence. Common rules for all are better than special regimes and individual exceptions.

Monopoly corrupts, and absolute monopoly corrupts absolutely. Only prices grow without competition. The rights of ownership are sacred. Private property is more efficient than the state one. The state is not an efficient businessman and should not run business.

No problems can be solved through injections of funding alone. Every ruble received should be earned.

Handing out unearned money is destructive and immoral.

The current actions of Russia’s economic authorities do not correspond to these principles. They are solemnly activating a mechanism that produces a nationwide race for frantically shedding the last vestiges of rational economic behavior.

Growth of state revenues and state expenditures outruns the GDP growth. Along with the predicted growth of real economy by 5% or a little more for the next year the authorities plan to increase expenditures of the federal budget by a two-digit figure. Thus happens re-distribution of resources from a more efficient sector of national economy to a less efficient sector. In other words, decisions that slow down growth of Russia’s economy are made deliberately.

Question: Probably we do not need such a rapid growth of GDP? Is it better, like many experts say, to increase wages first, to develop healthcare and education and some time later all this will add momentum to development of economy?

Andrei Illarionov: The maximum level of well-being can be achieved only due to a rapid economic growth. High and steady speed of economic development represents an absolute imperative of the economic policy of any responsible power, the main if not the only really nationwide and really long-term project. For each economy there is its own potential growth rate. For Russia’s economy it amounts to about 8% a year even in circumstances of low oil prices. Many countries being in more difficult conditions that Russia demonstrate not only equal but even higher growth rate. For example, in 2004 GDP of Ukraine grew by 12%, although foreign trade situation was more unfavorable for it than for Russia and even grew much worse due to a dramatic growth in prices of imported fuel. Last year, economies of Belarus, Tajikistan, Armenia and Georgia grew by 9-13%.

Being oil importers all of them had to increase their expenditures on purchase of fuel tremendously but nonetheless they were increasing their economic potential much faster than Russia.

In circumstances of a favorable foreign trade situation potential growth rate of Russia’s economy can and should be even higher than the aforementioned 8%. Such opportunities are confirmed not only by theoretic ideas but also by practical examples. In the last six years, average annual speed of economic growth in Azerbaijan and Kazakhstan has exceeded 10%.

Why is rapid growth impossible in Russia? When the matter comes to our country the minister responsible for “economic development” suddenly says that due to an unknown reason Russia is unable to grow by 28% a year, 20% or even 8% or even 7.2% a year (the speed necessary for doubling of the GDP in a decade). He says that Russia can grow maximum by 5.8% (5.7% in the first half of 2005) along with the oil export price of $60 per barrel!

A high growth rate for Russia is not a wishful thinking. Russia’s economy was really growing at such pace five or six years ago. In 1999, when oil prices were around $14 a barrel, Russia’s GDP (not the GDP of Ukraine, Azerbaijan or even China) grew by 6.4%; and in 2000, with oil at $24 a barrel, our GDP grew by 10%. Now oil prices are two or three times greater, but the growth rate is about half of what it was then. What has happened during this period? Has the export market situation grown worse for Russia? No. Have Russian people forgotten how to work? No too. What has changed? Only the pursued policy has changed and the speed of economic growth together with it.

Question: What are the economic authorities doing wrong?

Andrei Illarionov: The main thing that there is a lot of incompetent state in the country and there is little economic freedom. According to the index of economic freedom Russia is on the 115th place among 127 countries near Rwanda, Togo, Gabon, Congo, Central African Republic, Algeria, Syria, Niger and Nepal.

Numerous international and historic comparisons show that the burden of the state and monopolies, that is the volume of money re-distributed through the state budget and the state monopolies in our country exceed what is inherent to countries of the same level of economic development and the same size as Russia tremendously.

The scale of state regulation is also much bigger than in comparable countries. As a result, the actual speed of economic development in Russia is much lower than the potential one.

Against the background of slogans of equality of conditions for running business exclusive conditions are created everywhere for separate companies, industries and regions up to creation of special zones.

Question: That is why the actual speed of inflation proved to be higher than predicted?

Andrei Illarionov: There are several reasons. First of all, it seems that economic authorities do not have a real wish to cure the so-called “Dutch disease.”

Injection into economy of additional money received due to the favorable foreign trade situation leads to growth of the overall level of prices. In turn, higher costs make processing sectors of the national economy less competitive.

In case of consistent non-counteraction to such disease there is a serious risk of transformation of sufficiently diversified economy (so far Russia’s economy is such) into a kind of oil emirate with two or three functioning industries, 3 million people employed in them and 140 million dependent people. In this case the nearest prospect for Russia is becoming a hospice where tens of millions of adult men and women do not work and do not earn money for themselves and for their children but beg the state for social allowances.

It is well known how the “Dutch disease” can be treated. Stabilization fund is the most efficient remedy.

What is this? This is a dam protecting the Russia’s economy from narcotic effect of spare money. This is a powerful tool for maintenance of economic growth. Discussion of whether we need to protect the country from narcotic oil dependence, if we need economic growth and if we need to create stabilization fund respectively has been going on for four years. It was finally decided that the fund should be created. However, as soon as the stabilization fund was created the authorities immediately started active discussion of the ways to destroy it. They already started its destruction.

At first, the Economic Development and Trade Ministry achieved increase of the “cut-off price.” For efficient neutralization of the oil drug the “cut-off price,” that is the threshold starting from which revenue of exporters of energy resources goes to the stabilization fund, should be set at a level of $12-18 per barrel. Our authorities chose $20. This barrier did not last long too. In the budget for 2006 the cut-of price was increased to $27 per barrel. The Economic Development and Trade Ministry additionally lobbied creation of the investment fund with assistance of which this drug would be industrially spread all over the organism of Russia’s economy.

If the goal of the Economic Development and Trade Ministry is to eliminate jobs and make the entire nation dependent on charity, it should tell the people about this honestly. However, there is a small problem in the form of Russia’s current population numbers. Not 3 million people like in Kuwait, and not 25 million like in Saudi Arabia – but 143 million. Additional oil revenues injected into Russia’s economy are sufficient to destroy 30 million jobs, but certainly won’t be enough to provide social benefits for 140 million people.

Question: This means, that you think that we do not need the investment fund. Who will finance large infrastructure projects, upgrade, for example, our obsolete transport infrastructure?

Andrei Illarionov: First, even without the investment fund the budget allocates money for state investments. Second, the major part of the infrastructure can and should be financed by the private sector, naturally, under condition of acquisition of the right to own the created objects.

Question: Just agree, it is necessary to conduct social reforms anyway and this requires a lot of money.

Andrei Illarionov: At this point it is important which kind of reforms these are. One thing is if these are reforms aimed at broadening of marketing relations in the economy and hence increase of its efficiency and well-being of citizens. They should be carried out without dispute. But they are stopped now. This is just another matter if this is reanimation of state interference into economy. Such reforms really cost dearly but I am not sure that we need them.

If reforms require budget money, this means that they reduce efficiency of the economy, slow down the growth in living standards and hence such reforms should not be conducted. From my point of view, it is necessary to conduct reforms that do not require money but yield money including unused reserves, enterprising initiative and eliminating the “black holes” where economic resources disappear.

Question: Thus, the danger of this turn is that presence of the state in Russia’s economy is growing too big. In which directions do you think it should retreat?

Andrei Illarionov: The role and the place of the state in the life of human society is one of the central answers that the society will always ask. There is a huge danger that an illusory notion is spreading in our country today again that the state in the form of state officials can make decisions of higher quality than people can make for themselves.

In reality, each of us striving for our own well-being and well-being of our relatives act in the way the best for ourselves and for the society.

But if the authorities introduce import quotas for meat these are they and not we who decide for ourselves what we should buy, domestic or imported meat. They also force us to pay a higher price for this.

Introducing import duties on cars the authorities make decisions for us which cars we should drive and which price we should pay for this. Destroying the stabilization fund the authorities deprive millions of our competitors of jobs and earnings. Performing state investments from the investment fund the authorities decide for business where it should invest money and hence decide for ourselves what we should buy, consume, drive and how much we should pay for this.

Question: But after all, the nation elects the authorities to make decisions.

Andrei Illarionov: Yes, the authorities are elected to make decisions that lead to the fastest growth in well-being of people. I repeat once again: potential growth rate of Russia’s economy is about 8% a year. In case of a favorable foreign market trade situation this growth could by 1.5-2% higher. In other words, in the last six years the level of consumption of Russian citizens could double. In reality, it grew by 50%. This is not little according to various standards besides the standards of the currently existing Russia’s potential and current foreign trade situation. The difference between the potential and the actual levels of consumption is the price that the society pays for mistakes of the economic authorities and for the turn that they carry out.