Complacency the Main Danger
Dmitry Dokuchayev, Yevgeny Yasin

President Vladimir Putin promulgated his budgetary message in early June, thereby initiating deliberation of the draft 2003 state budget. What can we expect from it?

MN's Dmitry DOKUCHAYEV put this and other questions to Yevgeny YASIN, ex-minister of the Russian government, currently research director of the Higher School of Economics.

The draft of the 2003 budget foresees a four percent growth in gross domestic product. The president has insisted that the government should be more ambitious and raise the figure to six percent or so. Do you think the government will comply and aim at higher growth?

Of course it would be good to respond to the president's call. But I don't think we have the economic basis for a six percent growth. As matters stand, a growth of around four percent would be normal. We could drive the economy harder only through institutional reforms to improve the business climate. But no serious improvements are in sight at the moment.

What could be done to bring about a turn for the better?

The relevant statements by presidential economic adviser Andrei Illarionov imply that one basic measure would be to follow an exchange-rate policy that would strengthen the dollar and weaken the ruble. I'm not saying that Mr. Illarionov just wants to see more money printed. So the demand/supply ratio on the currency market would have to be altered. However, my analysis of the economic situation shows that we lack the essentials that could strengthen the dollar against the ruble without slowing Russian economic growth rates.

Therefore if we are to have significant economic improvements, Russia must boost the competitiveness of its products. As I see it, the situation is already unfavorable for Russian producers because there is a threefold gap between the ruble's real buying power and its market rate [to the dollar]. Despite that, it is suggested that we let the ruble slide further! This would mean encouragement for our weak industrial management and approval of our poor efforts to retool our industrial plants. Yet we know that healthy economic growth is not feasible without strong industries. The need to reorganize and upgrade them has long been the talk of the town, but there has been very little progress in practice. Consequently, the decisive factors of economic growth cannot be set into motion.

How, in your view, could we achieve faster economic growth rates?

It seems to me that in planning the budget, one point of fundamental importance has to be borne in mind. If a country wants to attain high growth rates not just for a year or two, but for a longer term, it must slash government spending. For Russia, the optimal level of such spending would be 30% to 32% of GDP. Actually, it is 36%, which is excessively high. The government should start thinking of ways and means of making the necessary cuts in its expenditures. Of course it must at the same time put an end to embezzlement and step up financial control. Of key importance in this endeavor, however, is privatization of a large number of state-financed organizations.

Also, further cuts in tax rates are necessary. One major problem about taxes is the proportion of the tax take that goes to regional and local budgets. It is no longer possible for the regions to get much from the federal budget. One thing that worries me about regional budgets is their huge subsidies to housing and utilities. Besides, local budgets are almost entirely dependent on regional budgets as they have no income sources of their own. This is all wrong! It is extremely important - for both financial and political considerations - to grant local self-government entities enough freedom to collect their own revenues.

Do your critical remarks imply that you agree with the president that the government should be more ambitious?

To be sure, I would like to see the government do more than it is doing at present. But, frankly, I envy it. Because if my fellow ministers and I had achieved as much as the current government has achieved within two years, I would have looked upon our achievement with pride.

I'll just mention a few items. The tax reform - on which there was so much debate previously - has, to all intents and purposes, been accomplished. Granted, certain things still have to be done in the tax sphere. But essential laws on income tax and profit tax have already been adopted. Furthermore, a new Labor Code is in place, and it is largely approved of by the public. Whatever complaints you may have against the Code, you will note that it contains articles characteristic of the world's most advanced legislation. The Land Code has been pushed through, and now a draft law on the sale of farmland is before the State Duma. Recall how many years were wasted in my time while we squabbled over that bill in parliament!

Indeed, the present government has achieved a great deal. Perhaps it could make faster progress, but it is moving in the right direction. Furthermore, the budget crisis is over (in this case the government may just have been lucky, though), while barter and nonpayment are no longer a major headache. We have a basically different economy.

Well, has the government made any errors?

Yes, definitely. When it came to banking reform, they let themselves be led by [former Central Bank Chairman Viktor] Gerashchenko, who was keen to retain the status quo in the banking sector. And the Finance Ministry, including the then ministry official Sergei Ignatyev [the present CB chairman], agreed with him that drastic moves were unnecessary. Yet banking reform is crucial to economic growth rates. Should the banks be able to at least double lending to the economy, our growth targets would be attained much faster. But this, in its turn, would require the banks to treble their capitalization. You will agree that increased bank lending to industry is a far more important task than exchange-rate manipulation.

Let us return to the draft budget. Only recently, we were afraid of being crushed by the overpowering burden of foreign debt payments, which will peak in 2003. Are these fears irrelevant now?

It is true that there was a payment problem. Because we were supposed to pay our international creditors $19 billion in 2003. But now, according to my estimates, the figure has diminished by over $2 billion. That's because we have been making current payments on our debts regularly. Presidential adviser Illarionov insisted on that, and he was quite right. Second, we pulled through a "buy back" operation, buying our own debt obligations worth some $2 billion. Such operations are not normally mentioned in polite society, but all countries buy back their debts bit by bit. So do we. Third, in 2001 the government contrived to create a stand-by fund of approximately $2.7 billion. If we manage this year to boost the fund by another $2 billion, we need not worry about next year's debt servicing.

And so 2003 will not see any financial upheaval?

No. There is, however, a serious danger: The government might become complacent about its achievements, and rest on its laurels instead of carrying on with urgent economic reforms.

“Moscow News”, #23, 2002
http://www.mn.ru/english/issue.php?2002-23-12