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Charles Wolf on Russia’s Economic Transition

Yesterday Charles Wolf of the RAND Corporation penned on a column on the economic transition currently occuring in Russia (hat tip Economist’s View). Charles_Wolf.jpg Russia’s status as a “market economy” may have been accorded for political reasons, says Charles Wolf

In fact, a heated debate is currently under way within Russia concerning the direction of its economic transition, which reflects the sharply different emphasis that the opposing sides place on “good news” pointing toward market-oriented change or “bad news” pointing in the opposite direction. The debate also highlights disagreement about the reliability of official data. Since 1991, Russia’s real GDP growth rate has been more than twice the unweighted average of the other G-8 members (Japan, Germany, France, Canada, Italy, the United Kingdom, and the US). During Putin’s tenure since 2000, Russia’s annual GDP growth has been 6 percent, compared to 2 percent for the rest of the G-8, its foreign debt has been reduced from 50 percent of GDP to less than 30 percent, and its $3.3 billion debt to the International Monetary Fund was repaid ahead of schedule in 2005. Of the $40 billion owed to its creditors in the Paris Club, Russia has paid $15 billion ahead of schedule, and its foreign-exchange reserves have more than tripled, to more than $250 billion. Optimists also cite evidence that the number of privately owned enterprises more than doubled in the past decade, to nearly 80 percent of all enterprises, while the share of state-owned enterprises shrank from 14 percent to less than 4 percent. Likewise, employment in private enterprises grew by 41 percent while declining by 15 percent in state enterprises. Indeed, optimists contend that official data on private-sector growth may actually understate the pace and magnitude of Russia’s move toward private ownership, given efforts by private businesses to avoid tax liabilities by not registering or by under-reporting transactions. … Furthermore, the pessimists dispute the picture of private-sector growth represented by official data. The level of state ownership, production, and employment in the Russian economy is at least as high now as it was in 2003, when Mikhail Khodorkovsky, the chief executive of the oil company Yukos, was arrested and the state seized Yukos’ assets, along with those of several other privately owned companies. Moreover, a key question about the “good news” is how much of it should properly be attributed to the windfall of higher oil and natural-gas prices (hence, to factors not under Russia’s control), rather than to improved economic policies and reform. Recent empirical work at the RAND Corporation, a nonprofit American research organization, highlights Russia’s heavy dependence on fossil fuels. Increased oil and natural-gas prices explain between one third and two fifths of the economy’s growth over the period from 1993 to 2005. Oil and gas production accounted for between 16 percent and 20 percent of Russia’s GDP and between 44 percent and 55 percent of its total export revenues since 2004. The buildup of Russian foreign-exchange reserves is a further illustration of this dependence.

Read the complete article here.