ECONOMIC VIEW : Bears set to make way for bulls on Russia's prospects

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The Independent Online
The Coming Russian Boom is a good read-me title for a book. The popular assumption, certainly within most of the business community, is that while China presents enormous economic opportunities for the West, Russia will remain pretty much a basket case. China, it is often argued, got its reform process in the right order, introducing the market economy before contemplating any greater measure of democracy; Russia, on the other hand, got things wrong by allowing political change before economic reforms were in place.

And so it is generally assumed that by the second decade of the next century China will be the world's largest economy, while Russia will still be mired in conflict, disorder and crime. This view of China may well turn out to be correct - you have to assume that something catastrophic will occur in China for it not to continue to grow very rapidly. But the perception of Russia ignores a string of positive economic features. These include the fact that Russia is not just the largest country by land area in the world, but it also has the greatest stock of natural resources: it is, for example, the world's largest producer of natural gas. Perhaps more important, it has also a highly-educated population, far more highly educated than that of developing countries with similar income levels. So lack of education will not hold back economic growth.

Because the positive case is made so rarely, this new book* launched yesterday, deserves serious attention by business people and politicians alike. It is a tough-minded, rational, but fundamentally optimistic assessment of the chances of Russia becoming a prosperous functioning democracy within the next generation.

Both authors know Russia intimately. Professor Layard, head of the Centre for Economic Performance at the London School of Economics, has spent much of the past five years advising the Russian government on reform, while John Parker has been the Economist magazine's Moscow correspondent - in 1992 he received the Moscow Union of Journalists award for coverage of Russia. So both are, so to speak, on the side of Russia. But, as they remind us at the start, by and large the optimists have been more right than the pessimists so far.

Their thesis is this. They set out by seeking to answer 12 questions about Russia, some principally political, others largely economic. These range from questions about Russia's instincts and history - is it naturally collectivist, autocratic or anti-Western? - to questions about the reform process: was there too much shock therapy, did the West do enough to help, and how do people live now?

The economic balance sheet they draw up is quite positive. The general prognosis is good, since GDP seems to have stopped falling, there are massive natural resources, a highly educated population and plenty of investment finance. Good progress has been made in freeing prices and markets, and in privatising state property; but progress has been poor in controlling inflation, protecting the weak and in particular establishing a climate of legality. The authors see this last as the greatest barrier to economic progress, something with which virtually all foreigners who have sought to do business in Russia would surely concur.

The political outlook, they feel, is less certain. The future of the economy will be driven by the pursuit of wealth, with predictable effects, and has natural stabilisers, whereas in politics this is less true. Next month's presidential election will be very important, for if Yeltsin does win policies will continue pretty much on present lines, while if the Communists were to win the outcome is much less clear. There would undoubtedly be an economic setback, as controls were reintroduced and some industries renationalised. Eventually these policies would be reversed but there would be damage in the meantime.

On the broader politico/economic question - what kind of society might Russia eventually become? - the authors produce the chart shown on the left, with degrees of political liberalism on the vertical axis and economic liberalism in the horizontal one. It will not, they think become quite the fully-functioning democracy and market economy of the USA or France, but equally it will return to a controlled economy, though it might become very autocratic politically in a Peron/Pinochet manner.

Most likely? Well, "more of the same" is the number one scenario suggested by the authors, based on the assumption that a Yeltsin/Chernomyrdin group continue in power. Progress will continue, with the familiar two steps forward, one step back method of advance. The legal system will improve gradually, but much regulation will continue. Inflation will fall but gradually. Above all, there will be good economic growth of 5 per cent a year or more.

The next most likely outcome is neo-communism, some form of left-wing nationalism, with higher inflation, rebuilding defence and seeking to put pressure on former Soviet republics to link more closely with Russia. It will fail - it would not be supported by the young - but meanwhile growth would be more muted, though the authors suggest, still at 4 per cent a year.

Other possibilities include noncommunist nationalism - authoritarian rule from the centre or even the right - and the least likely, reform pure and simple. Under this last, with a government united behind economic reform, there would be a surge in foreign investment and they believe growth could be 6 per cent or more.

The most interesting thing here from an economic point of view is that even if things go badly politically, there is a reasonable prospect of economic growth. Figures on the Russian economy are notoriously difficult to interpret. If you look at conventional GDP numbers, the economy seems to have continued to decline last year. If on the other hand you look at consumption, which after all is more than half of GDP, this has been rising since the huge fall in 1992. Layard and Parker believe the economy stopped shrinking in 1994. That is probably right, though some figures suggest that GDP fell further last year.

As a cross-check to the more optimistic assessment have a look at the graph on the right, which shows some estimates and forecasts for the Russian economy published by the US bank J P Morgan in a circular on the forthcoming elections. In these figures, the Russian economy is just at the turning point now: there should be just under 2 per cent growth this year and 4 per cent next. Inflation (not shown) remains dreadful, though it has come down from more than 300 per cent in 1994 to a forecast 75 per cent this year, but some of the other numbers are fine. Thus the fiscal deficit, at 4.4 per cent of GDP, is actually lower than that of the UK, and the current account is in substantial surplus.

If you plot the Russian experience against that of, say, Poland, it looks wholly plausible that in two or three years the Russian economy will indeed be growing rapidly: Poland started its reform process three years before Russia, but by last year had become the fastest-growing economy in Europe. It is worth recalling that in the early stages of Polish reform, many people felt that Poland, far away to the east and without much of a market tradition, would find economic reform much more difficult than, say, Czechoslovakia or Hungary. Now it is clear that Poland is doing as well as any former communist state.

Two final thoughts - reasons why, like Richard Layard and John Parker, there will indeed be a coming Russian boom.

One is an historical perspective. During the first decade of this century Russia was the fastest-growing economy in the world. Two of the forces which drove that growth, natural resources and clever people, are just as strong today. And Russia's brand of rough entrepreneurship suggests that the drive to make money is just as strong now as it ever was.

The other thought concerns the improbability of a return to a state-controlled economy. I have met Chernomyrdin only once (I have never met Yelstin) but one remark of his stuck in my mind. Did he, we asked him, see any case for a return to a more centralised economy? "No," he said, "I worked under the old system for 40 years. I know it. And it is because I know it, I also know how badly it worked. So I would never want to go back."

* The Coming Russian Boom, Richard Layard and John Parker, The Free Press ($28)