Whatever happens, Russia can do no wrong

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The Independent Online
Whatever happens to the politics, there will be strong economic growth. Russia's economy which is now the size of California's, will grow faster over the next 20 years than most OECD countries and probably faster than most emerging markets (outside the Far East).

The quote comes from a book to be published next week, "The Coming Russian Boom", by Richard Layard and John Parker. It is worth drawing attention to it, now that the full gravity of President Yeltsin's health has been revealed, for two reasons. First, its judgements are already being proved right: the book was completed before the outcome of the Russian elections earlier this year and it is due to the usual publishing delays that it is only available now. It not only correctly forecast the election result, it also set out several longer-term scenarios for the Russian economy that might take place under alternative political developments. It has the right "feel" for the country's instincts, but does not force any one scenario on its readers.

Second, unlike many writers about Russia, the authors understand economics. Prof Layard is a professor at the London School of Economics and adviser to the Russian government's economic staff, John Parker a former Moscow correspondent for The Economist. There is a great temptation in the West to assume that politics in Russia will determine its future economic progress. To some extent that is true - for the past 100 years it has certainly been true - but there is a powerful argument to be made that the Russian economy is now at a point where progress will take place irrespective of government.

The authors set out four main possibilities for the next 10 years.

The first and, in their judgement, most likely is "more of the same". The present power group, led by Mr Yeltsin and Russia's prime minister, Viktor Chernomyrdin, will remain in charge. Economic progress will go "two steps forward, one step back". Gradually the legal system will improve but regulation will continue and corruption will persist. Inflation will remain high - 30 to 150 per cent a year - but economic growth will be good, averaging 5 per cent a year.

Option two, and the next most likely, is neocommunism. The communist party regains control, though its policies would be more akin to the popular statism of Peron in Argentina than old-style communism of 10 years ago. Inflation would increase as public spending ran even further ahead of tax revenues, privatisation would be halted, price controls would be applied but would fail. After a couple of years the economic policies would have to be reversed and financial orthodoxy re-established. Then, within five years, economic failure would encourage change: the young would take over from the old again.

But even under this less attractive scenario, there would, after the initial disruption, be economic growth. The authors suggest at least 4 per cent a year.

Third is right-wing nationalism, at present represented by Vladimir Zhirinovsky, but of course it could be presented by other people over the next 10 years. Prof Layard and Mr Parker acknowledge that this might be very uncomfortable politically, and it would be damaging to Russia's business relations with the West as well as its political ones. But such a nationalist government might be strongly pro-business and the economy might do better than it would under more muddled government.

Finally there is reform. This is seen as the least likely outcome, but if it were to happen there would be a surge in foreign investment, which could rise to more than $10bn a year, with economic growth at more than 6 per cent a year.

At the moment Russia seems to be hovering between number one and number four: muddling through is still the most likely outcome, although there is the tantalising possibility of a sustained period of economic reform. The death of Mr Yeltsin would lead to new elections and options two and three would re-emerge.

But then there was always a possibility that that would happen anyway: the communists or the nationalists could recover power in the next scheduled elections in 2001, or even before. So in one sense Mr Yeltsin's illness does not really alter the big picture: political insecurity is always in the background. But that does not stop economic progress.

This year looks like being the first since the collapse of communism when recorded output is going to rise. You have to say "recorded" because much of the present output is in unrecorded services or in the black economy, while much of the recorded output under the communist system was not really output at all, in the sense that the goods being produced were goods which could be sold. (A lot of Russian economic activity actually subtracted value, in that the output was worth less than the cost of the energy and raw materials that went into it.)

At any rate, recorded output is now almost certainly rising, and through actual has probably been rising for a couple of years, it is still comforting to see official figures heading in the right direction.

Some of these, taken from the summer Economic Outlook of the OECD, are shown in the graph. The OECD is forecasting 3 per cent growth next year and a further fall in inflation. Unemployment is still seen as rising next year, and the fiscal deficit, at 3.5 per cent of GDP, will be lower than that of the UK, and not that far from the Maastricht limit. Inflation, however, remains dreadful.

So by the standards of Western developed economies, the hard economic numbers for next year, with the sole exception of inflation, do not look out of place at all - quite good in fact. Of course the absolute level of output per head remains lower, but if the growth prospects described by Prof Layard and Mr Parker are accurate, economic growth in Russia will run well ahead of the west for the next decade.

Stand back from the chaos of transition and ask the tough question: what are the comparative advantages of Russia in the post-communist world? There seem to me to be three. The most obvious is the wealth of natural resources, a useful "fit" with western Europe, which is resource-poor. Equally obvious is the wealth of human capital, and not just what might be called the intellectual capital of Russia's top scientists, top mathematicians and top artists, but also the rough human capital of people who are now running its rough private sector economy.

There is a third, less obvious advantage. It is that Russia is the only country in the world which straddles two of the three global time zones, for it is both a European economy and an East Asian one. We seem to be moving to a three time-zone world, a world where economic activity is passed from one on to the next, maybe to the next, before being handed back to zone one. One zone performs the night-shift for the other. We talk of European countries having a time-zone advantage. London can trade with East Asia and North America. In a way, Russia also has a time-zone advantage, in that it runs two time-economies: if Europe provides only slow growth, it can benefit from the Asian boom. Only politics can hold it back.

And if Prof Layard and Mr Parker are right, that will not happen.