The Unz Review - Mobile
A Collection of Interesting, Important, and Controversial Perspectives Largely Excluded from the American Mainstream Media
Email This Page to Someone

 Remember My Information



=>
Publications Filter?
Da Russophile
Nothing found
 TeasersRussian Reaction Blog
/
jim o'neill

Bookmark Toggle AllToCAdd to LibraryRemove from Library • BShow CommentNext New CommentNext New Reply
🔊 Listen RSS

Иn the wake of the 2009 recession, declinist rhetoric has come to dominate discussion of Russia’s economic prospects. Jim O’Neill, the founder of the BRIC’s concept, has his work cut out defending Russia’s expulsion from the group in favor of Indonesia, Mexico, or some other random middle-sized country. Journalists in the Western media claim its economy is “not growing”, as do liberal Russian newspapers such as Vedomosti. Comparisons between Putin and Brezhnev (who presided over the Soviet Union’s period of stagnation, or zastoi) are piling up. Even President Medvedev isn’t helping the situation, telling a forum of international businesspeople that Russia’s “slow growth” hides stagnation (good job promoting your country, DAM! not….).

I don’t want to exchange rhetorical barbs in this post (which you may note is not tagged as a “rant“), and my skills at mockery and picking apart tropes aren’t nearly as well developed as those of Mark Adomanis or Kremlin Stooge, so I’ll do what I do best and go straight to the statistics. And so we have Fact #1: what is described as stagnation for Russia is a growth rate of 4%. It grew 4.0% for 2010. It was 4.1% in Q1 2011, and the government predicts it will be 4.2% for the whole year. The World Bank predicts 4.4% in 2011, 4.0% in 2012; the OECD expects 4.9% in 2011 and 4.5% in 2012; and the IMF forecasts 4.8% in 2011, 4.5% in 2012, tapering off to less than 4.0% in the “medium-term.”

This does not strike me as being particularly bad by global standards. This is obviously no miracle economy of Chinese-like 10% growth rates, but Russia (4.4%; 4.0%) does not compare badly to the World Bank’s projected growth for other typical middle-income countries such as Turkey (4.1%; 4.3%), Thailand (3.2%; 4.2%), Brazil (4.4%; 4.3%), Mexico (3.6%; 3.8%), or South Africa (3.5%; 4.1%). Facing real stagnation, many countries in the developed world such as the UK could only wish for Russia’s growth rate; though this is an unfair comparison, because Russia is poorer and can therefore find it easier to grow faster (see economic convergence), it is not less unfair comparing Russia to countries such as India (8.4%; 8.7%) or Indonesia (6.2%; 6.5%) because the latter are so much poorer than Russia in their turn.

This discussion suggests that CONTEXT is vital when discussing the degree of stagnation in a country. One of the two major factors here is the current GDP of the country in question; real GDP, that is, because that is what growth refers to (i.e. if a country devalues its currency by half but output remains constant, then nominal GDP will fall by half but real GDP will remain constant; as such, real GDP per capita is also the better proxy for living standards and economic sophistication). Now there are two major estimates by international organizations of Russia’s real GDP. The IMF estimates it at $15,800 as of 2010, whereas the World Bank believes it is $19,800 (relying on recent joint research by OECD-Eurostat-Rosstat). There are grounds to believe that the latter is more accurate because the international price comparison data that goes into real GDP estimates is much more recent for the World Bank*. But regardless of which one you use, Russia’s GDP is still much higher than the other emerging markets or BRIC’s with which it is so frequently compared to – Brazil has $11,100, China has $7,500, Indonesia has $4,400, and India has $3,600.

This is extremely important for two reasons. First, it is much harder to grow quickly when you are already a mostly developed country (like Russia, Poland, Korea) than when you are a mid-level developing country (China, Brazil) or a poor developing country (India, Indonesia). The most important reasons are: (1) The potential to achieve rapid growth by transferring your population from rural agriculture to urban industry and services becomes exhausted; (2) the services sector, where productivity can’t be improved as fast as in industry, assumes a bigger share of GDP; (3) most importantly, those countries are far closer to the technological frontier or “best practice”, and hence must increasingly innovate their way to growth instead of reaping low-hanging fruit by adopting and copying from elsewhere. All this isn’t debatable – there is a ton of economic literature on this, it passes the common sense test, and it is basically a given.

Second, when your starting base is low, fast economic growth is far more necessary to achieve real improvements in living standards and catching up to the West. 5% growth in the US would be remarkable and unprecedented for decades. 5% growth in a country like Egypt, with a GDP per capita of $6,000, will not transform it into a developed or even mostly developed country for the foreseeable future. Not only that, but it will be significantly swallowed up by a population growing at nearly 2%. This is no different from the growth rates in most fiscally healthy developed nations and so in effect virtually no “catch up” happens whatsoever.

This brings us to a second point, the importance of accounting of adjusting for population growth. India’s 8% growth rate in the last decade seems remarkable, prompting talk of “Shining India” and how it is the next big superpower. But considering its very low starting base, and the fact that its population was growing by nearly 2% per year, and you have the far less impressive figure of 6% per capita growth. This is still respectable, but it is barely higher than (much wealthier) Russia, and probably doesn’t warrant the glowing accolades heaped on its “tiger” economy.

At this point, I think it will be a good idea to consolidate all these statistics into a single graph that illustrates the arguments. GDP figures are taken from the World Bank’s 2010 estimates (there is reason to believe China’s GDP is underestimated, hence it has two estimates). GDP growth refers to the mainstream consensus on how fast these countries will be growing in the medium term (e.g. Russia “stagnating” at 4% a year; China following in the historical footsteps of Korea; India growing at the realistically highest rates projected by its proponents; Brazil and Mexico continuing to conform to both their historical rates and medium-term predictions; etc). Population growth is subtracted from the GDP growth to give a per capita figure. The last column are the projected totals for 2020. Figures are rounded off.

2010 GDP /c GDP % gr. Pop % gr. 2020 GDP /c
Brazil $11,000 4% 1% $15,000
China (1) $7,500 8% 0.5% $16,000
China (2) $12,000 7.5% 0.5% $25,000
France $34,000 2% 0.5% $39,000
India $3,600 8.5% 1.5% $7,000
Indonesia $4,400 6.5% 1% $7,500
Korea $29,000 3% 0% $39,000
Mexico $15,000 3% 1% $18,000
Russia $20,000 4% 0% $30,000

The results, as you can see, are fairly stunning. A low population growth and relatively high base – Russia’s GDP per capita of $20,000 is equivalent to that of Poland, Hungary, and Estonia – means that as soon as 2020 Russia will be where Italy is today, with a GDP per capita of $31,500. Now granted Italy may have grown as well, but given its dismal record for the past decade and the growing financial tremors in the Eurozone even this is far from certain. In other words, even at “stagnant” growth rates of 4% per year Russia will have converged to the lower ranks of Western Europe’s rich countries (having overtaken Greece and Portugal outright).

But this isn’t that surprising when you consider that 4% is equivalent to the trend rate at which Korea has grown from 2003, when its GDP reached Russia’s today; the IMF predicts that by 2013, a decade later, it will hit $35,000.

(Excuse the minor digression from the main topic of this post, but the graph also convincingly demonstrates why my Sino Triumphalism is not misplaced. Even under fairly rosy assumptions for India, it will have have barely converged to China’s 2010 level in a decade’s time – and that assuming that China’s GDP isn’t underestimated. The real question isn’t why Russia isn’t growing as fast as China, but why is China growing so damn fast? See other posts for answers).

Now what about unexpected downsides? Objectively, Russia has solid macro fundamentals – far better than the over-indebted, over-leveraged Western economies (with the partial exceptions of Canada and Scandinavia). This is a trait it shares with the other BRIC’s and many other emerging markets in what is truly an amazing and perhaps unprecedented reversal of places in the last decade. This isn’t grounds for complacency – the 2009 recession is argument enough for that.

Nonetheless, the main facts remain intact: (1) It is growing from a relatively high base; (2) In an environment of approximately zero population growth; (3) The strength of state finances preclude any fundamental economic cataclysm as happened/is happening in Ireland, Greece, Latvia, etc. Taking into account these adjustments, a growth rate of 4% is entirely respectable and better than many if not most countries in the same general income bracket.

* Those interested in the details can read here and here.

EDIT: This article has been translated into Russian at Inosmi.Ru (Российская экономическая «стагнация» в глобальной перспективе).

(Republished from Sublime Oblivion by permission of author or representative)
 
🔊 Listen RSS

There is a wide divergence of views on Russia’s economic future. The pessimists project near zero growth (e.g. SWP, Guriev & Zhuravskaya), or even a renewed collapse if Europe goes haywire. The inventor of the BRIC’s concept (and Russia bull) Jim O’Neill of Goldman Sachs believes it will manage to eke out growth of 7%, nearly recovering the output lost in 2009. The consensus seems to be around 4-5% (World Bank, bne). In this post I’ll describe developments in Russia’s economy since I last did it in a systematic way in December 2008 and give some indicators of what to expect in the next few months and years. Most of this post is based on the information in the World Bank’s Russian Economic Report #22: A Bumpy Recovery.

1. After the sharp -7.9% contraction in 2008, Russia has began to recover at a slower than expected rate, with GDP rising by 2.9% in Q1 relative to the same period last year (in comparison with China’s 11.9%, Turkey’s 11.7%, Brazil’s 9.0%, India’s 8.9% and Mexico’s 4.3%). However, there are indications it accelerated in Q2. The slowness and bumpiness of the recovery is presumed to be due to the waning of crisis stimulus spending and continuing low demand.

The current recession was also significantly deeper and longer-lasting than the 1998 one, though its humanitarian impacts were almost insignificant (see later).

Also, the recovery has been uneven across sectors. Tradables and manufacturing sprang back very quickly in Q1 (as well as transport and comms), but retail stagnated and construction fell by 9%. However, the latest April (and May) figures show an improving performance in retail and construction.

Demand grew slowly on the back of recovering wages, but remains low due to sluggish credit activity and higher unemployment. Investment remains depressed, falling -4.7% relative to the same period last year in Q1 – “most enterprises appeared to be increasing their utilization rate of existing capacity while restocking inventories”.

2. The World Bank’s own summary:

Summary. Amid heightened global uncertainties, Russia is experiencing a bumpy recovery. Domestic demand is rising, but with high unemployment and limited credit and investment activity. Budget execution is better than anticipated due to higher oil prices. Implementing fiscal consolidation is a key medium-term policy objective. Dilapidated infrastructure, especially in transport, could pose serious risks to competitiveness and longer-term growth prospects.

3. Read the Report for the low down on unemployment, current and capital accounts and rollover of external debt obligations by Russian banks and companies. Nothing particularly new or interesting happening there.

4. What is really interesting is the graph of stock of credits to companies and households shown below.

Note how the flow of net credits stopped dead in the water after September 2008, after two years of furious expansion. This suggests that Russian companies had become highly dependent on debt-based growth in the years preceding the crisis. As soon as the spigots turned off in late 2008 and global funds flew to safety, there occurred a sharp drop in demand and investment in Russia.

Not only did this not happen to the Western developed economies, but they also pursued a drastic monetary loosening (while Russia tightened), which may explain why the GDP declines in countries like the US or UK were much more modest than in Russia (despite their much larger stocks of debt relative to GDP).

On the positive side, Russia’s inflation rate has sunk to a record low level of just 6% in its post-Soviet history.

5. Russia’s fiscal position remains strong, as according to Ministry of Finance estimates “the consolidated budget had a surplus of 2.5 percent of GDP” in Q1 2010 (this should be compared to deficits of 10%+ in the US and UK). On the downside, the World Bank notes that the tremors emanating from Club Med may torpedo oil prices yet again, thus widening Russia’s deficit in a few months.

6. Big Russian stimulus spending on social measures such as wages and pensions greatly alleviated the humanitarian impact of the crisis. They are now being phased out.

“The focus on people’s incomes has helped mitigate the social impact of the crisis, but at the expense of greater rigidity in the expenditure structure and infrastructure expenditures”. The World Bank points out that it might have been wiser to direct some of that spending towards addressing “acute infrastructure bottlenecks, [which] could have much larger fiscal multipliers”.

Despite the withdrawal of most stimulus measures, it is predicted that a planned 46% pensions hike by end 2010 will cause the federal budget to remain well in the red at -5.4% of GDP, but slightly lower than the -5.8% of 2009. The downside is that infrastructure spending, especially on roads, is to get deferred again.

The Report has a one page spread on the state of Russia’s infrastructure, which isn’t anything to write home about. Nonetheless, as I argued here, it almost certainly isn’t infrastructure constraints that are going to constrain Russia’s future growth… and in any case it is not clear why spending a lot of money on improving roads at this point in history (of peak oil, climate change, etc) is a great idea.

7. So what will happen if Europe goes haywire? Encouragingly, unlike in the last crisis, the costs of ensuring Russian debt hasn’t been spiking. This may not be a high bar to overcome, but it would be apt to point out that Russia is no longer assumed to be a weak link in the chain like Greece or Spain by global investors. (Indeed as Ben Aris argues in Rerating Russia its credit-worthiness is now higher than most of the developed world’s).

8. What the World Bank thinks will happen in the next two years:

Summary: The debt crisis in Western Europe has sharpened downside risks to global recovery and oil prices. But the impact on Russia is likely to be limited because of Russia’s better fiscal and debt positions and limited trade and financial linkages with the affected countries. Taking into account global developments and assuming no default/restructuring and no broader contagion in Europe, Russia is likely to grow by 4.5 percent in 2010, followed by 4.8 percent in 2011 as domestic demand expands in line with gradual improvements in the labor and credit markets. Employment situation is expected to improve only gradually with attendant reductions in poverty.

Below is a table showing projected growth for different regions.

9. Despite the World Bank’s concerns that Russia may be becoming too free with its wallet – which may put it into a dangerous situation if oil prices collapse and remain depressed for a long time (but which they are unlikely to do because of peak oil) – as things stand Russia is in an enviable fiscal position relative to practically all developed countries.

[Note that Japan, with a debt to GDP ratio of about 220%, is literally off the graph].

Funny, isn’t it, how it is almost all Western countries that are in a fiscal pickle. In contrast, the Russia (of kleptocrats), the China (of bad loans) and Venezuela (of spendthrift populism) are facing a sovereign debt apocalypse really well off comparatively speaking!

10. The World Bank’s Russia forecasts for this year:

Consumption, particularly household consumption, will be the main driver of economic growth in 2010, especially toward the year’s end. A modest contribution to growth is likely to come from inventory restocking in Q2 2010. At the same time, we do not expect large increases in fixed capital investment in 2010 given the excess production capacity and limited credit. So an increase in investment in Q2 will be due mainly to inventory restocking… But the positive contribution of net exports to aggregate growth from 2009 is likely to turn negative in by the end of 2010, as import volume picks up in line with economic recovery…

Below is a graph showing the composition of Russia’s GDP growth drivers.

The World Bank projects a deterioration in the current account as imports pick up and a rise in the capital account “if the European debt crisis has no significant contagion effect”. Furthermore, “an increase in fiscal revenues due to higher oil prices is likely to be partly offset by new expenditure pressures from additional social spending and increases in pensions”. As a result, “we project the fiscal deficit at 4.6 percent of GDP in 2010 and at 3.8 percent in 2011, taking into account additional pensions expenditures.” Inflation will be at 7-8% and “large banks and corporations should be able to finance or roll over their debt obligations in 2010″.

11. I already pointed out that the humanitarian impact of the 1998 crisis was much larger than of the current one: “While the percentage of the population barely making ends meet went up from 29% in July 1998 to 40% in December 1998, this figure remained stable at around 10% throughout the recent crisis”. This is reflected in Russia’s official poverty stats, whose non-rise was “a reflection of the unemployment increasing less than initially feared and likely also due to increased transfers to the population”.

12. The Report concludes with a discussion of how to solve or mitigate Russia’s monotown problem:

Summary: Monotowns present complex challenges for diversification and social and enterprise restructuring in the postcrisis period. Money alone will not solve them. Multipronged market-driven approaches, including active partnerships between the monotown and the private sector, based on good international practice, stand a better chance of success.

The case of the East German Bund–Länder-Program, Pittsburgh USA and Glasgow UK are offered as examples of how to revive ailing post-industrial towns.

13. A compendium of Russia economic stats since 2006.

14. Further thoughts. I do think that the European debt crisis will spill over and that there are already numerous signs of a second dip in the Great Recession – this time centered around sovereigns (1, 2, 3). According to quite a few leading indicators, this will probably occur within a few months, i.e. by this September or November.

Meanwhile, more dynamic and decoupled economies in the World of the Rest – especially China – are rapidly taking over industrial share from the indebted and aging developed world. They still have plenty of room left to grow so I think they will keep oil prices relatively buoyant (especially considering that global oil production is now falling or stagnating).

Russia seems to be in a stronger position than it was in 2008. Though still dependent on foreign debt intermediation, it is now to a lesser degree than two years back, and besides its comparatively excellent fiscal balances will probably mean that global credit flows will not desert it as fully or suddenly as before. The state will remain strong and solvent. Nonetheless, growth will probably slow to stagnation in late 2010-2011 should the events of 2008 be repeated.

One possible consequence is that Russia’s leadership will become disillusioned by the multi-year, post-2008 failure to lift Russia’s GDP any higher than that which prevailed at the peak of Soviet output, and the end result – within a few years – could be an all-out shift to the “mobilization model” proposed by Gregory Khanin, with the state taking a far more prominent role in forcing modernization from above than is the case even today.

Update July 8: It’s worth pointing out that newly released figures indicate that Russian consumer confidence has largely returned to near pre-crisis levels in Q2 2010. This may reinforce the evidence that the recovery accelerated during the period.

(Republished from Sublime Oblivion by permission of author or representative)
 
No Items Found
Anatoly Karlin
About Anatoly Karlin

I am a blogger, thinker, and businessman in the SF Bay Area. I’m originally from Russia, spent many years in Britain, and studied at U.C. Berkeley.

One of my tenets is that ideologies tend to suck. As such, I hesitate about attaching labels to myself. That said, if it’s really necessary, I suppose “liberal-conservative neoreactionary” would be close enough.

Though I consider myself part of the Orthodox Church, my philosophy and spiritual views are more influenced by digital physics, Gnosticism, and Russian cosmism than anything specifically Judeo-Christian.