from Johnson's Russia List, Cheers, Ken Hanly From: "stanislav menshikov" <[EMAIL PROTECTED]> Subject: NEOLIBERAL UTOPIAS IN BOSTON And Strong Realism in Helsinki Date: Fri, 13 Oct "MOSCOW TRIBUNE", 13 October 2000 NEOLIBERAL UTOPIAS IN BOSTON And Strong Realism in Helsinki By Stanislav Menshikov The future of the Russian economy was discussed in two recent international seminars, one in Boston dominated by US and Russian neoliberals, the other in Helsinki where Bank of Finland experts talked to economists from the Russian Academy of Sciences. The general tone and accents were very different ideological and impractical in Boston, pragmatic and problem oriented in Helsinki. The keynote speaker in Boston, US Treasury Secretary Lawrence Summers, lectured Russians on how to turn their current upturn into long lasting prosperity. He warned against relying on high oil prices and rouble devaluation and recommended tighter fiscal policies, deficit reduction, strengthening of financial markets, more integration into the world economy. The real sector was mentioned only once when he advised "distributing resources into key industries". He did not specify the industries or where to find the resources. Most surprising is that these recommendations are coming too late. Neither the government or parliament or businessmen are relying on high oil prices to stay. On the contrary, from past experience they dread collapsing oil revenues more than most other unpleasant things. The government refuses to include expected extra revenues into the regular 2001 budget. Oil companies shirk from investing their superprofits into rising oil output. Far from counting on rouble devaluation, the Bank of Russia is supporting a stable rouble. The situation in Russia is very different from Mr. Summers description. His accent on tight fiscal policies and deficit cutting is equally beside the point. The Russian federal budget is enjoying a surplus which came about due to a booming economy liberated from artificially cheap imports, not thanks to tight fiscal policies. Contrary to Mr. Summers's beliefs, integrating into the world economy had its destructive aspects: an unrealistic exchange rate, short-term capital instability that helped bring about the financial debacle of 1998. To insist on tight fiscal policies today means working against economic growth based on expanding aggregate demand. The value of the Boston seminar, if any, was clearly compromised by such proposals. In Helsinki the tone was set by scholars who know how the Russian economy works and the result was different. Viktor Ivanter who heads the Institute of Macroeconomic Forecasting convincingly showed that the current economic growth was not caused by high oil prices. It actually started when they were at a record low ($8-8.5 per barrel). The role of devaluation was also overplayed. Adjusted for domestic inflation the rouble lost only 40 per cent of its former value. This was hardly adequate to trigger an economic boom. Dr. Ivanter recalled that the euro has lost 24 per cent in value in the last year or so, but that did not produce a boom in Western Europe. According to Ivanter, the Russian rebound was caused by three principal factors: (1) falling real incomes that were transferred into industry profits; (2) strict control over prices in natural monopolies; (3) stable and non-ideology minded financial policies in the last two years. However, two of these factors are by now being exhausted. A new collapse of real incomes is hardly feasible. Natural monopoly prices are now rising sharply. Dmitry Lvov, head of the Academy's Economics Department added his pessimistic assessment of the prospects for the fuel and energy complex (FEC). On the one hand, natural rent created in this sector accounts for a large share of national income. On the other hand, the absence of a long-term national strategy for energy helps FEC stagnation. Not only has it become a principal source of cost-push inflation. The country is fast approaching the physical limits of its energy producing potential. This is threatening to put an end to overall economic growth. The Helsinki seminar also addressed other aspects of growth. One of these is very low expenditures on R&D coming from government sources and financed by the industry itself. Only a tiny minority of enterprises is able to develop new products or use new technologies. This is potentially a major factor undermining competitive power of Russian-made goods. The defence complex with its vast R&D network could be transformed into a factory of new products and technologies. The idea is supported by President Putin but needs vast financial support for its implementation. Military production reached an all-time low in 1998 (9.9 percent of the 1991 level). A turnaround occurred under Primakov and Putin. In 1999 military output increased by 40 percent and by another 29 percent in January-July, 2000. But considering the previous collapse, it is still 5.6 smaller than in 1991. Because of large unutilised capacity in defence and civilian industries, military expenditure could become another strong factor of overall economic growth, at least in the short- and medium-term. But that would need spending much more than the meagre 20 percent of the defence budget on military hardware, and substantially reducing in numbers of soldiers and officers on active service. This is easier said than done. Helsinki did not answer all these questions. But at least it pinpointed the real issues which are in striking contrast with neoliberal utopias emanating from Boston. *****
