How bad institutions brought Russia to crisis

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Как плохие институты довели Россию до кризиса

The current crisis in Russia requires the authorities of the transition to a new model of development of the country. By this view came to the participants of the International scientific conference at the Higher school of Economics.

HSE rector Yaroslav Kuzminov believes that the crisis in Russia now, not like the experience of the 2008-2009 recessions or experiencing rogue States. At the conference he presented the main findings of the report “Russia’s Economy: before a long transition.”

According to the report, the crisis in Russia will be protracted, and the output from it is very complex.

The country needs reforms, without which it can for many years to be trapped in stagnation – the economy will grow very slowly, the population will become poorer, and the share of Russia in world economy is declining.

“Society will go through trial and error and stubbornly hold on to bad institutions,” says Kuzminov.

To bad institutions experts attributed not only, for example, ineffective oversight bodies, but also a paternalistic system where people get benefits from the state, considering them to be free, and do not control their quality.

The failure of these institutions will happen only when society will be convinced that they are absolutely “empty”, said the economist.

Conclusions experts discussed the former Minister of Finance of Russia Alexey Kudrin, the rector of Ranepa Vladimir Mau and Minister Mikhail Abyzov.

Russian service Bi-bi-si listened to the panel discussion and brings the main conclusions.

What the Russian economy is suffering?

Как плохие институты довели Россию до кризисаImage copyrightRIA Novosti

Image captionНаименьшую yield in Russia has a small business

One of the main problems of the Russian economy, according to Kuzminova, is the low level of competitiveness of the economy. In various rankings, Russia lags behind other countries with similar level of development.

One of the reasons is the high presence of the state in the economy. The share of the state in the 10 largest companies of Russia was in third place in the world.

Another weakness of the Russian economy – high inflation, continues Kuzminov. For the entire period of administration of President of Russia Vladimir Putin it was below 10% only in three years.

“Our economy has become accustomed to high inflation,” concludes the HSE. This reduces its competitiveness.

Another Russia-specific phenomenon is the size of the shadow economy. The size of the shadow economy decreased gradually until 2007, but in recent years, the share of the shadow economy began to rise again.

Chief economist of BP for Russia and CIS Vladimir Drebentsov led assessment of the shadow economy in 40% of the total volume of the economy.

Russian business, according to experts of the HSE, has very high standards for the project income. It should cover the high risks of doing business, but also take into account the high inflation.

If in advanced economies, annual yield of 12% is a normal level for starting business in Russia this threshold is 20 or 30%.

A return can be obtained either from natural resource rents, or the creation of artificial monopoly in the market, business innovation, however, for Russia this kind of business is atypical, said Kuzminov.

Most profitable business in Russia are major commodity exporters. Second the yield of the sector is a major manufacturing industry, which will receive subsidies from the state, believe in HSE. The lowest yield has a small business.

Как плохие институты довели Россию до кризисаImage copyrightGetty Images

Image captionСамый profitable business in Russia are major commodity exporters

Such estimates agree and the Minister Mikhail Abyzov. Large and medium-sized businesses now provide a return in their investment projects at 20%, at best, 15%. The official also noted that in Russia there is no conditions to create innovative products.

Vladimir Mau pointed out another problem: business is not popular among young people.

“Children from wealthy families want to work in goskorporatsiya and from poor families – in the power structures,” said Mau.

Vladimir Mau said that the Russian economy is in a stagflationary trap – slow or negative growth occurs on the background of high inflation.

This is the main difference of the Russian crisis on the situation in Europe, the expert believes. This does not help the growth of budget expenditures or stimulating demand. You need to move to supply-side Economics and reforms. Otherwise, Russia may repeat the fate of Japan and for many years to be trapped in slow growth.

What institutions in Russia inefficient?

The emergence of bad institutions was one of the consequences carried out in 2000-ies in Russia’s economic policy

Как плохие институты довели Россию до кризисаImage copyrightRIA Novosti

Image captionУ the population is very low quality requirements such social benefits provided by the state free of charge

“They survived, they have become great institutions that underpin the behaviour of participants in economic life,” said Kuzminov.

One of these bad institutions, according to experts of the HSE, is “state paternalism in the social sphere”. Russia borrowed it still the USSR.

Pensions, education and health are provided free by the state social benefits. It erodes personal accountability for these areas, the population does not make decisions about these benefits or their contribution to them.

As a result, the population expects the state to provide these goods for free, and reforms to becomes very difficult. And with the onset of the crisis, increasingly, the middle class begins to enjoy such benefits and to claim them.

Mikhail Abyzov said that it has another side. The population is very low requirements to the quality of such social goods provided free of charge.

Second bad Institute, according to Kuzminova, is offshore capitalism. If other countries are leaving the company in a foreign jurisdiction because of tax problems, in Russia the withdrawal of assets is a form of insurance used to minimize the risks.

Since the early 2000s, the government collects oil rents (additional taxes on the income of oil companies). It is possible to create reserves and to solve some social problems. However, this had created another controversial Institute: for many years the government subsidized machinery, road construction and others.

In fact, the state has attracted business in a sector with a small income, while it almost did not require any guarantees. This feature has actually been exhausted.

Another inefficient institution is forced charity. Mostly this applies at the regional level, when the head of the region or the city is asking business to Fund social facilities.

“You are the temple of repair, you basketball team to Finance,” – said Kuzmin.

Как плохие институты довели Россию до кризисаImage copyrightRIA Novosti

Image captionГосударство for many years attracted the business sector with a small yield, such as building and road construction

It’s called Natalegawa impact on the business. Such a charity may take up to a quarter of the company’s profit.

From Drebentsov BP brought another problem: in recent years, labor costs have increased faster than productivity. “All accustomed to the fact that we are improving their lives much faster than we improve the quality of their work”, – explained the expert.

“We need to assess how, can lead the economy to the erosion of the capacity of such a scheme, said Kuzminov. – The funny thing is that almost all players – business, government, the population is trying to act as if nothing happened.” All these institutions continue to function.

The destruction of bad institutions

Expectations about the future of the Russian economy differ. Kuzminov suggests that Russia may move to a new equilibrium without a permanent increase in oil rents.

This transition can begin, if inflation falls to 3-4%, and the company will be able to get loans and funds in the financial markets, which can be used for further development. In such a situation in economy of Russia should receive long-term money, which may be, for example, pension savings.

Agree with the former Minister of Finance of Russia Alexey Kudrin. He compared the situation in Russia with the situation in Greece: both countries suffer from low productivity and lack of “long money”.

Как плохие институты довели Россию до кризисаImage copyrightReuters

Image captionВ year, according to the HSE, the business loses about 2% of GDP because of the actions of the regulatory authorities.

Domestic investment could help boost growth in the Russian economy.

This view is confirmed by Mau: the decline in inflation will increase the availability of loans.

Another prerequisite is to refuse to charitable business tax, and reduction of political risks for businesses. In addition, it is necessary to reduce the regulatory burden on business, said Kuzminov.

In a year, according to the HSE, the business loses about 2% of GDP because of the actions of the regulatory authorities. Estimates of OPORA Russia and Business Russia, the loss is 5% of GDP.

According to former Finance Minister Alexei Kudrin, part of these measures the authorities begin to implement. The government has already highlighted the need to reduce political risks for business. Kudrin also agreed that the dismantling of the control load.

This view was supported by the Minister. He believes that it is necessary to revise the Soviet demands on the company, which are still in force.

Many of the rules and requirements were spelled out in the 1960-ies. Since these requirements are obsolete and have become very expensive. So these “hundreds of thousands” of documents, according to the Minister, takes a few years. He also believes that to solve this problem it is better to use modern information technology.

Years of stagnation

However, there is another scenario – the state simply will not change anything. In this case, as predicted by the HSE, 2-3 years will be spent all the reserves.

Such an assessment leads and Alexei Kudrin. The availability of reserves, in his opinion, some slowing of the reform process. With these funds, reform can be postponed.

Once the reserves run out, according to the HSE, all the problems of the Russian economy aggravated.

The state will not subsidize a business that will result in the suspension of automobile production or road construction. There will be a sharp reduction of social programs and consumer demand. The problem will come from trade and agriculture, which focuses on the domestic market.

Как плохие институты довели Россию до кризисаImage copyrightRIA Novosti

Image captionЭксперты predict that even the rate of growth at 1.5-2% can be a luxury

Scientific supervisor of the Higher school of economy Evgenie Yasin has led the survey of experts about which way will Russia choose in the coming years.

Almost half of the 32 surveyed experts expect 2016 will be implemented to the inertial scenario: the authorities will carry out the policy they pursued in recent years. This will result in a long period of stagnation of the Russian economy.

Another 28% expect the implementation of the mobilization scenario – in fact, this “crackdown”. The implementation of this scenario will lead to a deep fall of the Russian economy. The implementation of the innovation scenario expect only 6.7% of the respondents.

Abyzov added that in this situation, even the pace of growth at 1.5-2% can be a luxury. “For that we have to fight”, he said.

At the expense of domestic demand, the Russian economy can grow by about 0.5%. To growth of 1-2% is possible to come only through increased exports. However, this is only possible in the case of innovative companies and products. The Minister does not see now the conditions for the emergence of such companies.

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