Dr.E.Gaidar - Limits of the Socialist GrowthDate of publication: 2018-02-01 02:35:26
The article is timed to the date: 1996-11-05
Other articles related to: Date1996-11-05 Articles for: Year1996
The set of ideas which I would like to share with you is, indeed, tied to the manuscript I am working on now. In my work, I try to prove some ideas.
The first of them is as follows: there is a set of rather stable and large- scale deviations of national trajectories of economic development, predetermined by a set of structural parameters of, let us say, dominating global trajectories which may be called models of economic growth.
The other thesis is the following: within the framework of at least some of the above models of economic growth, one may determine upper limits of development attainable within the framework of the model, measured through, for example, GDP.
The third thesis is that given attempts to quit the frames of those upper limits of a model's productiveness, the economic development becomes unsteady and reversible.
The fourth thesis is that the economic growth of the USSR in the 70s- 80s was precisely of that very character, and the respective of production volumes happened thereafter in that country, as well as in the states which economically were chained to the USSR was in many aspects of a compensating character and was inevitably determined by a reverse wave related to an exhaustion of temporary and passing-by factors of the socialist and economic growth.
And, finally, the last thesis states that the deviation of the Russian economy's current structural parameters from average global values typical for the given level of economic development, is a substantial factor determining the field of tolerable values in forming an economic policy.
Unfortunately while trying to figure it out how to make this presentation, I attempted to avoid anything which, because of the volume of the matter, might make the report absolutely formal and groundless. That is why, with your permission, I would like to concentrate, first of all, on the introduction of a concept of the limits of economic growth, within the framework of respective models, to illustrate the concept using an example of import-substituting industrialization. I do hope that we would be able to proceed at the next session of our Research Council, applying our discussion to socialism and socialist economic growth.
The basis of all the reasonings is rather well formed in current economic literature. All what I would like to express within the forthcoming ten minutes is mainly either understood, or trivial. Unfortunately, without this preamble, the following discourse would not be so easily introduced.
You are well aware that the current economic growth, as for instance, S. Kuznets defined that, is that one which is characterized by an excess of the GDP growth over the one of the population growth. This is the relatively recent phenomena in economic development. In its formed shape it is about 200 years old. Within the framework of the current economic growth, given societies with absolutely different structures and cultural traditions, rather unidirectional and profound changes of crucial economic and social parameters happened. It was 250 years ago when there had been an innumerable number of economies different by their structure, traditions, growth opportunities, etc. Those economies and societies, however, were characterized with dominating agrarian population ( over 85% of employees in agriculture), dominating rural population ( urban population made up less than 15%), dominating illiterate population ( the literacy rate is less than 15%), with the share of state expenditure in GDP not exceeding 10%, while the one of exports was less than 15%, etc. On the whole, those were, as a rule, traditional monarchies, remaining rather stable, with the above unchanged set of characteristics throughout a long history of agrarian civilizations' evolution.
In the course of the last 200 years, at least in many of them unidirectional changes had happened, though in different time, which led to a radical increase of the share of urban population, along with the radical reduction in a share of rural population, radical reduction in a share of a quantity of population in agriculture, radical increase of a share of literal population, change in demographic regime relevant to the demographic transition, change of social institutions, political regime, gradual transition from a traditional monarchy to unstable regimes, and, finally, to stable democracy on a more advanced level of economic development.
It is clear that industrialization and current economic growth are not a general regularity. There is no rule in compliance with which all the state pass and make a transition to the stage of modern economic growth. There is a set of states, and we are well aware of them, which have failed to establish their national prerequisites for economic growth. This is the given data. At the same time, for all of those who succeeded in accomplishing that, the respective transition began to gain its general typical features. The latter were researched into from various angles, on the basis of various research strategies, of which one may single out classical works of S.Kuznets on pioneers of industrialization, researches into catching-up industrializations ( from Gerschenkron to Reynolds), as well as works on a comparing analysis of structural characteristics inherent of modern states of different levels of economic development, of which the works of Chenery and Syrquin of 1975 are the most quoted.
This set of researches as a whole, in spite of some insignificant discrepancies in details, proves the existence of some general regularities. If toady one sets up a rather limited number of parameters, then one would be able, at a higher degree of reliability, to predict a set of other structural characteristics inherent of the given society. Let us assume that you have a share of exports of processing branches in GDP less than 1%, while the one of rural population exceeding 80%: you can state for sure that it is a traditional monarchy, and the share of literate people there is not more than 20%, and the one of the governmental expenditure in GDP does not exceed 10%, etc. If you for example set the parameter stipulating that the share of exports of processing branches exceeds 15%, while the number of employees is less than 20%, then we are convinced that we deal with highly developed state, literate population and accomplished demographic transition, etc.
Naturally, the parameters are not the universal data. To regard them as normative values for a respective level of development, one should introduce a number of reservations. The first one is likely to be natural ( it was introduced ones by Gerschenkron): it is the difference in terms of trajectories of pioneers of industrialization and catching-up industrializations. The latter get an additional technological potential based on already created technologies. As a rule, the state's activity is more intensive in this case, the demographic transition starts earlier, the rates of economic growth, if the country put itself on the track of economic growth, are higher than those of pioneers' of industrialization, while democratization processes take place a bit later. These are the first large specifics, without the account of which it makes no sense to speak about an international normative level. The other specifics, naturally, separate large countries form small- size ones.
Suppose, given an equal level of development and other parameters, it is clear that the share of exports in GDP for the latter country should be higher than for a large country, due to rather clear regularities.
The third specifics separate countries which are poor in terms of raw materials from wealthy ones. It is evident that the wealthy countries have higher potential for the export of raw materials in an overall volume of exports than the poor ones.
With the account of the above reservations, we however can, by fixing a set of parameters, rather precisely single out the set of structural characteristics which determine regular international values for a country of the given level of development and certain scope of economy which started a process of modern economic development in the given period.
At this point, it is rather complicated to deliver strict definitions in terms of what can be included in the corridor of a mainstream, and what cannot. Nevertheless, if we do not limit ourselves so strictly, we might conclude that a significant number of national trajectories of economic growth could be included in the main corridor of market development.
All the above, on my opinion, is rather trivial and nearly indisputable. The following is subject to debates and requires some proof.
If we single out the main corridor, it would be 4 large groups of countries actually left beyond that.
The first one- those countries of so called Swedish model. These are the states with market economies, abnormally high shares of state expenditure and revenues in GDP, exceeding, accordingly, 50- 55% of that, advanced social programs and abnormally low indices of income differentiations.
The other group includes countries ( this is the variant of Asian types) with abnormally low (with respect to the relevant level of development) share of state revenues and expenditures in GDP, abnormally low social pressure on economy, and irregularly high share of savings in GDP.
The third group are the countries of the import- substituting industrialization. These countries are characterized by an abnormally low share of foreign trade, accordingly, of imports and exports, in GDP.
And, finally, the last group covers the countries of the socialist industrialization, for whom disconnection market mechanisms, abnormally high state pressure on economy, abnormally high rates of resource intensiveness of GDP, let us say, abnormally high rates of energy intensiveness of GDP, are typical. And, alike the import-substituting industrialization, the abnormally low share of foreign trade in GDP is characteristic of them.
I will put aside the matter of the first two models, since it probably requires a specific analysis, and will immediately move to a discussion of anomalies related to the import- substituting industrializations, having in mind that it was our country in which, for the first time, the models of import- substituting industrialization had taken shape in full.
It was the NEP ( New Economic Policy) economy between 1921- 1928 which was of such a character. In this connection, the model of import- substituting industrialization, from historical viewpoint, is a predecessor to the socialist one. In some sense, it is a simplified picture, and the analysis of it allows to comprehend much of that was characteristic of socialism afterwards.
The term import- substituting industrialization is rather broadly popular in economic literature, though, as a rule, it is not strictly defined. Thus, to have a research field, one should first of all comprehend what should be defined as import- substituting industrialization. I think everybody in attendance is aware of the work of Sachs and Werner in which they research into the correlation between the level of openness and closeness of an economy and indices of economic growth. There is a set of criteria there by which a state may be attributed to close or open ones, accordingly. I would not remind of them. They are related to a level of tariff barriers, rates of an extension of non- tariff limitations, existence of currency bonuses, and licensed regulation of basic export goods, etc.
The definition itself is too broad to single out import- substituting industrialization on its basis. First of all, it does not take into account fluctuations of a global norm in the openness level, let us say, of the protectionism period of 1929- 1950. And if one used that straight, we would find out that nearly all countries were once closed, at least under such circumstances as war or post- war periods.
That is why I would suggest adding, while singling out not closed states, but the import- substituting industrialization ones, two more requirements to the above criteria. First: The country must be closed for a long term, so that the closeness may have had a profound impact on its main structural characteristics. It is, of course, beyond any sense to debate figures, but in my work I proceed form the closeness period lasting not less than 30 years. Second: I think that it would be logical to attribute countries with an abnormal share of foreign trade, export/import in GDP to those ones of the import- substituting industrialization.
In this connection, again. proceeding from the existing ideas about the norm, I would single out the countries whose share of export in GDP is below 10%. It may be argued. I do not stand for the preciseness of the definition. Actually, it is too narrow. The whole range of countries which would have been regarded as import- substituting industrializations, are not covered by this definition. We need the latter, however, not to built up Chinese Wall, but to single out a pure model, and then, proceeding from that, to attempt to consider how it might be extrapolated upon other countries' experience.
By the above two criteria, if we singled out a country ( I was speaking about a long- term level of GDP and exports), we would discover that there is rather a limited circle of countries, nonetheless, uniting nearly a half ( more than a half) of the developing countries' population, which fit in the definition. Naturally, it is India, Pakistan, Bangladesh, Myanma, Brazil, Argentine, Mexico. This is the complete list of the states in whom the model of import- substituting industrialization is implemented in a pure form.
The specifics of import- substituting industrialization is that we disconnect market mechanisms regulating foreign trade activities. There were lots of states implementing protectionist policy in the world history. Nearly all of them, at certain stages, were implementing such a policy. The specifics of import- substituting industrialization is that from protectionism we pass to a disconnection of market mechanisms of the foreign economic sector. In this case, it is various forms of a direct addressed rationing of currency often accompanied with many exchange rates, a developed system of licensing, etc. which gain a determining role in the mechanism of foreign trade connections. The monopoly on foreign trade in the USSR is the most successive and simple way to disconnect market mechanisms of foreign trade.
At the same time, within the framework of the domestic economic development, market mechanisms maintain and continue to be a basic instrument of a microeconomic regulation of the domestic economic growth.
What is characteristic of the model of import- substituting industrialization? It comes to life in a very natural, very evolutionary way. It does not require any crucial changes in determining statuses, social structure. It is most frequently that it appears within the framework of the catching- up country's reaction to development difficulties, primarily, currency ones, deficit of payment balance, and it is only then it gradually becomes a core, a comprehended strategy of economic growth. The ideology of the import- substituting industrialization is likely to be stipulated in works of (omitted) , with his idea of a different elasticity of demand for goods of raw materials and non- raw materials branches, and, accordingly, with an inevitably vulnerable state of raw materials exporters, etc.
The disconnection of market regulators of the foreign trade sector, closing an economy allow to eliminate a competition from the part of imported goods on processing branches' market, and, in this connection, to liquidate some barriers on the way of industrialization, which are in generally characteristic of and currently exist for the countries whose processing industry is not so much efficient and the entrepreneurship sector is not as much dynamic.
At the same time, this institutional innovation entails specific anomalies in the behavior of a growing processing sector. Having closed an economy, you are capable to secure prerequisites for social and economic growth. The indices of a share of population employed in industry, share of urban population, indices of literacy, of a share of savings, etc. are going up. Nevertheless, given the processing sector is established as a hothouse plant, without a rigid competition form the part of global market, one usually has the processing sector enterprises, forming in the conditions of import- substituting industrialization, of rather a low level of competitiveness, at least on global markets. It is not an abstract reasoning, but is confirmed by such an index as the per capita export of processing branches characteristic of states with import- substituting industrialization.
What usually happens with an economic structure after the state has chosen a path of import- substituting industrialization? In all the a. m. countries, the unidirectional standard evolution happens during the first two- three decades of the import- substituting industrialization. The share of exports in GDP is getting down steadily with regard to initial values, to be stabilized then on the level of this country's minimum. Should you take different countries ever trying this path, their share of exports in GDP in a basic year had made up 15- 25%, while in 20- 30 years afterwards it usually fluctuates in a range between 5- 8% of GDP. It is a natural first stage, 20- 30 year stage of the import- substituting industrialization, and the economic growth happens on the background of a growing closeness of an economy.
The interesting phenomena occurs then. It is getting obvious that the modern economic growth, being in its essence an international process, always secure technology, technical experience, relevant technical interrelations moving across borders. Thus, the former is likely to secure the upper levels of an economy's closeness, or, respectively, upper levels of GDP/exports volume ratio, compatible with the economic growth. Obviously, it cannot be proved theoretically. Nevertheless, if one checks the current World Bank's aggregated data on the above ratio as a whole, it would be impossible to find the GDP indices exceeding the export ones for more than 25 years, given that there are two very short- term and specific exclusions. In one word, 4% of exports in GDP- it is a lowest level of a country's possible participation in international labor division. There are, indeed, two exclusions. First is the China of the Cultural Revolution period and the respective economic crisis, and at that time the volume of exports was between 3 and 4%. The other example is Birma for four years, too. As you are aware, that country is not classified as an economically growing state. If one applies an additional criteria, namely growing country, the precise result should be obtained: there are not any growing economies having GDP exceeding exports volume for more than 25 years.
Upon coming to this deduction, one has got the gradual industrialization's potential exhausted, given a reduction in the share of exports in GDP, and reached the bottom limit. Now, from this point, let us say for India it should be a. 1965, for Argentine- 1955, etc., it is getting obvious that the possibilities of the per capita GDP's growth are determined by the ones of the per capita exports. One cannot have GDP growing without growing exports. However, we bear in mind that due to the specifics of the import- substituting industrialization, the processing export is initially incompetitive on the world market. It is not a set of abstract reasonings. If one checks all the countries of import- substituting industrialization for the whole period of observation, it would be impossible to find any of them whose processing sector ever exceeded USD 150 per capita annually ( in prices of 1987). The index actually is under USD 100, in an overwhelming majority of cases.
Given the above rate ( processing sector's per capita productivity) was set by the model's framework, one cannot (please note, given that the respective rate in Argentine is USD 100 per capita annually, while in South Korea, with a relevant development level and scope of the economy, that year it made up USD 1,100) make GDP grow at the expense of the processing exports' growth. What remains then? It is only the export of raw materials which remains (roughly speaking, export of agricultural and mineral products).
Upon reaching the lowest point of the economy's closeness, one's further possibilities for economic development, making the per capita GDP grow are determined by the ones of having the raw materials per capita exports growing. If one has relevant possibilities, the economy may grow further on, but it would enter a stagnation period if there are not such possibilities. It is absolutely natural that the rates of resources in stock are different in all countries. It is getting clear that there are two system determinants of economic growth within the framework of the model. The first one is an ultimate level of the economy's closeness and ultimate levels of the per capita processing export GDP. Thus , obviously, we have one national parameter which determines the limit of growth within the framework of the model, namely- the raw materials per capita exports. It strictly quantitatively determines the upper level of the per capita GDP, to which an economy may steadily grow within the framework of the model of import- substituting industrialization.
What regularly happens? The above level, indeed, is different for countries rich with resources and poor ones. India is a typical example of a poor state of the import- substituting industrialization.
It had reached the upper closeness level a. 1965, as well as Pakistan did. The raw materials exports from the country were not practically growing between 1965 and 1985. Therefore, it is getting obvious that the target of the economic growth is a task to secure the domestic processing sector competitiveness. The national political elites are trying to resolve the problem on the basis of various forms of stimulating exports ( export subsidies, etc.), but in the course of time it comes out that it would not work within the model's framework, unless the economy is opened. The processing exports are not growing, anyway. In other words, the poor country is confronted with the mighty stimuli which literally push it out of the import- substituting industrialization model at the early stage of development, when the industrialization potential of the traditional sector has not exhausted yet.
The contradictory sample is a country reach with resources. It is Argentine which is a typical example of a country which was reach, with a large volume of raw materials, mostly construction, exports. The country had managed to be the first one to reach the maximal limits which eventually might be attained within the framework of the model somewhat by the late '50s- early 60s. After that, the actual economic development was happening in the conditions of a permanent stagnation.
The struggle around a distribution of convertible currency is the issue dominating for decades in Argentine economic policy, as well as in Brazil, Mexican and Indian ones,. In other words, it is the struggle between the necessity to export either machinery, or half- finished products and resources.
Any attempts to resolve the problem of exports' competitiveness within the framework of the model at the expense of any measures prove to be inefficient. One, however, should take into account that the economic structure in the given example is more advanced then in India. The industrialization has gone far ahead. Actually, the national industry has rather high rates of average salaries and wages. Therefore any measures on opening the economy should inevitably lead to a severe crisis of the productive infrastructure which had taken shape in the conditions of import- substituting industrialization.
One cannot resolve the problem of further development without refusing the model. It is impossible to refuse the model and open an economy without a severe economic crisis which would be dragging out for decades, as a rule.
This is the set of ideas which, on my opinion, regardless of political elites' will, lead to an quitting import- substituting industrialization, heading for respective serious attempts of both reach and poor countries on different stages of economic development.
I think that all in attendance understand very well what natural analogues might be applied in this case to socialist industrialization and socialist model of economy. Obviously, socialism is a much more comprehensive, systematic deviation from the main trajectory of economic development. In this connection, the scope of structural anomalies determining the upper limits of socialist growth are rather complex than in the case of import- substituting industrialization.
-Dear colleagues! Here are two possible ways: I either can stop at this point and proceed the discussion of the socialist model next time, or can can proceed with the socialist model and take up the socialist practice next time. What would be better?
-(Retort):- To the model, please.
-Very well. Agreed.
As I have already told, the socialist model of industrialization takes shape, historically and logically, on the basis of import- substituting industrialization. By 1928, Russian economy, given a lot of similar characteristics, differs from the 1913 Czarist Russia's one by the fundamental parameter: in the former, the share of foreign trade was lower two times, which was, of course, related to both the specifics of peasants' holdings' behavior and the monopoly on foreign trade.
The import- substituting industrialization does not resolve at least one fundamental problem of the early market society. It does not eliminate internal, immanent, very hardly controlled limitations imposed on economic growth, which is determined by a national norm of savings. The latter is a crucial parameter determining differences in national rates of growth. It is very much complicated to influence the parameter through economic policy measures. All the struggle in Russia around industrialization's rates, the discussions between NarkomFin and Gosplan (The Bolsheviks' Ministry of Finance and The State Planning Committee.-note of translator ) had been around those immanently given for actual market conditions of Russia's of the '20 upper limits of accumulation compatible to market.
Of course, I would not like to go deep in details of what was practically implemented. Nevertheless, being confronted by such limitations, one cannot at all hit the target which once was formulated by Iossif Stalin: We are behind the advanced countries at 50-100 years, and we must pass this backwardness for 10 years, otherwise we would be crushed(The quotation made by memory.-note of translator) It is impossible within market conditions, at least manageably impossible. It would have been possible, if one had a mere luck.
Attempting to eliminate the above limitation, one must radically disconnect market mechanisms, not only in the field of foreign trade regulation, but in an internal microeconomics as a whole. One must substitute the system of markets with a system of integral hierarchy which would allow to ration products distribution, to control an economy through the system of targeted plans, limits of distribution, etc. It basically means a usage of the military economy's instruments, but in a long- term perspective, and for different purposes.
The state violence used in this connection allows to liquidate obstacles on the way to control the savings norm. It is not a parameter given to you, on the contrary, you, as the state, can control that. According to your wishes, it becomes possible to make rates of savings get higher, or lower.
Everyone in this hall is well aware of the Lewis's model describing the industrialization process in the bisector economy, i.e. what actually happens in socialist state. In reality, the socialist innovations allow to decrease a per capita consumption rate in traditional sector comparing with a pre-industrialization level, and make that be under the sector's average productivity rates. The innovations, respectively, allow to decrease real salaries and wages rates in the modern sector, so that they find themselves under the level which is characteristic of the market industrialization. On such a basis, it becomes possible to increase the volume of national savings, providing, naturally, that the state' share in GDP should increase sharply.
It comes out that the rates of a growth of capital investments are rather higher than in normal market industrializations. And now you have an opportunity, by using an existing technological experience, to rather rapidly form an industrial structure molded with the account of advanced economies.
At the same time, from the beginning one sees a set of anomalies which make the trajectory of socialist industrialization differ from the ones of regular market industrializations. The first of those specific characteristics ( I omit a lower share of exports- imports, since it is the given data inherited from import- substituting industrializations)- diverging trajectories of agriculture and industry. In reality, given regular market industrializations, an increase of agriculture's productiveness is traditionally prior to industrial revolution, creating a basis for the latter. In a course of industrialization, the volume of agricultural production practically never reduces,- it grows, though the rates of such a growth are twice slower than the ones of a rise of an industrial production for the main stream of industrialization.
In this connection, given the well- known Engel's law, the share of consumption of agricultural products in the overall consumption volume falls, and the share of agriculture in the total production volume drops, too. However they fall together in such a way that in general the integrity of countries under the industrialization process have found themselves rather self- sufficient, in terms of agricultural goods. The states.(omitted), as you know, have the zero balance of exports- imports of agricultural goods. The US remain a largest exporter of agricultural commodities within the framework of industrialization. Both the production share and consumption one are getting down there, but they drop in parallel.
With socialism, the situation differs radically. The industrialization, at least in the first years, goes on the background of both an intensive crisis of agriculture and a fall of agriculture's general productiveness. The agriculture finds itself traumatized with this shock for decades afterwards. In this connection, one observes the trajectories of agricultural and industrial production diverging. There is a sharp industrial growth which naturally entails a growth of the demand for food products, at least at the expense of a decrease of a burden over the natural holding, on the background of a long- term stagnation of a domestic agricultural sector.
It would not be so crucial, had socialist economy been open by its essence. In this case, it would have been possible to secure an agricultural import, if it were needed, at the expense of exports of processing branches. We, however, have made a reservation concerning a certain set of conditions making the competitiveness rates of import- substituting industrializations' processing branches low. Approximately the same happens with processing branches under socialism.
The other interesting anomaly of socialism which, of course, is tied to a disconnection of market mechanisms and incentives, fine- tuning buttons related to the latter is abnormal dynamics of resource intensiveness. At this point, I would like, first of all, to discuss a single issue: the GDP's abnormal dynamics of energy intensiveness.
You are aware that there is a general regularity carving its way through national specifics: it is a gradual increase of energy liberation in a course of economic growth. Let us assume that the output of GDP per 1 kg of oil equivalent in the integrity of countries which the World Bank attests as the poorest ones is the '94 1 USD per kg. Then the indicator gradually grows, reaching 4 USD per 1 kg among the states with high revenues.
The anomaly of the socialist industrialization constitutes the fact that the GDP's energy intensiveness rates at last count do not decrease. If you, for example, monitor the dynamics of energy consumption in the USSR and the dynamics in GDP with minimal realistic deflators showed in CIA or any other reports, it would come out that within any period of this country's development, between 1928 and 1990, the energy consumption was growing more rapidly than the GDP did.
Looking at the integrity of the states whose GDP energy intensiveness data are in the World Bank's database, one notes that nearly all socialist and post-socialist countries' GDP energy intensiveness rates are under 1USD per 1 kg of oil equivalent, given the '94 prices. One would also note that of non- socialist countries ( there are 2-3 of them), all states' respective indicators are lower than the ones inherent of the market economies with lowest revenues rates. These are the internal characteristics of the model related to a set of social innovations: industrialization at the expense of agriculture, closeness of economy, disconnection of market mechanisms). What all the latter factor would tell us about the upper limits of the growth within the framework of the socialist model?
First of all, it allows to reveal two significantly different stages of socialist development. The first one: the economic growth happens on the background of the ongoing food exports. The processing branches' competitiveness rate is low. The share of exports in GDP goes down gradually, as it was observed in the case of import- substituting industrialization. Initially, there are exports of agricultural products and mineral ones. The share of the former decreases steadily, while the one of the latter grows.
In certain moment, the socialist state approaches a point, at which, given a level of economic development, the inevitably growing necessity of food products, due to a growth of population, starts being opposed with a stagnating productiveness of agriculture. And at this point it comes out that the further economic growth might be possible only if one made the transition from the ongoing export of agricultural goods to imports of those.
This is, indeed, one of the crucial points in the economic development of socialism: from net- exporter of agricultural goods, one becomes a net- importer of them.
Let us recall once again that we observe the autarkic economy, whose share of exports in foreign trade is rather small, processing exports are ultimately small and inefficient. Now one needs a raw materials export, in order to both not only secure a technological shifting and a minimal level of the economy's integration into structures of international labor division and technical progress: the export is also needed to finance 1-2% of the GDP's agricultural imports. This is a crucial point, indeed separating early dynamic socialism ( for Russia, it is, conventionally, 1928- 1958) from the matured, developed socialism ( in our traditional terms).
For that time, very significant changes in many characteristics of the model take place, though we are short of time to consider them. I just would like to remind that the potential in terms of the reduction of the GDP exports share is exhausted, the limits of the ultimate correlation between GDP and exports have been achieved, the agricultural imports potential is exhausted, too. Now it is mineral exports on which the burden lays, plus the GDP's energy intensiveness rates which are not decreased. In other words, the possibilities of the GDP's further growing are limited by two parameters: firstly, the possibilities of energy resources per capita national production, in order to support domestic consumption, and, secondly, possibilities of raw materials per capita exports necessary to finance food imports and technological shifting.
Actually, there were two large socialist experiments ( The socialist Eastern Europe , due to the non- market character of relations inside the Council for Mutual Economic Assistance and with regard of the foreign trade structure in which the mutual trade had made up more than 50%, should not be regarded as an independent economic establishment). We therefore consider the Soviet Empire( along with the Eastern Europe), China, and some parts of Yugoslavia, Albania, North Korea which it is rather hard to research into, due to informational limitations. It is often more expedient to regard the two empires' socialist experiment.
If what has been said is correct, the stimuli to quit socialism should arise from absolutely different levels of development for countries rich and poor with resources. By the late '70s, China found itself, in terms of what was said, approximately at the point which Russia had passed by in the late '50s. The limits of growth at the expense of an intensification of the closeness are exhausted. The crisis of the agricultural system had become a comprehended problem. The exports of agricultural goods was substituted by imports of those.
What is actually interesting and is not comprehended by everybody yet- from my viewpoint- the first reaction of the Chinese authorities was precisely the same as previously of the Soviet ones.
Let us see what steps China actually undertakes in 1975- 1979, to handle the problem. It is very much alike what we had done since the late '50s. China tries to increase investments in raw materials exports, to intensify oil extraction, to increase oil exports. It makes a transition from exports of agricultural products to imports of them. It comprehends the problem tied to the fact that inefficient agricultural production is the crucial problem. It attempts to increase the share of agriculture in the structure of investments.
Nonetheless, it comes out very soon that for a poor country this potential would be exhausted for 3-4 years, unlike the USSR where it was lasting for 25- 30 years. It becomes clear by 1980 that further possibilities to increase oil exports are exhausted, there are the drastic deficit of the payment balance, severe domestic energy crisis, it is impossible to finance the respective large- scale program of a putting into operation the complete import equipment. In one word, China tries to implement the same as the USSR had done, given that the internal logic of the model in the conditions of the poor country pushes it hard out of the socialist model.
I would not like to further discuss the technology of the Chinese reforms, but, observing the processes there, one would find out that the Chinese authorities were dead against them on any stage, trying to maintain the existed framework. It was only the set of circumstances which made the progress in given direction inevitable, preventing at the same time any backtracks.
For the USSR, with the other level of a resource potential, the long- term opportunity of entering the mature socialist regime appears. With that, we made a transition from a large- scope withdrawal of resources from agriculture to large- scale subsidies directed to it, from large- scope agricultural exports to large- volume imports of agricultural goods, and from autarkic economy to the one which is more dependent from international labor division, since the USSR energy exports are constantly required to feed up the formed economy structure. That is why one has a possibility to develop within the framework of socialism, to the extent of a level of industrial development, to the one of the GDP per capita rate which both are higher than the ones China had failed to reach within the framework of socialism.
Due to the above, the inevitable, natural question arises: why the Chinese authorities started quitting socialism at the moment when all resources of traditional sector had not been utilized yet, while in Russia ( the USSR) the latter were exhausted and the economy structure was formed? It is not tied to the assumption that Brezhnev and Kruschev and their teams were stupid, while Den Syao Ping had a bright head. It is, of course, different specific structures of both countries, economies, different levels of a sufficiency of resources which formed the background of the above.
There is one more thing naturally arising due to all the above. There are well singled- out natural regularities which tie together a possibility of democratization processes and a level of economic development ( it is stipulated in works of Huntington), though the former are not strict ones. You always can refer to democratic India and authoritarian Singapore, for example. It is given, however, that the level of a development of democratic institutions is strictly tied to the GDP one. It is clear, why: the stable democracy is tied to a population literacy rates, a share of urban population, economic growth, the rates of a coincidence of population with middle- class life standards, etc. It is, in one word, a quite natural regularity.
In this connection, there is one more point in which the evolutions of China and the USSR diverge: Gorbachev is often blamed in the world for starting political reforms, liberalization before economic ones, why he, like Den Syao Ping, had not started with economic reforms, dealing with political ones then. I would like to briefly describe the respective GDP per capita levels of both countries at the moment of an exhaustion of reserves for socialist growth. With the account of this concept, one may find out that by that time China was lagging far behind, in the group of the states with dominating antidemocratic regimes, and the democratization process was unlikely to have a stable basis in such a case. At the same time, the USSR (I would like to raise this issue next time) on the basis, in particular, of the oil boom of the 70s- 80s, had approached the group of the states of which democratic institutions are characteristic to a high extent. Proceeding from this, it is getting clear that the Gorbachev's soft liberalization steps made in 1985- 1987, when the phantom of freedom was only showed, immediately caused a mighty democratic wave which destabilized the regime's politics.
If one accepts this hypothesis, it becomes also clear that the above divergence was not related to Den Syao Ping's and Gorbachev's mentality, but was tied to the different levels of economic development. For a country poor with resources, the exit out of socialism starts at the point at which democratic prerequisites have not been established, while for a rich country the turning point happens when the prerequisites are mature and overmature. The transformations, respectively, gain absolutely different character, revolutionary by their nature.
Let me shortly remind you of the few basic ideas which I have tried to ground in my recent lecture.
1. There are general regularities of the industrialization process manifesting in the interrelated structural shifts through which economies of different specific national characteristics go.
2. The existence of specific stable models, or types, of economic growth uniting countries with similar anomalies against average global normal values.
3. The existence for at least a part of those economies of upper limits of the per capita GDP, attainable within the framework of the given model.
4. The existence of such limits for the socialist model. The dependence of the restrictions on a level of an economy's self- sufficiency in terms of resources. The correlation of the latter with a set of structural anomalies which determine the specifics of socialist growth, and, in this connection, the correlation between the different time of the start to quit socialism with the a country's characteristics, including the latter in terms of a level of sufficiency with resources.
Today, basing on the above set of hypothesizes, I would like to discuss what was happening in the Soviet economy in the course of the recent decades. I would also like to talk about in what way the current problems we are confronted with are tied to the structural anomalies.
By the end of the '60s, the USSR economy, as well as the East European ..... ones, had seemed rather stable, and stagnant, though. The basic structural anomalies of socialism clearly manifested themselves: low competitiveness rates of the processing export, constant inefficiency of agriculture, resulting in growing compulsory imports of food, exports of mineral raw materials as a bearing for foreign trade, abnormally high rates of the economy's energy intensiveness.
By its level of the per capita GDP, the USSR reached the one which was slightly under the lower limit of the countries with high revenues, let us say, the level of Spain of that time, for example.
It would have seemed that after finding the possibilities for a further development within the framework of the model exhausted, the USSR should have been doomed to a period of a long stagnation, low rates of economic growth, while socio- economic and socio- political stability was kept. No external debts, the economy still remains rather closed, the resource base of the country is rich. Yes, the economy cannot develop any more, cannot make the per capita GDP grow dynamically, given the frameworks of the set of institutions. However, there are not any clear social and political forces capable to break the current elites' resistance to radical changes.
It was the time when the USSR and its top authorities refused to profound economic reforms. It was the time when the concept of stability of existing institutions, managing structures, and managing personnel had gained the meaning of the symbol of the century.
At the same time, the situation was developing by absolutely different scenario. It is the combination of two factors which played a crucial part in this case. Firstly, it is the discovery of rich oil deposits in West Siberia, with their unique characteristics of production costs and capital output, and, secondly, a sharp change in the global market juncture, along with a sharp increase of prices for fuel.
In the world economic literature, the phenomena of so- called "Dutch" disease of the internally unstable development which is based on factors of unstable long- term perspective is rather well known. In this connection, the development is reversible.
The thesis I will try to prove constitutes the fact that the USSR economic growth in the '70s- 80s was exactly of the same character. The country had internal unstable resources and sources as its bearings. In this connection, upon the exhaustion of the sources, the powerful forces had appeared which began to bring the GDP per capita rates and structural characteristics of the economy down to basic parameters of the moment from which the growth in the conditions of oil boom started.
Proceeding from the above, I was trying to prove that the ongoing processes in the economy are the combination of, on the one hand, a rapprochement of the structure and production volumes to those which were characteristic of the moment when the USSR had entered the oil boom mode, and, on the other hand, they are natural structural shifts, determined by the collapse of the socialist model, to radical institutional changes, and in this connection, to the elimination of a part of anomalies previously inherent in socialism.
The specifics of oil and gas extraction is that, for the respective branches, the high rates of growing of capital intensiveness and production costs are typical, given the transition from the most rich deposits to less profitable ones. At the moment when, due to a combination of factors, the USSR had had an opportunity to rapidly put into operation effective oil and gas deposits in West Siberia, the country's economy adjusted itself rather promptly to a usage of oil rent. The sharply increased revenues simultaneously allowed to substitute the tax imposed on a turnover of agricultural goods with revenues resulted from foreign trade. The latter were mostly covering growing subsidies to agricultural goods, thus creating a new revenue base for the budget. In the second place, they allowed to eliminate the upper restrictions, in terms of hard currency resources, necessary for a large- scope increase of agrarian imports. And, finally, they allowed to finance complete purchases of imported equipment necessary for an acceleration of a development of a range of relatively new, for that time, branches of the national economy.
The USSR, parallel with the above, continues the military contest with the West and utilizes appeared resources, in order to form, exactly at that time, its military and strategical policy.
At the first sight, the economy of the USSR of the 1970- 1980 ( we remember it well, personally) seems rather stable, as if nothing drastic had happened. However, in fact, if one analyzes what had happened in 1970- 1980, it would be found out that the radical change in the whole range of the economy's basic characteristics occurred.
1. The economy became radically more open. The dependence of both production structures, the population's consumption, and finances on foreign trade grew sharply.
2. Due to the above, the economy found itself dependent on the factors which are beyond the national bodies' of power control, since the juncture on oil and gas markets is natural, and it cannot be in full subject to any management of it.
At the same time, the whole range of basic internal characteristics of the USSR economy are kept. It is still ultimately energy intensive, it cannot generate processing exports, and the usage of resources directed to agriculture is very much ineffective, due to the set of the factors which we have discussed recently.
If in 1970, the USSR economy is sufficient with resources, in a sense that the mineral resources are sufficient for a long- term and guaranteed securing of formed volumes of raw materials production, energy output, and energy exports, it is through with the sufficiency with resources by 1980, in terms of a securing of a maintenance of the existing structures' stability. The fact is, at that moment the potential to not just a development, but to a mere maintenance of the achieved production levels was determined not only by an existence of the respective mineral resources, but by a constant and regular putting into operation of new deposits analogous to Samotlor, in terms of their effectiveness.
We had received an abnormal oil rent of oil deposits, with a very low capital intensiveness rates and low production costs. We used that to finance already included in the base mass purchases of grain (which had increased for that time by a.10 times), meat ( 10 times), a large- scale exports of resources for agriculture, and production of weapons. In one word, that had been within the base already, in formed structures, in poultry farms, in the formed system of consumption and distribution of fodder stuff, etc.
Then we face a new task. Now, the capital intensiveness and production costs rates of the oil extraction start to rise all at once in the exponent. The economy which has already adjusted itself, formed structures which live at the expense of the oil rent, bumps into the task of an urgent substitution of the oil rent with anything else. For socialist economy, because of its specifics, such tasks are either complicated or unbearable, regardless of any attempts to resolve the problem basing upon an increase of the fuel and energy complex's share in the investment structure. However, it is impossible to secure an explosive rise of investments: its is beyond the framework of a socialist economy's resource flows and resource flexibility.
Since 1980, it is becoming clear that the economy has found itself in a vicious circle. There are not investments sufficient not only to increase the extraction, but even to maintain it. The decline of oil extraction marks a severe crisis of all the structure of the economy formed at the expense of that, since , at the same time, both the problem of a lack of energy resources to secure the resource- intensive structure of economy's functioning and the problem of securing exports arise. The lack of capital investments causes a start of a crisis in the field of oil extraction and a decline of the latter. The crisis, in its turn, intensifies all problems, including financial ones, along with problems of a securing resources for oil- refining industry itself.
When all the above find themselves under a change of juncture on the world market, along with the start of a drop of global prices for oil, it becomes clear that the filled balloon of "the oil growth" starts loosing the air rapidly. All attempts to substitute it with a rise of external borrowing are of a short- term character only.
In this connection, given the set of the reasons, it becomes clear that the USSR economy, by the moment when Gorbachev and his team came to power, seemed standstill stable at the first glance only. Behind the facade of a relatively structural rigidness and financial stability, there were very profound internal disproportions, which should inevitably manifest themselves.
I would not like to discuss now all details of economic policy of the Gorbachev's period. A lot was written about it, and all words were rather correct. If we accept the hypothesis, nearly all the steps taken by Gorbachev and Ryzhkov were counterproductive, strictly opposite to what should have been done. Nevertheless, we must say that the role of their mistakes was substantially exaggerated in many works dedicated to the analysis of the Perestroyka policy. The fact is, they, after jumping down from a sky- scrapper, tried to hop up a bit. However, actually it was not they who jumped down. Basically, all the steps were determined by the previous strategy of growth and the failure of that.
If we accept the set of these ideas, there is one more, rather funny, consequence proceeding from the above. Last time we discussed the correlations between democratization processes and level of economic growth, including the level of GDP per capita. It was popular to rebuke Gorbachev for the start of political reforms ahead of economic ones; the opinion was that one should not start a democratization until the economic reforms are not implemented.
Let us ask ourselves another question: why, in principle, the political reforms were pursuing their path in such a powerful way, resulting in the revolution,, by its essence? Why had the reforms gained such a profound public response? In this case, if we recall the correlations between democratization processes and level of economic growth, it becomes clear that in the '70s- 80s the Soviet authorities made their stake on internally unstable, disbalanced resources of growth mostly tied to oil and gas, along with the utilization of ultimately effective resources of oil and gas deposits of West Siberia. Therefore, having forced both the growth and the scopes of the GDP per capita rates to be over the level steady attainable within the framework of the socialist model , at least for some time, the Soviet authorities found the country to be very much close to the zone of the GDP per capita rates typical for steady democratic states.
The correlations between a level of economic development and democratization are not at all of some mysterious, obscured character. The growth of the GDP per capita rates means a spreading of middle- class standards, rise of education, increase of informational level, an inevitable rise of a rate of a society's openness. In one word, it means fundamental changes which cause regular democratization processes on this level of development.
Thus, having started the engine of the unstable oil growth, the Soviet authorities had led the USSR, judging by the per capita rates, to the zone of which democratization processes are most characteristic. In this connection, it is rather evident why Gorbachev's first liberalization steps undertaken in 1985- 1987, being rather cautious at the beginning, suddenly gained such a mighty base of support, and why the authorities who had initiated the processes could not control them hence. Proceeding from the above, if we consider the respective reasoning not to be a nonsense, it becomes clear that, though paradoxically it is, it is not Gorbachev, but Brezhnev and his team who had made their stake on the oil growth. They had been, indeed, politicians who basically destabilized the mechanisms of political control over socialism and put the latter beyond the framework of its stable values, and, generally, pushed it in, many ways, to the post- communist revolution, of which everybody here is a witness.
If the given set of reasonings is not lacking sense, it should be checked how it may be applied to the further development of this country. We had an unstable growth of the 1970- 1980, the intensive crisis of the socialism afterwards, when the old institutions did not work, nor the new ones did. Then we went through reforms ( and a part of us here participated in them), and the market institutions have more or less stabilized by 1995. We, however, have a lot of problems now, but, anyway, if we have such a track, it is worthy to check how the Russian economy of 1995, with its mainly stabilized market, and the one of the early '70s are correlated, what is similar and different in both of them?
If we check, it comes out that the Russian economy-'95, by many fundamental characteristics of production and consumption, is fantastically alike the Russian economy - '70. It is, of course, hard to calculate production volumes, but now, by any calculations, we are in some ways on the level of 1970- 1975.
Considering the natural production, the oil extraction has stabilized at the level of the early '70s; the output of basic metallurgical products have stabilized on approximately the same level; the production of meat, upon the liquidation of a large- scale grain import which had previously secured that with the relevant fodder stuff, has stabilized, again at the same level; meat consumption has stabilized on the same level, too. As a whole, after the soap bubble dissipated and the relevant reserves secured that have exhausted, as a result of an automatic impact of the factors, very many characteristics, indeed began to structurally approach the level of the early '70s, by the output and consumption indices.
Where are natural differences? We need to assume that they would appear in those points where the economy's market character provides a beginning of the structural characteristics' drawing converging with the ones typical for average values, and this actually happens. Where are the most serious discrepancies between the to-day Russia and the one of the '70s? Naturally, it is a less rate of a state pressure onto the economy. The pressure is still rather abnormally high for the current level of development, but substantially less than before, though. It is also the shifts in a consumption of the products the consumption of which was traditionally abnormally low in the socialist era. Let us say that given a sharp drop of meat consumption, the indices of telephone service, number of passenger vehicles etc. grow rapidly.
On the whole, comparing the USSR economy of 1970 and the one of Russia in 1995, one may understand that after passing the circle, the country has found itself being rather close to the level of 1970, by a number of indicators; by a number of parameters, we start approaching the same level, being inherent in the GDP per capita rates as of the same period observed in market economies, though.
How may all the above be applied to the experience of other socialist countries which have survived the breakup of the socialist empire (I mean the East European countries)? Last time, I stressed that they could not be regarded as independent subjects of economic policy until 1990- 1991. Any sensible person knowing something about, let us say, Hungarian economy, undoubtedly understands that the latter in principle was incapable to function without the resource flow from the USSR, as well as the Czech, Bulgarian, etc. ones.
The USSR oil growth actually had not occur within the USSR only, but had rather rapidly covered the whole East Europe. It was secured by a range of natural instruments. The first of them was a sharp rise of a dumping, by its nature, export of energy resources to the East European countries, along with the respective direct, or indirect re-exports of them. The part of the socialist countries were openly exporting the resources (omitted), and basically that actually donated export from the USSR secured an opportunity for a rather resource-intensive export from those countries.
Between 1970 and 1980, the East Europe's volume of oil imports from the USSR grows approximately by two times, as a rule, thus securing both the respective growth of those economies and a rise of the resource- intensive energetic exports from them. Parallel with that, the USSR market opened for them opportunities to increase their exports of processing branches' products. If there were not the Soviet market, they would have never found their niche anywhere.
Thus, the economic growth in those countries was also secured at the expense of the re-distribution of the oil rent created by our Samotlor and West Siberia. Those countries' turnover could exist only unless the donating was continuing.
In this connection, it also should be worthy to rehabilitate Mr. Ryzhkov. I may know him rather well, and I am sincere to him, but when he is blamed for destroying the SEV's trade, it is incorrect. The fact is that, given the radically changed Russian situation, resulted from the start of a sharp drop of oil yields, the trade within SEV could not help but collapse. Given all the above growth was based, in fact, on the West Siberia's oil and gas rent, it is sensible to assume that in the lowest point of the post- socialist fall the above countries should find themselves at the levels close to those which they had started their oil growth from.
No doubt that given the higher had been the dynamics of rates of the growth over the '70s- 80s, the worse the consequent fall should be. Accordingly, wherever the growth was less dynamic, the fall should be less steep, against the lowest point of the drop. The statistics shows that, indeed, it is so. By the way, the regularity was discovered by J. Kornay, though he has not commented it, nor tried to realize what it was related to. The countries whose rates of growth were highest in the '70s- 80s, indeed, experienced the most dramatic fall afterwards, while the fall was not so much disastrous for the "slower" ones.
Thus, the hypothesis concerning an unstable character of socialist growth within the framework of the whole socialist system, including the USSR and East Europe, is proved by the economic practice.
Again, I emphasize that the matter of reforms themselves, along with transformations, mechanisms, existing restrictions, gradual and radical strategies of their implementations is a separate issue. We have taken that up many times, and are likely to discuss all the above once again. With your permission, I would like to leave this beyond the framework of today's session, and should take it up only in terms of problems related to the fact that the unstable growth has paved the way for political destabilization, collapse of political institutions which were fully tied to the internal institutions of the socialism's microeconomics. In this connection, their breakup caused both the dramatic crisis of the intraeconomic regulation and the financial crisis. There is no country in which stabilization starts earlier than in three years after the collapse of socialism.
All the above I have to omit today. So, let us discuss another matter: what happens due to the above, what anomalies are inherent in the post- socialist economy upon it, to a higher or lower extent, have stabilized after the crisis, and in what way do these anomalies influence further perspectives of the post- socialist growth?
The most characteristical of the anomalies were determined by socialism: high state pressure onto an economy, high rates of an economy's energy intensiveness, relatively low competitiveness of processing branches and rather a serious problem of agriculture inefficiency. Parallel with the above, there is the whole set of characteristics which cannot be estimated in any other way but as a positive socialist heritage: let us mention a relatively high level of education, more uniform pattern of revenue distribution as compared with one inherent in the countries of the relevant development, etc.
In fact, what may be immediately observed, following all the post- socialist countries' trajectories, is the fact that for all of them the gradual convergence is typical, at different rates and by different scope, though. The convergence is going by those structural parameters which to the highest extent differ them from normal average values typical for market economies. I.e. wherever we observe those anomalies after the collapse of socialism, the gradual process starts of approaching global average values, and, again, I stress, by different scope and at different rates, but in the same direction.
Let me come back again to the problem of the correlation between economy and politics. The core of complications which many of us have faced in practice, while implementing the post- socialist economic policy, is that the latter is like castor oil: nearly everything which must be done sensibly from economic viewpoint in order to stabilize a situation formed after socialism is politically conflict and not so much popular. It proves to be hard to establish a stable political base for such a policy.
In this respect, let us take a look how it may be applied to both different levels of the per capita GDP of the countries escaping socialism and their chances to establish stable democratic institutions.
The post- socialism constantly provokes to implement a populist policy, to make short- term politically profitable decisions, irresponsible they are, though. The prerequisites for the political economy of populism are usually tied to an institutional unstableness, when political agents do not obey the rules of the game, trying to constantly change them. (Omission)
If it so, it would be sensible to assume that in those countries in which maximal chances and the social base for a forming of stable democracies exist, it would be simpler to mobilize consensus on matters of a sensible economic policy. For countries which, by their level of a development of democracy, do not find themselves within the zone of stable democracies, the task would be more complicated. There is a long- term task of an estimation of GDP in East European countries in the period preceding the collapse of socialism. It is very complicated statistically and requires a specific discussion.
Let us take a look at the 1994 per capita GDP rates, given the same year's prices. What countries may be included in the top group of states with medium level of revenues, in terms of parity of purchasing capacity? It is Czech Republic, Poland, and Slovenia. It is not a surprise why it was these countries which a) managed to be the first ones to form a stable set of democratic institutions, and b) to privately impose a taboo on populist economic policy. Even in those countries in which, formally, very radical changes in personal composition of executive power happened, like in Poland, the taboo was actually in force. Therefore, naturally, the countries' ability appears to most rapidly form a strategy of market development and to start an economic growth. On the other hand, the countries with the GDP per capita rates under 2.5 thousand which found themselves involved in internal and external wars are Armenia, Azerbajdzan, Tadzhikistan, Moldova, Georgia, etc., or those are countries with non- democratic authoritarian regimes.
Between the above two groups, there is one of unstable democracies, i.e. the democracy in which is not a given phenomenon, or the democracy is not put beyond the framework of a subject to political discussion, namely- Ukraine, Russia, Bulgaria, Romania. It is this group in which, indeed, the forming of sensible, more or less consistent policy has proved to be the most complicated task. In particular, it was hard due to the fact that basic institutional factors were constantly within the framework of serious discussions, under serious threat, and this, of course, imposed huge restrictions on an opportunity to implement consistent reforms.
At the time, Russian economy, along with other post- socialist ones, has a range of structural anomalies. One of the latter ones is rates of public expenditure which are high for our level of development. In this respect, there is, on my opinion, a somewhat simplified approach to the problem. The essence of it is, given such anomalies, that they should be corrected. Accordingly, we have to orient our economic policy to maximal velocity rates of its approaching the average values existing for market economies.
In the article of our colleague Mr. A. Illarionov in "Voprosy Economiki" monthly magazine this idea was expressed in the most consistent and strict form. On my opinion, it is the case on which it is hard for me to agree with the logic of Mr.Illarionov's reasoning.
First. There are things which can be created: innovations, structures,- but which seem hard, or impossible to liquidate. The rather comprehensive pension system is not characteristic of our level of development. Well, what's then? One may make a conclusion that it might be possible to reject it within the framework of socio- political realities? For the countries of our level of development, indeed, the whole range of financed directions are not inherent in, and that financing was not cut by a lot of them. One may give a counter- example. let us say that, indeed, China has sharply reduced the state share in GDP over the last 15 years. This is true. China, however, has reduced that on the basis of high rates of economic growth. Accordingly, it has not disassembled the previously formed structures, but simply created a broader resource base for their financing.
In this respect, I agree with what is being told on the fact that a high state pressure is a serious problem. I, however, against any simplified approaches to how the problem may be resolved.
If this high state pressure by a number of directions is given data, then a principle question is: a) To what extent may the financing these non- decreased expenditures be secured? and b) To what extent and in what place, anyway, are there reserves to cut the expenditure, which can be actually implemented within the framework of a probable current freedom of a socio- political moment?
Comparing in this respect Russia and East European countries, one may see that, indeed, the latter ones still keep ( even the growing one) the level of the state pressure, the rates of which are substantially higher than Russian ones, at the expense, particularly, of more effective taxation system. However, what they have actually made- they were more decisive on a reduction of subsidizing pressure. And what was happening in this country? We have got our taxation base eroded, which has resulted in a reduction of government revenues, while at the same time, the high donation pressure was maintained. As a result, the social sphere was becoming a compensatory factor for all the reduction on the whole. The crisis of the sphere was the inevitable given phenomenon, within the framework of the above model. In East European countries, the policy of which I don't idealize at all, nonetheless, given some reduction of a state pressure, it was tax reforms which allowed to maintain that at a rather high level, or in terms of financing social expenditure. At the same time, a sharp reduction of the pension pressure allowed to increase social programs' efficiency, along with a financing them, thus allowing to avoid a severe Russian- type crisis in the social sphere .
In my work, I was trying to describe two opposite scenarios for Russia, proceeding from the above,- pessimistic and optimistic ones, since the elimination of the anomalies might be possible through absolutely different ways. It would be possible to eliminate the anomalies in the following way: the constant crisis of government revenues, crisis of financing education, degradation of it, ineffective social policy, further growth of indices of poverty differentiation, social instability. To cut it short, we actually make the average, and that is it. However, one may try to get the financing of education stabilized and to make it a priority, to increase a social support through making it targeted and more efficient, which should result in an establishment of a base for the GDP growth. On this base, it would be possible to eliminate structural distortions.
I realize quite well that a real development of the situation could not be so much tragic, nor it would be so much favorable. It is not so usual, and everything should lie in the middle. However, my faith is that all the structural anomalies a) should be crucial issues in a forming an economic strategy for Russia, and b) the chances for the scenarios coming to life, within the framework of which we strengthen the deviations from the world weighted average data, are highly improbable. In this respect, all the ideas of a mere radical immediate increase of a share of tax collection in GDP, and, as a result, one would be capable to pay everything to everybody, are clearly immanently unstable.
Finally, to wrap it up, a few words about economico- political reality and crucial tasks which, on my opinion, the current Russian economic policy faces today. Considering thoroughly the Federal budget for 1997, one may see that basic, surface reserves of a reduction of expenditures have mostly exhausted. It is indeed may be possible to touch the financing of agriculture a bit, since currently it is a source for wasting money. In perspective, it might be possible to cut coal donations, but not this year, and after rather large- scale investments to the branch first. Any further reductions in the field of defense are practically impossible. In one word, the whole set of these reserves is of an ultimately limited character. On the other hand, the ideas that it may become possible to sharply increase a tax collection and make the government revenues grow by 3-4 points comparing with 1997, are clearly unrealistic.
It is becoming clear that within the framework of a mere continuation of the currently implemented policy, there is no strategic way out within 2- 3 years, since the burden related to a servicing the debt should grow, tax revenues should not grow drastically, while serious cuts in the army and in the field of the national coal industry require money. It is not the situation in which one need to tighten his belt and wait a bit, and then? Nothing! Actually, this set of problems has a resolution if only there is a political will to implement a few absolutely mature reforms. There is a lot of talks about them, the Government talks a lot, and the words are true, but there was so little done over the last three years.
1. It is the reform of the system of social support. The current system of social support, with which every half year the number of privileged beneficiaries grows, it is in principle impossible to handle any social task. It is impossible in principle to finance it and regulate pensions. At the time, by current estimations, as a part of the attendants know, it is poor people who are issued with 20% of the money forwarded to social support. I.e., 80% of the money we spend on supporting those who are not poor. Such a system is a heavy burden, and it is very ineffective at the same time.
What must be done? The Government have expressed everything more than once. The system must be sharply simplified. All the welfare systems must be related to needs, etc. However, it must be understood that it is not in today's agenda. It just must be done.
Secondly, the donations to housing and communal fund. Actually, the largest reserve of the budget for the time being are donations to housing and communal sphere and transport. If one withdraws 4- 4.5% of GDP without utilizing that, none of financial indices for the following 2-3 years may converge in principle. It is evident what has to be done in this field. Again, the Government has proclaimed that, including its contribution in 1993. However, the moving in this direction was extremely slow. Naturally, these donations need to be substituted with a normal system of poverty welfare, and it should be simple, clear and transparent. Nevertheless, we are very slow.
Thirdly, the reform of the system of interregnal transfers. The current one is offends common sense. The Government, first of all, sets up the task to punish those implementing a sensible economic policy, and to award the regions whose policy to a maximal extent is inefficient and senseless. As a result, every year the number of donating regions is going down, while the number of donated ones is growing. By 1997, of 89 regions we should have 79 ones being donated. If we keep this trend, the number of them should grow further on. Furthermore, the money is still allocated, though once the necessity has been proclaimed to tie any forms of a granted support to the requirement to the regions to make their budgets open, to consolidate their extra- budgetary funds, to implement a responsible expenditure policy, to liquidate clearly groundless expenditure, not to implement the restriction policy, and many other things. Unfortunately, nothing has been practically done by now. It means that we really create mighty stimuli for the regions to be given the Federal budget's suck.
It is clear what must be done. We need a program of a sharp reduction in the number of donated regions, along with a strict tying the relevant support programs to the set of requirements to an implemented regional policy, along with a program of an overcoming of the being- donated character of many regions. However, unfortunately, there is so little being done.
The tax reform. In some sense, we have an amusing taxation system. We have the minimal rate of the tax imposed on salaries and wages of 50%, social insurance and income tax inclusive. At the same time, the maximal tax rate actually due to be paid in terms of non- salary income is zero. Having such a taxation system,- will you please ponder this on!- you shall inevitably end with the share of salaries and wages in GDP equal to zero! Again, given that all the salaries and wages are under the 50% and over tax rates, while the zero tax is imposed on non-salary income. Could you imagine any bright mind aspiring to receive his personal income in a form of salary, in such a situation? If it is impossible to handle this problem, one shall absolutely inevitably end with the zero income tax, and, much more dangerous, with the zero deduction to the pension fund and all other social funds, since he does not actually extend them.
Its is absolutely evident what should and need to be done in this field. It is necessary to consolidate all the payments, divide them further on, decrease the rate of the tax imposed on salary with a simultaneous equalizing of rates of all the taxes on other types of income, including, naturally, revenues resulted from bank deposits and others, withdraw them from the source and compensate them in favor of the poor part of the population. The taxation system should be ultimately simplified and be transparent and well controlled, etc. I do not even speak about other corrections. To fulfill this, one needs a sensible work and political will, too. In other words, indeed such short- term stabilization tasks were in many aspects resolved by 1995- 96. We, of course, currently enjoy the fruits of the mighty destabilization wave of the political cycle related to the Presidential election, and I would not really like to take up this issue today. It is clear to many of us, and these problems are of a short- term character. They might be regulated upon the President's recovery and given a sensible work of the Government. It should be understood that the set of long- term anomalies closely related to the preceding model of the socialist growth presents a serious and long- term problem to Russian economy. It also should be understood that the resolution of these anomalies requires rather severe, consistent and profound transformations. It cannot be secured on the basis of such a gently sloping policy of compromise. It is evident that the perspectives and chances for a stable economic growth in Russia in 1997- 98 are dependent on the fact to what extent the Government would be capable to implement the reforms over these years.
Dear colleagues! Will you please allow me to stop at this point. I would be happy to answer your questions.
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