An attempt at optimism

The president set some serious goals in his address to the Federal Council. If it''s more than just talk, the logic behind them will completely change economic policy.

Valeri Fadeev

Last Thursday, Vladimir Putin made his annual address to the Federal Council. The president reaffirmed his commitment to a liberal approach to economic development, a matter, naturally, of utmost importance. At the same time, he pointed out the inefficiency of government mechanisms and called for the modernization of the Russian government.

The Good Parts

The central economic hypothesis in the president''s message was that entrepreneurship is an important factor in economic development. Basically, entrepreneurs'' activities lead directly to economic growth or stagnation, and either make the population at large richer or cast them into poverty. This means we need to support entrepreneurs and provide them with the conditions they need to develop their businesses. True, when the president goes into detail, for some reason the whole discussion focuses on small businesses. In general, the message talks a lot about small businesses and has only good things to say about them. Unexpectedly, small businesses seem to have become the major driving force behind the Russian economy.

Another of the message''s important hypotheses is that Russia must rely on its own powers: "No one is waiting for us in particular (in today''s world). No one is going to help us. We will have to fight for our place in the economic sun on our own," the president announced.

One aspect of this fight will be Russia''s participation in the WTO. The president dedicated much of his address to this subject. The basic message: "The WTO is a tool. Whoever figures out how to use it will come out stronger." Have we figured out how to use this tool? Not yet, it seems, and apparently we haven''t even started learning. The president addressed the weakness of government structures "which are supposed to help domestic producers adapt to new working conditions," as well as the "lack of adequately qualified cadres." He furthermore suggested the establishment of a "Business-Government" discussion forum to examine the problems associated with joining the WTO. Apparently, president Putin has begun to doubt Russia''s readiness to enter the organization as soon as possible.

The address'' ambitious main goal of creating rapid economic growth grabs your attention. Putting it into action cannot be delayed. The problem isn''t just the 40 million Russians still trapped in poverty. If Russia remains this poor and this weak, at some far off point in the future the country will cease to exist.

For the main economic points of the president''s address, see the accompanying diagram.

What''s Missing

In our opinion, which we''ve expressed repeatedly, three important things are missing from Russia''s current economic policy: the establishment of a functioning financial system, a real industrial policy, and innovation strategies. These things were only vaguely touched upon in the president''s address. In fact, nothing at all was mentioned about industrial policy.

The notion of "industrial policy" still frightens the powers that be in Russia. They still seem to think that industrial policy contradicts economic liberalism. Which is of course not true. People to this day associate industrial policy with direct government financing of particular firms and industries, or with heavy-handed intervention that borders on socialism.

We recently gave an excellent example of this, namely the on-going discussion of how to develop the Russian aviation industry. Possible approaches can''t be determined without government participation. This is not only the view of bureaucrats and those involved in the industry since Soviet times, but also of completely independent entrepreneurs who are trying to run a business and not just squeeze money out of the government. Last October, the government approved a plan for civilian aviation and tried to make everyone happy in a way that will surely bring about the demise of the Russian air industry. Economic liberalism does not necessarily mean standing by while an entire industry dies only because it can''t dig its way out of a crisis relying on the invisible hand of the market alone. Economic freedom does not just mean freedom to fail and die.

There are plenty of examples of this. A significant number of Russian industries have absolutely no strategic orientations of the kind Putin would have the government determine. Markets are severely limited, in part thanks to the clumsy meddling of the government. The problem of private property and ownership in many cases also has yet to be resolved.

In terms of the financial system, the address discussed the need to improve the efficiency of the banking system, yet gives only modest means to do so: improve bank regulation and increase the capital holdings of banks.

There''s been a lot of talk lately about bank reform. The head of the Central Bank was even fired in part due to his passive attitude toward reform. However, despite the talk, you are lucky to hear even a few reasonable ideas, forget a whole competent plan. People say there are too many banks (more than 1,000), they are too small, and cannot provide proper credit services. They say, close the small banks and then the remaining larger ones will start to finance the domestic market.

But this is doubtful. First of all, the majority of Russian banks aren''t banks at all, but accounting centers for certain business groups. Federal entities have such strong distrust for each other that more or less serious business organizations refuse to give their money to an independent bank. Destroying small banks won''t change this. Secondly, the basic reason for the weakness of the Russian financial system is the country''s lack of capital. There is no basis for a strong financial system, including a bank system. The government''s first goal should be to create just such a capital base.

Finally, the third point: innovation and research and development policy. The address did hint at the possibility for taking steps in the right direction on this issue. At least, the emphasis the president placed on this particular policy direction inspired some hope. He discussed the need to get involved in the global venture capital market and commercialize applied sciences. He stated that only in the instance of a domestic demand for innovation and research will there be a technological boom. But how does the lame, sluggish Russian government plan to make these ideas a reality?

The president did not address these three points, and, by the way, these are far from comprehensive. This leads one to believe, as many observers have noted, that there is an obvious gap between the president''s ambitious stated goals and the half-hearted selection of means suggested for achieving them. However, this is hardly a tragedy. In the end, economic growth, be it ever so slow, is far better than the economic freefall that Russia found itself in for an entire decade.

Diagram: What the president said about the economy and our observations (in small type)

See also: Representing the Unrepresented