Tatiana Gurova

Productive consolidation

The first analogy that comes to mind when reading this year’s presidential address: Putin has presented his project for a Russian socially-oriented state to the Federal Council. By “socially-oriented state,” I mean a state based on two principles. On one hand, it preserves democratic freedoms, private property, and market competition, and on the other hand it eliminates excess social inequality and attempts to secure a decent standard of living for all. Using this very model, capitalist Europe showed the world that social justice does not require going to totalitarian lengths. And in fact, this same pathos can be felt in the president’s address. Putin emphasized several times that Russia has no intention of rejecting the principles of liberty. At the same time, the president dedicated the main part of his address to the economic issues that must be resolved in the name of improving Russians’ standard of living. He has thus disassociated himself both from the aggressive, regressive parties pushing for a totalitarian increase in state power and from the liberals ignoring the low standard of living in Russia. He is taking a very advantageous middle-of-the-road stance.
However, the productive nature of this conceptualization itself calls up doubts. The European social states appeared after many decades of capitalism. They had an elite, including among civil servants, that knew how to carry out large-scale projects under market conditions. Russia does not have any such people working for the government, and businesspeople have been pushed aside. As a result, the address gave us goals, but not the means to achieve them or any idea who will participate in this process.

Everything for everyone

This year, the address turned out extremely socio-economic in orientation. Less than 10% of the speech was dedicated to politics. At the very beginning, the president stated Russia’s achievements: “For four years, our economy has developed at a decent pace. Last year, growth rates reached 7.3%. In the first four months of this year, they reached 8%. Russia’s economic success and political stability will finally allow us to set about solving some of the country’s most important problems.” Here, someone closely involved with the economy would expect to hear something about structural changes or the underdeveloped financial system, but the president immediately turned to the problems of the common man: “I believe that today it is absolutely necessary to concentrate on goals that touch the lives of practically every Russian citizen, every family…This is first and foremost the quality and availability of housing, education, and medical care.” Thus, the president defined the three crucial markets that in his opinion the state should focus its energy on. What principles of development does the president see for these markets? Very modern and market-oriented principles.
There are two key points related to the housing market. The first is the expansion of the mortgage system. “Mortgages must become available to people of average means.” A bit earlier in the address, the president gave some target numbers: “The government and regional and local authorities must strive so that by 2010, at least one third of Russia’s citizens (and not one tenth as it is today) can purchase an apartment that meets the demands of modern life.”
The second point is even more important than the lonesome and unsung return of mortgages to Russia. The president spoke about the “need to break up the monopolies on the construction market” and eliminate administrative barriers. Moreover, he even stated some concrete means for doing so. Russia must set clear rules for zoning and building, simplify permit procedures, and expand utilities and infrastructure. All of these measures make sense, yet the economic goal of reducing the amount of time and money spent on construction is too narrow to bring about a real revolution in land and real estate issues. It would make more sense to say that construction should become a driving force behind economic development, and for this to happen, large construction companies have to appear on the market. So that these companies would be independent of the local bigwigs, the real estate market needs to be transparent, which would lead to a dramatic rise in investment in construction. For the time being, however, the address only discussed reducing construction costs and time. With this kind of slogan, the whole notion of fighting monopolies and administrative barriers threatens to turn into a big smear campaign against the mayors of major cities and the construction companies associated with them.
The second market that the president emphasized was health care. According to the president’s socially-oriented logic, the address focused not on developing the private health care market, but on modernizing the system of guaranteed medical care. In other words, instead of supporting the rapidly expanding market for private medicine, which could establish new standards for care, the president ordered the government down the long road to reforming the way state medicine is funded.
The third market, education, looks even grimmer. Putin expressed the mix of state concern about access to education and desire to better predict the demand for certain specialists typical for the Soviet era. What predictions? Will the state simply determine the number of specialists it needs to solve its own problems or does Putin want to determine demand for the entire labor market? Who knows? The fact that, for example, private business was given an insignificant role in offering student loans and that the president did not even mention the growing private education sector at all demonstrates that the government also plans to close itself off in this area and solve the problems of the common man on its own.

Transportation and inflation out of left field

Two more economic goals were announced in the address and are important both in understanding the government’s logic and because of their potential macroeconomic consequences. The first goal is connected with developing Russia’s transportation infrastructure. “Bearing in mind Russia’s great size and the remoteness of certain of its territories from its political and economic centers, I would say that developing our infrastructure is more than a purely economic aim.” The president went on to give a detailed list of almost every significant transportation project, but his vague “we have to keep working on this” blurred the picture.
Finally, the president set a mirage of a goal, to reduce inflation from today’s 10-12% to 3% a year. If fiscal authorities take this goal seriously, Russia can bid farewell to the dream of high growth rates. A dramatic reduction in inflation requires setting notable limits on the money supply, and this will inevitably put pressure on investment activity. The statement on inflation makes it particularly clear that the president is paying no heed to actual economic processes, and is putting social goals above the general aim of economic development and the interests of the average Russia above those of private businesspeople. Supported by obedient bureaucrats unschooled in the art of management in a market economy, the president is posing a threat to the very economic growth he himself claimed gave Russians the possibility to dream of wealth for all.

What’s missing?

A fairly frivolous set of figures was all we heard in the address about economic growth. The lack of discussion of why the economy is growing and ways to keep it growing in the future is a serious omission. Growth didn’t come out of nowhere. It was the result of several processes coinciding: favorable world market conditions, the return of capital to Russia, and an increase in investment activity on the part of thousands of Russian companies. Today, both the local and the global limits to this growth are apparent. The local factors include the tense relations between the state and business and the loss of strategic targets in developing the natural resource industries. The global limits involve the underdeveloped nature of Russia’s financial system. These factors are already having an effect and in a year or two, the financial system will become the main reason growth begins to slow.
Another blank spot in the address was the lack of any discussion of who would pursue the goals stated. Entrepreneurs were mentioned in two concrete places discussed above. The first was in connection to student loans. The second was as participants in transport construction in accordance with state plans. It seems the government will do everything else, spending the tax money contributed by private business as it sees fit. This is a strange and not all that constructive stance to take, because by forcing business into submission, the president has automatically expanded the area of the state significantly.
People keep saying that all the Western countries went through this. Sure, they did indeed, but only after accumulating a huge amount of life experience under market conditions, after creating a real capital foundation for the economy, and after establishing an elite capable of comprehending that state interest is actually the sum of many private interests. Because this elite does not exist in Russia, the president, by pushing entrepreneurs out of the picture, is merely handing over the economy to be torn to shreds by state bureaucrats.
It makes sense to take a pragmatic view of the address. In the end, the president in one way or another did define some priorities for economic development, and that means that these areas should become especially attractive to investors. There is little hope, however, that things will happen this way. Today, the Russian bureaucratic machine, no matter how it tries, is not capable of changing a social utopia into concrete programs. This is really too bad, as all the economic areas discussed by the president are extremely important for Russia’s development. Housing and transportation have the potential to become driving forces behind economic growth in the next year or two. Education is not only the source of qualified cadres, but could in time become a major export industry, taking into account the particularities of Russia culture. Yet for all this to happen, we have to find answers to the question of how to serve Russians less expensively and to the question of who is willing to operate on these markets and under what conditions.

More in Russian>> www.expert.ru