Stanley Fischer
1
January 9, 1998
Six years after the start of the Russian economic reform process, much has been achieved and
the continued progress of the economy towards economic normalization is not in doubt. Now
the challenge is to move the economy toward sustained growth of output and living standards.
That will require many difficult economic decisions, and many political battles -- whose
outcomes will determine both the future structure of the economy and its growth
performance.
Nineteen ninety seven was a year of achievement for the Russian economy. For the first time
since 1992, the economy grew, albeit barely.2 The current
account of the balance of payments was in surplus. The Central Bank of Russia once again
proved its professionalism, as inflation continued to decline, and as late in the year it
successfully fought off contagion effects from East Asia and maintained the currency band.
At the start of 1998, with a broadened currency band, and a non-confiscatory currency reform
under way, confidence in the maintenance of monetary stability should continue to
strengthen.
In 1997, as in 1996, central government revenue shortfalls constituted the major failure of
macroeconomic policy. At the start of 1998, fiscal reform and performance remain both the
crucial element and the crucial question at the center of Russia’s economic program
with the IMF. The reform of the tax code and increased revenue collection are on one side of
the equation; on the other side, increasing the efficiency of government spending and
strengthening expenditure management deserve no less attention. Equally important for future
growth is continued progress with structural reforms, whose implementation had for some
years lagged until recently -- but it must be noted and emphasized that the structural
components of the Russian reform program moved ahead as agreed with the IMF (indeed
even a little faster) during 1997.
I am also happy to report that the IMF Executive Board yesterday completed the delayed
sixth quarterly review of the Extended Fund Facility with Russia, and -- laying particular
stress on the fiscal action plan agreed between the Russian authorities and the Fund staff in
December -- agreed to disburse a $700 million tranche, thus bringing the program back on
track.
I. Achievements of the past six years.
Six years ago, Russia set out on the road to a market economy by liberalizing prices and
beginning to dismantle the instruments of central planning. In these six years, Russia has
made remarkable progress in important areas. These changes have been charted in detail
elsewhere,3 so that a summary will suffice here:
Political development: The Soviet totalitarian system has been buried. Russia has
become a democracy, with a President and legislative bodies elected by popular vote, with
open political debate and a free press. To be sure, the political system still has to find ways to
reach decisions by consensus-building rather than by conflict.
Market development: A large and increasing share of Russian economic activity is
channeled through market mechanisms. In its latest Transition Report, the EBRD
estimates that 70 percent of GDP is accounted for by the private sector.4 This vibrant private sector, for all its imperfections, has
become the major agent of economic growth and change.
Policy-making: The government has created from scratch mechanisms to manage the
economy through indirect means rather than through direct commands. Monetary policy is
now conducted by a professional central bank, which has made remarkable progress towards
price stability. The old central planning establishment has been largely dismantled, and
agencies bent on structural reform and deregulation are gaining strength. The main
shortcoming in this area is the rudimentary development of instruments to formulate and
implement fiscal policy. Still missing are modern tax and budget codes (though both are
making their way through the Duma), fully competent agencies to collect taxes and control
expenditure, and adequate information systems for fiscal management.
Economic activity: While output is still well below the levels of six years ago, it has
begun to grow again; inflation has been reduced to near single-digit levels (see table); and the
exchange rate arrangement played a crucial role in maintaining financial stability during the
1996 presidential election, and was successfully defended by the central bank during last
month’s Asian contagion.
II. Major policy challenges.
The experience of other transition economies, as analyzed in a number of studies, suggests
that Russia will move onto a sustained growth path as inflation falls and fiscal adjustment and
structural reforms proceed.5 In many respects, Russia has an
exceptionally favorable basis to achieve that end: important natural resources, including
minerals and energy; a highly educated labor force, which is still employed to a large extent in
the less productive state sector; and a potentially large domestic market with pent-up demand
for consumer goods and social infrastructure. However, a major constraint to Russia attaining
satisfactory rates of growth is that the process of structural reform has not gone far
enough.
Indeed, empirical analysis has shown that the main reason why growth in Russia and other
CIS countries lags behind the record of the Eastern European and Baltic countries is the
slower pace of market-oriented structural reform.6 While
Russia has made substantial strides in some areas of structural reform (notably small scale
privatization, the liberalization of the trade and foreign exchange system and, to a lesser
extent, natural monopoly regulation), there are important areas where much more progress is
needed.
Before turning to those structural reforms, let me start with the fiscal problem. I will not
cover monetary and exchange rate policy, because they are both fundamentally on track. Nor
will I take up in detail the critical need for vigilance in supervising the banks and the financial
system, but the task is a vital one in all countries, including transition economies.
A. Fiscal reform
Currently available estimates indicate that in 1997 Russian federal government spending
amounted to 18.3 percent of GDP, while revenues were only 10.8 percent of GDP, implying
(on the IMF’s accounting definitions) a deficit of 7.5 percent of GDP. Cash revenues
were 9.1 percent of GDP, the rest being collected in the form of non-cash arrangements
featuring the mutual clearance of tax and spending arrears. Low revenues and the
corresponding high deficit are the major macroeconomic problems now confronting the
Russian economy.7
The Russian tax system is complex, with many types of taxes, numerous (and sometimes
arbitrary) exemptions, narrow tax bases and, partly as a result, very high tax rates. Tax
administration is clearly inadequate. Such conditions create uncertainty, discourage domestic
and foreign investment, encourage tax evasion, and foster the expansion of underground
activities. Improvements in tax administration are needed, not only to raise revenue, but also
to reduce the effective burden on compliant taxpayers, increase the equity and transparency of
the tax system, and permit a reduction in excessively high tax rates. The need for a tax reform
that would simplify the tax system and broaden the tax base has been widely accepted for
some time. Now, after several years of drafting and debate, the government has submitted to
the Duma a comprehensive draft Tax Code that pursues those objectives.
In addition to the new code, it is also necessary to improve tax collection. This will likely
require reorganization of the 180,000 strong State Tax Service and coordination with the Tax
Police and Customs Service. To provide some of the necessary incentives to taxpayers, it is
essential to enforce realistic penalties on those that do not pay taxes, or pay them late. It is
sometimes said that taxes will not be paid until companies are forced into bankruptcy for
non-payment, but that is an exaggeration -- the need is to penalize non-compliant taxpayers,
not necessarily to force them into bankruptcy. That is why some cases recently in the
limelight are so critical as potential signals and examples of the beginning of a change in the
culture of non-payment of taxes. At the same time, and no less important, it is critical to end
the practice of permitting non-monetary tax payments. Success on this front, besides being
important in its own right, will also contribute to reducing the more general problem of
payments arrears and non-cash forms settlement in the economy.
On the spending side, efforts are needed in particular to redefine the role of the government
in the Russian economy and ensure that spending decisions are based on efficiency and equity
considerations. In setting spending priorities, it will be important to:
- strengthen expenditure management and control, in particular by strengthening the Federal
Treasury;
- reform the civil service by shedding redundant workers while providing competitive wages
to retain high-quality staff ;
- downsize the workforces in public health and education while improving the provision of
services;
- improve the targeting of social benefits while strengthening the social safety net; in
particular, phase out the generalized subsidization of utilities, housing, etc.;
- implement reforms to ensure the financial viability of public pension schemes while
reducing the government’s role and enhancing the rate of return on retirement
savings.
The Russian government is moving forward in many of these areas, as part of its fiscal
adjustment program, which is the central element in its IMF-supported economic program.
Progress has not been easy, partly because of political difficulties, partly because of the heavy
decentralization of the Russian administration. Indeed, in implementing its reform program,
the Russian government has been fighting an administrative system inherited from the Soviet
bureaucracy that devolved substantial powers to largely autonomous agencies, enterprises,
and local governments.
8
B. Structural reforms
With macroeconomic stability close to being attained, the focus now must shift to structural
reform, particularly private sector development. A fast pace of economic recovery
will demand substantial increases in efficiency and capital accumulation, and these in turn
demand a competitive business environment. Certain elements of such a business environment
(such as a market culture) cannot be developed rapidly or established by government action,
but other major elements (including the legal and institutional framework) can be. Such
efforts are under way in several areas:
1. Faster, more transparent privatization and improved management of state-owned
enterprises. The privatization program was stepped up in 1997 after a
disappointing record in 1996, and the Government’s privatization plan for 1998
envisages a further acceleration. The new privatization norms call for an open, transparent,
and competitive process -- elements of which were missing in earlier waves of privatization.
To increase efficiency and accountability, the enterprises remaining in state ownership should
be made subject to hard budget constraints and profit objectives.
2. Restructuring and pricing of natural monopolies (gas, electric power, district
heating, and railways). A long-term objective is to introduce competition into
these sectors where possible, but limited headway has been made. Where demonopolization is
not possible, it will be necessary to put in place appropriate regulatory systems.
3. Urban land and real estate reform. It is critical to establish a legal framework that
supports full private ownership and development of land, and its utilization as collateral in
credit transactions. Progress in this area has been hampered by lack of cooperation between
the executive and legislative branches. In addition, it is necessary to foster a private market in
land by making it possible to register land ownership, to encourage regional authorities to
allow the sale of leased land (especially under privatized enterprises), and to promote the
creation of a mortgage market.
4. Further progress in capital market development. Although this has been one of the
most successful reform areas in recent years, the agenda remains long: strengthened corporate
governance and protection of outside investors, including through better disclosure and
registration requirements; a more effective legal framework for securities transactions; and a
stronger securities commission.
5. Development of a sound and efficient banking system. So far the Russian banking
system remains too small to serve the financing needs of the private sector — particularly
given the large borrowing needs of the government sector — largely because of the
adverse effect of earlier high inflation on real financial savings, tax evasion, and concerns
about bank soundness. With the decline in inflation and a more stable exchange rate,
confidence in the banking system can be restored through action to eliminate insolvent
institutions, improve banks’ internal governance, and strengthen the regulatory and
supervisory framework. Headway has been made in these directions, but faster progress is
needed.
6. Setting up a legal and institutional framework to make it easier to exercise and
transfer property rights and to enforce contracts.9 Very
important, in particular, is a bankruptcy mechanism that permits insolvent
enterprises to be liquidated or reorganized rapidly and efficiently.
7. Liberalizing the housing market and encouraging the mobility of workers from
traditional sectors to new and more productive activities.
8. Promoting agricultural efficiency and productivity. Agricultural land and
management remain largely collectivist, even though the largest share of land is non
state-owned. It is important to strengthen individual rights to land ownership, create fully
functioning land and mortgage markets, improve the performance of the marketing system,
reorient government expenditure in agriculture away from subsidies to targeted income
support, and in general facilitate farm restructuring.
9. Continuing to open the economy to foreign trade and investment, by eliminating
remaining trade barriers and resisting pressures for import protection.
10. Eliminating behavior by government officials that impedes investment, in
particular corruption, arbitrariness, and complex administrative rules (red tape).
Together these reforms are likely to strengthen growth prospects by directly improving the
environment for and scope of private sector activity and investment, while scaling back the
size of the public enterprise sector.
III. Concluding remarks
Progress in implementing these reforms is likely to be difficult,10 but if the specified policies are followed, the Russian
economy can achieve:
A sustained rate of growth of real national income and private consumption. If the
progress towards price stability can be maintained, and fiscal adjustment and structural reform
can move forward, as envisaged above, then the IMF staff envisages that output will be
growing by about 6 percent a year early in the next decade. Even with high rates of saving,
private consumption would be rising at a similar pace.
A low budget deficit and a sustainable public debt position. Fiscal reforms can set the
basis for substantial fiscal adjustment: an adequate revenue performance, and levels of
spending consistent with government priorities and low borrowing requirements. With
decisive efforts, it would be possible to cut the deficit of the general government by half or
more to the range of 3-4 percent of GDP early in the next century. If so, public debt would
be stable or falling modestly in relation to GDP.
A low rate of inflation. The Central Bank of Russia is aiming to achieve a single-digit
annual rate of inflation in 1998, a goal that is within reach. Six years from now, if the fiscal
deficit can be kept at the 3-4 percent level, Russia could have a price performance closer to
that of the major industrial countries.
An improved rate of investment, financed largely through national saving and foreign
direct investment. Structural reforms would increase the prospects for investment, including
foreign direct investment. At the same time, a continuation of low inflation, and stronger
domestic credit markets, should encourage a shift of portfolios of domestic residents towards
domestic assets. The external current account deficit will probably shift into deficit, and it will
be a challenge for policy-makers to keep the deficit manageable.
In summary, Russian economic reform is entering a less dramatic phase than that of the last
few years: the most important battles in securing macroeconomic stabilization and
creating a market economy have been won; but much remains to be done to secure the future
growth of the economy.
Up to this point, the optimists on Russia have been more right than the pessimists. There is
good reason to believe the optimists will continue to be right.
| Russian Federation
Macroeconomic Indicators, 1993-97
|
|
| 1993
| 1994
| 1995
| 1996
| 1997 Actual/ Estimated
|
|
|
(Annual percentage changes unless otherwise indicated)
|
| Production and prices
|
|
| Real GDP
| -8.7
| -12.6
| -4.0
| -2.8
| 0.3
|
|
| Change in consumer prices
|
| Annual
average
| 895.9
| 302.0
| 190.2
| 47.8
| 14.7
|
| 12-month
| 841.6
| 202.7
| 131.4
| 21.8
| 11.4
|
|
| (In percent of
GDP)
|
| Gross national saving
| 26.6
| 29.7
| 25.2
| 22.4
| 22.2
|
| Federal
Government
| -3.9
| -8.4
| -3.8
| -6.8
| -6.0
|
| Other
| 30.5
| 38.1
| 29.0
| 29.2
| 28.2
|
|
| Foreign saving
| -1.4
| -3.8
| -1.3
| -0.5
| -0.8
|
|
| Gross domestic
investment1
| 25.2
| 26.0
| 23.9
| 21.9
| 21.4
|
|
| Enlarged government
deficit
| 7.4
| 10.4
| 5.7
| 8.2
| ...
|
| Federal government (cash
basis)
|
| Fiscal deficit
| 6.5
| 11.4
| 5.4
| 8.0
| 6.5
|
| Domestic
financing2
| 6.6
| 11.4
| 5.6
| 7.4
| 5.1
|
| External
financing3
| -0.1
| 0.0
| -0.2
| 0.6
| 1.4
|
|
| (Percent change)
|
| Money and credit (end-period
change)4
|
| Base money,
narrow definition
| 647.1
| 185.7
| 117.6
| 26.2
| 28.0
|
| Net domestic
credit of the banking system
| 358.0
| 263.1
| 141.5
| 54.8
| ...
|
| Ruble broad
money
| 429.0
| 197.7
| 127.4
| 33.6
| 30.0
|
| Ruble money
velocity, level
| 11.1
| 11.0
| 12.1
| 11.2
| 8.2
|
|
| Interest rates, percent per
annum
|
| Deposit
| ...
| ...
| 86.9
| 48.6
| 15.05
|
| Credit
| ...
| ...
| 160.3
| 103.0
| 32.05
|
| Interbank rate
| ...
| ...
| 171.8
| 101.7
| 19.05
|
| Central Bank of Russia refinance
rate
| 210.0
| 180.0
| 160.0
| 48.0
| 21.05
|
| Treasury bill rate
| ...
| ...
| 176.0
| 102.0
| 40.46
|
|
| (In billions of U.S.
dollars)
|
| Total exports, fob
| 58.3
| 69.6
| 81.5
| 90.2
| 88.8
|
| Total imports, fob
| 44.2
| 48.5
| 64.0
| 73.9
| 72.2
|
| External current account (deficit -)
| 2.6
| 10.4
| 4.5
| 2.2
| 3.9
|
| Public external debt service
due
| 19.3
| 19.2
| 18.4
| 14.8
| 10.4
|
| Public external debt service after
rescheduling
| 2.8
| 3.7
| 6.4
| 9.5
| 6.3
|
|
| (In percent of exports
of goods and nonfactor services)
|
| Public external debt service due
| 29.6
| 24.4
| 19.6
| 14.5
| 10.2
|
| Public external debt service after
rescheduling7
| 4.3
| 4.7
| 6.8
| 9.3
| 6.2
|
|
| (In months of
imports of goods and nonfactor services)
|
| Gross reserves coverage
| 1.7
| 1.2
| 2.4
| 2.0
| 2.2
|
|
| Memorandum items:
|
| GDP in trillions of rubles
| 172
| 611
| 1,630
| 2,256
| 2,678
|
| Exchange rate rubles per US$1 (pd.
average)
| 933
| 2,205
| 4,557
| 5,123
| 5,780
|
| GDP in billions of U.S.
dollars
| 184
| 277
| 358
| 440
| 463
|
|
Sources: Russian authorities; and
Fund staff estimates and projections.
1Investment includes both capital formation and capital repair, as consistent with
the methodology of Russian Goskomstat.
2Includes domestic bank financing, change in the stock of government securities
held with the private sector, proceeds from privatization and the sale of gold and other
precious metals, principal repayments to domestic nonbanks, and other financing.
3Includes rescheduling of principal and interest plus (net) disbursements.
4Monetary data calculated as percent change for same month in preceding
year.
5September data.
6Data as of December 16.
7During the period 1992-96, cash payments fell significantly short of amounts
falling due, with the remaining debt service obligations either being rescheduled or falling into
arrears pending discussions on debt rescheduling with various creditors.
|
1First Deputy Managing Director of the International
Monetary Fund. These remarks were prepared for delivery at the 1998 U.S.-Russian
Investment Symposium, at Harvard University, on January 9 1998.
2Macroeconomic data are presented in the table at the
end of the paper.
3See Anders Aslund, How Russia Became a Market
Economy (Brookings, Washington, D.C., 1995); and "The Russian Economy: Where Is It
Headed? " (The Ernest Sturc Memorial Lecture, 1996); European Bank for Reconstruction
and Development (EBRD), 1997 Transition Report ; Richard Layard and John Parker, The
Coming Russian Boom: A Guide to New Markets and Politics (The Free Press, New York,
1996); and Organization for Economic Cooperation and Development, OECD Economic
Surveys: Russian Federation 1997.
4EBRD, op. cit. , page 14.
5See, e.g., Stanley Fischer, Ratna Sahay, and Carlos
Vègh, "From Transition to Market: Evidence and Growth Prospects, " in S. Zechini
(ed.), Lessons from the Economic Transition.
6Differences in initial conditions are also important in
the early years of the transition. For a review of the issues and a detailed econometric study,
see Andrew Berg, Eduardo Borensztein, Ratna Sahay, and Jeromin Zettelmeyer, "The
Evolution of Output in Transition Economies: How Different is the FSU? ", mimeo (IMF, July
2, 1997). EBRD, op.cit. Chapter 6 also stresses the importance of structural reforms for
growth.
7Differences in initial conditions are also important in
the early years of the transition. For a review of the issues and a detailed econometric study,
see Andrew Berg, Eduardo Borensztein, Ratna Sahay, and Jeromin Zettelmeyer, "The
Evolution of Output in Transition Economies: How Different is the FSU? ", mimeo (IMF, July
2, 1997). EBRD, op.cit. Chapter 6 also stresses the importance of structural reforms for
growth.
8On the decentralization of power during the Brezhnev
and Gorbachev eras, see Anders Aslund, How Russia Became a Market Economy , in
particular p.15 and pp.33-34.
9On the importance of the legal framework in economic
reform, see J.F. Sachs and K. Pastor (eds.), The Rule of Law and Economic Reform in Russia,
(Westview Press, 1997).
10One impediment to structural reform in Russia is the
sheer size and spread of the defense establishment (including the armed forces and the
military-industrial complex) inherited from the Soviet Union. On the legacy of the defense
complex, see Clifford Gaddy, The Price of the Past: Russia’s Struggle with the Legacy
of a Militarized Economy (Brookings, Washington DC, 1996).
|