Russian Federation and the IMF
Russian Federation and the IMF
The IMF and Good Governance -- A Factsheet
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Russian Economic Policy at the
Remarks by Stanley Fischer, Acting Managing Director of the IMF1
Start of the New
Prepared for the conference on
"Investment Climate and Russia's Economic Strategy"
State University: Higher School of Economics
Moscow, April 6, 2000
1. It is a great pleasure to be taking part in this timely conference at the Higher School
of Economics on the economic policy choices that confront the incoming Putin administration.
And it is an extra pleasure to be participating in a conference organized by my friend and widely
respected colleague, Professor Yevgeni Yasin, with the participation of so many other leading
Russian economists and policy analysts.
2. I will make four main points:
- After ten years of experience in over 25 transition economies, the evidence is
clear that the basic economic reform and growth strategy recommended by mainstream
- Despite the many disappointments and setbacks in Russian economic reform, we should
not underestimate what has so far been achieved in Russia.
- The way ahead for economic policy in Russia at this critical moment is clear. To achieve
sustained and equitable growth in Russia will take a strengthening of macroeconomic stability and
the intensification of sectoral structural reforms, including improving the social safety net.
- Worldwide experience shows that economic programs are most likely to succeed when
they are "owned" by the country implementing them, and if necessary supported by
the international financial institutions and bilateral lenders. Russia's economic program is more
likely to succeed the more it is designed by Russians. The IMF and the international community
stand ready to help support a serious Russian economic reform program, whose seriousness is
demonstrated by progress in its implementation.
3. The experience of the transition economies that started on the process of economic
reform at the end of the Cold War has been studied intensively. There has rarely been an occasion
when so many countries changed economic policies at the same time; this makes it possible to use
econometrics to study the determinants of their growth experience since the start of transition. My
IMF colleague, Ratna Sahay, and I have examined this experience, using data from the
25 countries for which it was available.2
We measure the extent of structural reforms using the indices of different elements of structural
reform constructed by the EBRD. We conclude that the basic strategy advocated by
market-oriented proponents of reform a decade ago is correct: namely that both stabilization
policies and structural reforms, particularly privatization, contribute to growth; and that the faster
is the speed of reforms, the quicker is the recovery from the inevitable initial recession, and the
more rapid is growth.
4. To say that the basic strategy is well understood is not to say that carrying out a
reform program is easy, nor to deny that the way the strategy should be applied in each case
varies from country to country, nor to deny that policymakers face technically and politically
difficult choices every day. That is all true, and we must salute those policymakers who have
succeeded through their insights, technical and political skills, and courage, in moving furthest in
the transition process.
5. But it is also true that since the basic growth strategy is understood, it is necessary
to ask what determines the extent to which a country embraces transition and is effective in
undertaking the needed economic reforms. An answer relevant for some countries is that they
lack the technical expertize to implement the required policies. That could have been true at some
early stages of reform in Russia, but given the technical skills and sophistication of policymakers
in this country, it certainly cannot have been true for most of a decade. The answers must lie
elsewhere, in the political realm, in a lack of effective political or societal support, and in problems
of governance. I will return to some of those issues at the end of my remarks today.
6. This seminar is taking place at a time when the public debate in Russia and abroad
has been dominated for some time by disappointment about the achievements to date and some
cynicism about the future. Much of this skepticism has remained despite the favorable events in
the Russian economy over the past year. While there is much to be disappointed about, and many
negative developments that need to be reversed, Russia also has had positive achievements during
the last decade. I am not talking here only about the great historical achievement of the last
decade, the remarkable extent to which democracy is becoming entrenched in Russia. Much has
also been achieved in the economic sphere:
- Most fundamentally, a consensus has been reached that the process of transition is
irreversible and that the establishment of a truly market-based economy should continue to be an
overriding policy objective and the road to sustained growth and future prosperity in Russia.
- A commitment to low inflation and sound fiscal policies has taken hold across a broad
segment of the public as well as within the political elite. After the 1998 crisis, some Russian
policymakers argued that the country should welcome moderate--say 40-60 percent--inflation,
and that larger budget deficits were desirable. That did not happen. There is a clear resolve to
limit public expenditures to available revenues and to avoid inflationary financing. And that is
- There has been considerable domestic market liberalization, including price and wage
liberalization and the dismantling of most of the system of state direction of economic activity.
Privatization, while flawed in several respects, has allowed much of economic activity to be
governed by the incentives of the market. There has also been far-reaching exchange and trade
liberalization, with liberalization of exports and imports, introduction of current account
convertibility, and unification of the exchange rate.
- The institutional setting for the conduct of macroeconomic policies has been
strengthened. A modern central bank and payments system have been established.
Interest rates have been liberalized and the elimination of low-interest CBR direct credits has
strengthened the capacity to conduct monetary policy. Fiscal reforms include large reductions in
subsidies, improvements in the tax system (although this is a job that certainly is not yet finished),
and the establishment of a treasury.
- In addition to significant privatization, we have also seen the introduction of institutions
and legislation required for a well functioning market economy. These include bankruptcy
procedures, competition policy and anti-monopoly reguations, improvements in accounting
standards, a securities commission, and regulatory agencies for the natural monopolies. To be
sure, , the implementation and enforcement of new laws and regulations has been inconsistent.
Nevertheless, many of the basic underpinnings of a market economy have been put in place.
7. There has been real progress in these areas, even though these reforms are
incomplete or highly imperfect. Nonetheless, the disappointments about the overall progress of
the last decade are valid, and the setbacks have been dismaying. One needs only to look at the
basic social indicators, with life expectancy declining and the incidence of poverty increasing. And
that takes us to the next question:
What needs to be done?
8. In 1996 there was decisive progress in achieving macroeconomic stability in Russia.
However fiscal policy and the record of policy implementation in the structural area after that was
poor. While the government's medium term program adopted in 1996 constituted a coherent and
comprehensive structural agenda, performance in that area during the life of that program was
very weak, and was a fundamental factor leading to the Russian financial crisis in 1998. And little
has been done to tackle Russia's deep-rooted structural problems since then.
9. Russia's commitment to low inflation and sound fiscal policies is evident in the
continuing decline in inflation over the past year, and in the improving fiscal situation. However it
will take a broad-based acceleration of structural reforms, not only to increase growth, but also to
maintain macroeconomic stability.
- The recovery in output, the improvement in the fiscal position, and the notable
measure of financial stability that has been achieved has in large part--though not
entirely--due to the effects of the sharp real depreciation of the ruble in the wake of
the 1998 crisis, as well as the jump in world oil prices.
- Sustained growth and the further fiscal consolidation that is needed to maintain
macroeconomic stability will require an acceleration in structural reforms to spur investment
activities and strengthen exports, as well as comprehensive tax and expenditure reforms.
- The goal of many of the needed structural reforms is to improve the investment climate,
primarily for Russian investors, but also and importantly for foreign investors. The large
amounts of Russian capital now abroad will begin to return only when the investment climate
changes, and as it comes back and investment picks up, so too will growth--and here I echo the
theme of this conference, on the investment climate and the prospects for economic growth in
10. What should be the focus of the structural reform effort? There are
19 groups in this conference discussing different areas of reform, and the new government
will have to make progress in all those areas. Four topics are grouped under the heading
"state regulation of the economy: freedom and the rule of law". That is critical. It is
part of the pressing need to increase transparency in the economy, in both the public and private
sectors. This will be a crucial factor in assuring external support for the Russian economy.
11. Rather than go in detail into the overall program, let me select six priorities:
- industrial restructuring, including privatization, and other measures
needed to improve the business climate--especially in corporate governance and strengthening of
the rule of law
- measures to eliminate the nonpayments and barter problems;
- restructuring of the banking system, including reform of the central bank;
- tax reform, and expenditure reform, including reform of the civil service, which
has grown remarkably in the last decade;
- strengthening of the social safety net;
- agricultural reform and land ownership reform.
With progress in these areas, the stage will be set for Russia to begin sustained growth,
allowing its people to fulfill their potential.
12. It cannot be overlooked, however, that many if not most of the proposed measures
have already been part of government programs in the past--they have just not been
implemented. Why? The poor record reflects, fundamentally, a failure to overcome fierce
resistance from vested interests in the face of weak government consensus. There are many
examples, but let me mention three areas that have been the subject of discussion in this
conference--bank restructuring, tax reform, and the rule of law:
- Following the collapse of a large number of banks in the aftermath of
the 1998 crisis, the authorities made little use of the authority granted within the existing
legal framework to place ailing banks under administration. By the time these banks were
subjected to bankruptcy procedures, they had become mostly empty shells. One result is that bank
restructuring will be more expensive than it otherwise would have been.
- Tax enforcement is another key area. Politically influential enterprises have been able to
pay well below their statutory tax obligations for years, without effective government penalty.
Indeed, instead of strict enforcement backed up by bankruptcy or criminal proceedings against
owners and managers, we have witnessed numerous schemes of tax restructuring and
rescheduling, and negotiated settlements. This treatment of large taxpayers has been accompanied
by much tougher treatment of smaller enterprises and individuals. Against the background of very
favorable energy prices, revenue performance in the last year has improved, but this problem still
- The failure to strengthen the rule of law and improve governance both in the public and
corporate sectors is at the heart of weak investment, the failure of enterprises to restructure, and
capital flight. It helps account for the extremely low level of foreign direct investment. FDI in
Russia has run below 1 percent of GDP, compared with around 3 percent of GDP in
the Central European transition economies. An improvement in the investment climate could reap
big rewards for the economy in this regard. It could also help reverse capital flight, which has
averaged $10-20 billion per year since the early 1990s. Russia's economy, and Russia's
financial needs, will look very different when Russian savings, instead of fleeing abroad, is used to
finance productive investments in the domestic economy.
13. Why mention these past failures? Because this, the start of a new administration,
working with a new Duma, presents a rare opportunity for a second beginning. Many of the
problems of the past occurred because there was not sufficient support for the economic reform
program within the political system and the society. Some of those problems happened because
the policies were badly implemented. Many lessons have been learned about policy in transition
economies in general, and in Russia in particular. The question now is whether it will be possible
for Russia to develop its own economic reform program, a program worked out by Russians, and
effectively supported by the society, a program owned by Russia.
14. We have seen in this conference that there is no shortage of good ideas about what
those policies should be. What is needed now is to translate this knowledge and energy into a
coherent reform strategy that is backed by strong public consensus and leadership, and that is
implemented. If that happens, the IMF--and I am sure also the rest of the international
community--will be ready to do what it can to support and strengthen the program and Russia's
1Prepared for the conference on "Investment Climate and Prospects for
Economic Growth in Russia", State University: Higher School of Economics, Moscow,
2See Stanley Fischer and Ratna Sahay, "The Transition Economies After Ten
Years", IMF Working Paper, WP//00/30, February 2000.
IMF EXTERNAL RELATIONS DEPARTMENT