Finding Sources of Growth in an Unstable World

24.08.2017

On August 23, 2017, at 15:00, the Valdai Club held an economic seminar titled “New Normal for the World Economy: The End of Booming Growth?” The seminar, hosted by Yaroslav Lissovolik, Programme Director of the Valdai Discussion Club and Chief Economist of the Eurasian Development Bank, focusing on the implications of reduced global growth and the sustainability of new economic growth, both in Russia and in the world as a whole.

The sustainability of growth at the global and national level was the chief topic of discussion. In the case of Russia, Natalia Orlova, Chief Economist at Alfa Bank noted that while GDP has risen above forecast, investment has remained linked to major state projects: Renovation in Moscow, the Kerch Strait Bridge in Crimea and the Power of Siberia pipeline in the Far East. After the latter two projects are completed in 2018, there is concern over the sustainability of investment growth, although 2019 is also the year when Russia’s economic growth is expected to pick up.

“Not only the elections, but also expectations of the agenda post-elections are keeping both consumers and investors in a high level of uncertainty. We know that the new cabinet will be formed by May next year, and will only be able to prove its reform agenda in some time. An improvement will happen, at best, in 2019,” Orlova said.

Orlova also discussed the quality of growth in recent years. One major issue has been that economic downturn has not led to increased productivity. In fact, productivity decreased by two percent in 2015. There is hope, however, as key growth comes from small and medium enterprises, although many of them are part of the shadow economy. Lower inflation and decreased Central Bank policy rates could offer yet another boost to such growth.

International instability

Igor Makarov, Senior Fellow at the Centre for Comprehensive European and International Studies, Higher School of Economics, gave an in-depth look at instability internationally, identifying inequality, labor migration (particularly in the EU) and the slowdown of growth in BRICS countries as a source of significant risks.

“Russia’s economy in recent years became less dependent in terms of finance and technologies. I am not sure if this is good, especially in terms of technologies. But Russia’s economy is still dependent on global trends because it is still dependent on oil exports, most of all, and other raw material exports, such as metals and fertilizer markets, making it very much dependent on the global economy,” Makarov said.

Discussing stability factors in Russia, experts focused on the 2018 elections, pension reform and tax reform. While the first two factors relate more to the economic system’s predictability, tax reform is a more multi-dimensional factor. Orlova noted that Russia’s current flat tax rate is part of a social contract in which the population does not play much of a role in political life. At the same time, a progressive tax would be more costly to administer and more prone to evasion. Not implementing it, however, could lead to more income inequality, an important factor in maintaining stability.

New sources of growth

The experts looked at Russia’s situation and the search for sources of growth. Lissovolik identified two: the reduction in the size of the shadow economy and a move from import substitution to export-led growth. While income inequality is a fundamental barrier to long-term growth, reducing economic inefficiency, both in labor and economic governance was seen as a separate source of future growth.

“It’s also encouraging to some degree that we’re starting to see more conditionality ascribed to state support more recently, on the part of Russia, vis-à-vis large state companies. Hopefully, the story here is that the inefficiencies and the problems in the state sector with some of the large companies have reached such a scale that you need to come up with efficiency improvements, conditionality, something that starts to generate a more effective economic system,” Lissovolik said.

The reduction in the size of the shadow economy, though loosely defined, was identified as an important reserve of growth for Russia, although it is increasingly difficult to tap, as all simple solutions are already in use. According to Makarov, new technologies have increased the shadow economy thanks to cryptocurrencies and virtualization of services, such as renting rooms through Airbnb. Orlova noted that as international cooperation declines, targeting shadow sectors of the economy becomes increasingly difficult. 

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