Rents and instability the Russian growth model tested

Rents and instability : the Russian growth model tested again Julien Vercueil, INALCO, Paris

Russia's double paradox • Russia, a paradoxical emerging country • Three decades of economic trajectoires : Russia’s record compared BRICS: GDP Growth compared, 1992 -2016 100: 1999 500 China 375 India 250 Russia South Africa 125 0 Brazil 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Explaining trajectories : productivity, institutional changes and « growth models » • A Growth model (in the short to medium run) is a way of combining productivity growth and institutional change : • no « one best way » , but several coherent combinations of institutions and economic trajectories (Serra and Stiglitz, with Rodrik, 2008) • Question n° 1 that links productivity and the institutional framework : where does productivity growth come from? • Question n° 2: how are productivity gains redistributed ? • Each emerging economy provides its own answers to these questions

BRIC’s catching-up trajectories compared: some clues of a rent-based growth trajectory Which kind of catching-up ? Investment and productivity (2, 1) : R&D/GDP Current US $ per capita GDP in % of European Union 35 WORLD 2000 (2, 08) 30 BRAZIL 2015 25 (1, 17) WORLD 2015 (2, 1) RUSSIA 2015 (2, 0) CHINA 2015 (1, 15) BRAZIL 2000 20 (1, 0) 15 (1, 16) 10 (0, 97) RUSSIA 2000 CHINA 2000 5 (0, 73) (0, 81) INDIA 2015 INDIA 2000 0 0 50 100 150 Gross capital formation in GDP in percent of European Union 200 250

From the Dutch Disease to the Rent based Disease • Sources of productivity growth in Russia (Kudrin and Gurvitch, 2014) : +2, 5 % /year directly coming from windfall gains • Standard way to analyse this problem : « Dutch Disease » model – a static model without institution Russia: Labour Productivity Index (Base 100: 1992) 130 120 110 100 90 80 70 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source : Total Economy Database 2017, author’s elaboration

Main characteristics of a rent-based growth model • Oil and gas rent : extra revenues obtained from the ownership of a particular kind of asset (subsoil natural resources) • Main challenges : • Exogeneity [external shocks disconnected from productivity gains] • Redistribution [multiple distorsions : monetary, fiscal, financial, by sectors (Kudring and Gurvitch, 2014)] • Instability [volatility of international prices]

Instability and Russia’s rent-based growth model • Financial instability : • • • Exchange rate and oil prices • Financial markets and oil prices, banking system and exchange rate • Buffers : Currency reserves of BCR – but limited Monetary instability : • Exchange rate crises and inflation (1998, 2008, 2015) • Buffers : Monetary policy and Interest rates – but limited Fiscal instability : • Oil prices and fiscal revenues (federal and local) • Buffers : Sovereign funds (Reserve fund and National welfare fund) – but limited

Instability and Russia’s rent-based growth model (continued) • Growth instability (elasticity of GDP to oil prices) • Institutional lock-in : Windfall gains seem to play a role in the perpetuation of the low-quality of institutional framework in Russia • Low level of fiscal pressure on economic agents => paternalistic style of government, low pressure from taxpayers for better quality of public management • Weak « checks and balances » at all levels of government • Proximity between oil & gas major’s managers and the Government => economic and political goals can easily be confused • High level of corruption - more or less tolerated by the population

An illustration of the paternalistic style of government in Russia

Conclusion : how to exit from the rent-based growth model ? • Contradiction between institutional lock in and the instability of a rentbased growth model : how to solve it ? • Long term solution : exit from the current growth model by fostering industrial diversification • Short term solutions : exchange rate flexibility is not enough => capital controls ?

Thank you ! • References : • Kudrin A. , Gurvich E. (2014) : « A new Growth Model for the Russian Economy » , Russian Journal of Economics 1 (2015), 30 -54. • Serra N. , Stiglitz J. (Eds) (2008) : « The Washington consensus reconsidered. Toward a New Global Governance » . Oxford: Oxford University Press. • Rodrik D. (2008) : « A practical approach to formulating growth strategies » , in Serra and Stiglitz (2008), 356 -366. • Vercueil (2010: 2015) : « Les pays émergents. Brésil-Russie-Inde-Chine : mutations économiques, crises et nouveaux défis » . Paris : Bréal, 2015 (première édition 2010) • World Bank (2016) : « Russian Economic Report » , n° 36, November 2016.

A simple framework for analysing emerging growth models including INSTITUTIONAL ECONOMIC FRAMEWORK OPENING POLICIES (and macroeconomic Rest of policies) INSTITUTIONAL CHANGE AND POLICIES including National territory including DEMAND-SIDE POLICY SUPPLY-SIDE POLICY the world CREATION AND RESTRUCTURING OF DOMESTIC FIRMS INVESTMENT AND INCOME REDISTRIBUTION TYPE 1. EXTERNAL DEMAND DRIVEN GROWTH MODEL PRODUCTIVITY GROWTH TYPE 2. DOMESTIC DEMAND DRIVEN GROWTH MODEL EXTERNAL DEMAND PRODUCTION GROWTH DOMESTIC DEMAND FOREIGN ENTREPRISES SUPPLY DEMAND TYPE 3. RENT BASED GROWTH MODEL