Thursday, May 23, 2013

Russia's Growth Crisis: It's not the middle-income trap that Russians should fear. It's the Bear Traps

Russians and observers are concerned that Russia is in a growth crisis.  A recent article in Russia Today is typical:
The Russian economy will not be able to grow faster than 2 percent per year in the coming decade and might become another Greece, says one of Russia’s leading investment banking firms Renaissance Capital.
An underlying theme is that Russia is entering the Middle Income Growth Trap. The idea is that when countries reach an annual per-capita income of $15,000 in PPP dollars that growth significantly slows down. 

Fear of the middle income growth trap misses the point, however. Russian growth has slowed down not because the period of catch-up growth is over but because oil prices have stabilized. The reason why Russia grew so fast from 2000 to 2008 was the growth in oil prices. As oil prices grew Russia became much wealthier. Now that oil prices have stabilized this source of growth has receded. The slowdown we observe today is simply the expected outcome of the stabilization of oil prices. Growth rates have declined because the period of rising oil prices has ended. Russian growth rates have settled down to levels that are consistent with the non-oil fundamentals of the economy. It is only now that oil prices have stabilized that we can see how anomalous the high growth rates of the last decade were.

To the extent that the middle income growth trap is a real phenomenon, it is because that level of income reflects a certain degree of convergence to the technological frontier and therefore the steady-state growth rate. Absent the oil effect, Russia is not really at the middle income level. Its per capita GDP grew from $7,700 in 1999 to $15,100 in 2008. If we say the economy would have grown at 2% a year at a flat oil price, then it would have grown to $9,200 by 2008. So Russia is a $9,000 economy, that only resembles a $15,000 economy because of oil The middle income rule doesn't apply.

Now the fact that Russia's 2000-2008 growth was due to oil and not catch-up means there is more room for catch-up growth than one might otherwise think. That is good news, in one sense.

But the more fundamental point is that all during this period Russia's growth process has been hampered by the structural legacies it has inherited from the Soviet period, what Clifford Gaddy and I refer to (in our new book that has just appeared) as Bear Traps. These are primarily a spatial misallocation that imposes excess costs on production and investment; distortions to human capital; an excessively high relative price of investment that serves as a tax on physical capital accumulation; and an economic mechanism that inhibits adjustments that would correct the misallocation.

Because of the Bear Traps Russia cannot experience the same catch-up growth that a similar economy not so burdened would display. Russia must always invest more to get the same catch-up effect as other countries. Also, the existence of the Bear Traps keeps it from being able to implement the necessary institutional reforms it needs for effective catch-up. 

The emphasis on the middle income growth trap, and the reluctance to notice the impact of oil prices on Russian growth distorts analysis of Russia's growth crisis. It pushes attention away from dealing with the Bear Traps which is the only way to fundamentally alter Russia's growth trajectory.

But it should also be noted that oil has been good for Russia. Russians are much richer than they otherwise would have been. Yesterday's oil may have been a key enabling factor in creating the structural legacy that so burdens today's Russia. But wishing away today's and tomorrow's oil is stupid. Russia without oil won't be Sweden, or even Hungary or Poland. It won't even be Ukraine. It will be Ukraine with Russian-size Bear Traps. The only hope Russia has to deal with the Bear Traps is to take advantage of the oil and gas -- the Resource Track.

No comments: