Russia Is Losing Sources of Economic Growth and like Brazil and India has stagflation

Anders Aslund of the Peterson Institute for International Economics has written about the problems that Russia has generating economic growth

The annual Gaidar Forum, held last week in Moscow, is a good occasion to assess the country’s economic state of affairs. Russia’s economy and politics are marked by what optimists call stability and what pessimists call stagnation.

Prime Minister Dmitry Medvedev claimed that Russia’s economic growth sources have been exhausted, and he introduced the idea of Russia being in a “middle-income trap,” drawing on an academic paper by the Berkeley Professor Barry Eichengreen. Medvedev was concerned with the sudden slowdown in economic growth, which is common to countries that have reached middle incomes, such as Russia and Brazil.

Sensibly, Medvedev emphasized that the causes were primarily domestic in nature. Russia risks losing out when competing with more advanced economies because of insufficient institutions and high costs in less developed economies. It needs to improve the quality of its labor, management, health care, pension system and, most of all, its institutions. Yet as usual, Medvedev ended with only minor proposals for improvement, notably in the business environment.

First Deputy Chair of the Central Bank of Russia Ksenia Yudayeva claimed that Russia, like India and Brazil, had entered “stagflation,” as the West did in the 1970s. Their economic growth was declining, while inflation was rising.

Economic Development Minister Alexei Ulyukayev opened the forum with a daring programmatic speech. Russia now seemed stuck at an annual growth rate of no more than 2.5 percent, while the rest of the world was set to grow at 3.5 percent. He focused on two factors to boost growth. Russia’s investment of 21 percent of gross domestic product needed to increase to the savings rate of 30 percent of GDP. The other factor was to promote supply by improving Russia’s institutions in several ways.

Corruption was discussed in multiple panels, but only as a low-level problem of doing business rather than as top-level larceny. The obvious solution is to discipline big state corporations, privatize them, and liberalize their markets. But everyone realizes that this is not possible under the current regime, which favors economically harmful state corporations.

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