There May Be No Demand in Investments

Actually, it means motivation of economic growth on account of heightening of the level of investments.

The direction of economic development chosen by the government is within the logic of the economic growth model offered by Evsey Domar as early as 1946 when the repercussions of the Great Depression were still felt. However, according to the author the model in question was more suitable for solution of potential cycle problems of the post-war US economy, rather than for motivation of economic growth in developing countries.   Evsey Domar believed that the high rate of unemployment as in the pre-war period would be the specifics of the US economy in the post-war period, too.  It was expected to solve the problem of a high level of the rate unemployment – which was of a cycle nature and anticipated by E. Domar -- by way of building up investments in the physical capital.

Domar’s model resembles a great deal decisions which economists started to use for motivation of economic growth in developing countries. According to perceptions of a number of economists, the workforce engaged in low-efficient economic sectors, for example, agriculture where a larger number of people produced products only at the level which was necessary for maintaining themselves could be utilized more efficiently in industry where it produced goods with higher added value. In such an economy, both a buildup of the volume of the capital and outflow of the workforce fr om agriculture to industry would actually contribute to growth in output and it is to be noted that economic growth rates would be pro rata the growth rates of investments.  

The latter factor made calculations a great deal easier and, as a result, contributed as well to adoption of that model as an important instrument of determination of an economic policy for developing countries. Sure, if the output is pro rata investments it would be enough to determine the required level of investments in order to achieve the desired economic growth rates.

However, the results of the economic policy obtained on the basis of that model can hardly be called effective. Quite a large number of countries which received aid fr om international donors to heighten the level of investments not only failed often to show rapid growth, but sometimes did not grow at all despite that fact that the level of investments in their economies was a high one.

Russia is not at the stage of development where it requires a donor aid to increase the level of investments, so, there is no point in discussing issues which may arise at the aid-investment stage in case of Russia. However, in the context of the present-day Russian issues the potential problem may consist in the fact that there may be no demand in investments or if growth in investments becomes the result of the proposed economic policy, the latter does not correlate much with economic growth.

In terms of return on investments, the problem may consist in the fact that the efficiency of investments in the physical capital, including modernization of production capacities, depends on availability of complementary factors of production, such as, for example, technologies and human capital.

It is not enough to upgrade the equipment by buying it in Russia or abroad; it is important to be able to produce with that equipment goods and services of a world-class standard. To achieve that, it is necessary to have both production technologies and skilled labor with a different level of authority, that is, fr om a worker to a top manager. However, the above key factors of production may be in short supply  due to both  problems related to the national system of training of personnel and potential difficulties related to transfer of technologies from developed economies (at the present level of national technological development it is the main source of technological evolution in Russia). If Russia can manage without international financial aid, it can hardly do that without an international transfer of technologies and knowledge. For utilization of more advanced technologies in combination with upgraded funds for production, Russia needs a higher level of the human capital.

 In addition to potential problems related to availability of new technologies and skilled labor -- which problems inhibit growth in return on investments -- there are institutional problems which reduce the opportunity of realization of the right to return on investments made.  It is difficult to secure high demand on investments without reliable guarantees of protection of proprietary rights to the results of investments. 

So, the measures listed in the forecast sooner resemble a “patchwork” decision: they (probably) solve one of the main problems inhibiting economic growth, but do not say much or anything about how other disadvantages which are not less important are going to be removed. The proposed solutions focus on easing of the budget limitation for investment into modernization of production – which is actually an important factor of growth -- but virtually nothing is said either about the policy aimed at securing a higher return on investments (for example, reforms which stimulate technological development or accumulation of the human capital), or feasibility to improve the situation with realization of the rights to returns on investments.

Ivan Lyubimov, Senior Researcher

At the International Economic Forum in St. Petersburg, Vladimir Putin, President of the Russian Federation declared that capitalization of Russia’s important backbone banking and financial institutions would be increased, including by way of conversion of subordinated loans into preferred stocks which measure would permit banks to extend more loans to the economy and make loans less expensive.

Actually, it means motivation of economic growth on account of heightening of the level of investments.

The direction of economic development chosen by the government is within the logic of the economic growth model offered by Evsey Domar as early as 1946 when the repercussions of the Great Depression were still felt. However, according to the author the model in question was more suitable for solution of potential cycle problems of the post-war US economy, rather than for motivation of economic growth in developing countries.   Evsey Domar believed that the high rate of unemployment as in the pre-war period would be the specifics of the US economy in the post-war period, too.  It was expected to solve the problem of a high level of the rate unemployment – which was of a cycle nature and anticipated by E. Domar -- by way of building up investments in the physical capital.

Domar’s model resembles a great deal decisions which economists started to use for motivation of economic growth in developing countries. According to perceptions of a number of economists, the workforce engaged in low-efficient economic sectors, for example, agriculture wh ere a larger number of people produced products only at the level which was necessary for maintaining themselves could be utilized more efficiently in industry wh ere it produced goods with higher added value. In such an economy, both a buildup of the volume of the capital and outflow of the workforce from agriculture to industry would actually contribute to growth in output and it is to be noted that economic growth rates would be pro rata the growth rates of investments.  

The latter factor made calculations a great deal easier and, as a result, contributed as well to adoption of that model as an important instrument of determination of an economic policy for developing countries. Sure, if the output is pro rata investments it would be enough to determine the required level of investments in order to achieve the desired economic growth rates.

However, the results of the economic policy obtained on the basis of that model can hardly be called effective. Quite a large number of countries which received aid from international donors to heighten the level of investments not only failed often to show rapid growth, but sometimes did not grow at all despite that fact that the level of investments in their economies was a high one.

Russia is not at the stage of development wh ere it requires a donor aid to increase the level of investments, so, there is no point in discussing issues which may arise at the aid-investment stage in case of Russia. However, in the context of the present-day Russian issues the potential problem may consist in the fact that there may be no demand in investments or if growth in investments becomes the result of the proposed economic policy, the latter does not correlate much with economic growth.

In terms of return on investments, the problem may consist in the fact that the efficiency of investments in the physical capital, including modernization of production capacities, depends on availability of complementary factors of production, such as, for example, technologies and human capital.

It is not enough to upgrade the equipment by buying it in Russia or abroad; it is important to be able to produce with that equipment goods and services of a world-class standard. To achieve that, it is necessary to have both production technologies and skilled labor with a different level of authority, that is, from a worker to a top manager. However, the above key factors of production may be in short supply  due to both  problems related to the national system of training of personnel and potential difficulties related to transfer of technologies from developed economies (at the present level of national technological development it is the main source of technological evolution in Russia). If Russia can manage without international financial aid, it can hardly do that without an international transfer of technologies and knowledge. For utilization of more advanced technologies in combination with upgraded funds for production, Russia needs a higher level of the human capital.

 In addition to potential problems related to availability of new technologies and skilled labor -- which problems inhibit growth in return on investments -- there are institutional problems which reduce the opportunity of realization of the right to return on investments made.  It is difficult to secure high demand on investments without reliable guarantees of protection of proprietary rights to the results of investments. 

So, the measures listed in the forecast sooner resemble a “patchwork” decision: they (probably) solve one of the main problems inhibiting economic growth, but do not say much or anything about how other disadvantages which are not less important are going to be removed. The proposed solutions focus on easing of the budget limitation for investment into modernization of production – which is actually an important factor of growth -- but virtually nothing is said either about the policy aimed at securing a higher return on investments (for example, reforms which stimulate technological development or accumulation of the human capital), or feasibility to improve the situation with realization of the rights to returns on investments.

Ivan Lyubimov, Senior Researcher