What are the Factors behind Slowdown of Long-Term Growth in the RF: Domestic or External?

In numerous research, the current economic growth slowdown is related to domestic economic problems, exhaustion of recovery growth factors after a transformation slump and slowdown of growth in output structural component. Under a GDP structural component we mean a GDP component cleared of the effect of oil prices – an important foreign economic situation factor for the Russian economy.

However, here is another simple explanation: growing oil prices were a prevailing factor of economic growth in Russia. The period of explosive oil price growth is long over, so no significant economic growth was observed in the past seven years. To illustrate the relevancy of the above hypothesis, in the Fig. below the real GDP dynamics (in logarithms) is compared with artificially modelled time series. In building artificially modelled time series it is assumed that long-term growth in GDP structural component over the entire period under review was equal to 2% a year (it conforms economic growth of developing countries), while long-term output elasticity on the basis of oil prices, to 0.2 (the results of a number of empiric studies on the economy of RF).

As seen from the Fig. above, the artificially modelled time series demonstrates trends similar to the actual dynamics of Russian GDP. As in case of Russian GDP, the tree well-defined segments with significantly different average growth rates can be singled out in it. So, rather low growth rates of the Russian economy in the past seven years can be explained by the fact that explosive growth in prices on oil stopped, while changes in the domestic economic growth factors are not evident.

In the research, efforts were made to identify the nature of changes in Russian economic growth and answer the question if any changes were observed with utilization of official statistical methods in trend growth in the structural component of the Russian economy. The answer was positive. The outputs of the empirical analysis point in favor of existence of two structural changes in that indicator in the period from 1995: in Q3 1998 and Q3 2007. It is to be noted that the period of the second change is identified three quarters earlier as compared to a similar estimate received with use of one-dimensional statistical tests which do not take into account the dependence of the domestic economic output on oil prices. The obtained result means that structural problems of the Russian economy started before the 2008-2009 crisis and relatively high growth rates shortly before the crisis were underpinned only by oil prices. No evidence supporting the third change in the vicinity of the current economic crisis was found. The estimate of average growth rates of the structural component before Q3 2007 and in subsequent periods amounts to 5.3% a year and 1.3% a year, respectively.

Also, the results of empirical analysis show that in the specifications of the economic model permitting existence of changes in trend growth in GDP structural component the estimate of long-term elasticity on the basis of oil prices falls nearly by half as compared to the estimates received earlier with utilization of similar models in scientific papers and amounts to about 0.1.

Аndrei Polbin, Head of the Macroeconomic Modelling Department
Аnton Skrobotov, Researcher