Newsletter - INSTITUTE FOR THE ECONOMY IN TRANSITION

№ 9 2002	IN THE ISSUE:
	1	About the conference
	2	Presentations
	3	Announcements

Institute for Economy in Transition (Gaidar Institute) on March 20-21, 2002 held in Moscow an international conference “Post-Communist Economic Growth.” The end of the first stage of the post-communist transformation made it urgent to discuss the character of economic growth in Russia and the possible ways of its consolidation. The following economists have taken part in the conference:

   - Yegor Gaidar - IET Director and the Deputy of the State Duma of RF
   - Anne Krueger - First Deputy Managing Director of the IMF,
   -Arnold Harberger - Professor, UCLA
   - Alexander Pochinok - Minister of Labor and Social Development of RF
   - Alexei Ulyukaev - First Deputy Finance Minister of RF
   - Andrei Illarionov - Economic Counselor to the RFPresident
   - Mikhail Zadornov - Deputy Chairman of the Budget Committee of the State Duma, and the Former Finance Minister of RF
   - Arkadiy Dvorkovitch - Deputy Minister of Economic Development and Trade of RF
   - Vladimir Mau - Head of the Working Center for Economic Reform under the Government of the RF
   - Sergei Dubinin - Deputy Chairman of the Board of Directors, RAO UES of Russia, Former Chairman of the Central Bank of Russia
   - William Easterly - Senior Fellow, Center for Global Development and Institute for International Economics, Washington
   - Kalman Mizshei - Director of Bureau on Europe and CIS, UNDP
   - Barry Eichengreen - Professor, University of California, Berkley
   - Thorvaldur Gylfason - Research Professor, University of Iceland in Reykjavik
   - Michael Alexeev - Professor, University of Indiana, Bloomington
   - Leon Aron - Senior Fellow, American Enterprise Institute, Washington
   - Tatiana Paramonova - First Deputy Chairman of the Central Bank of Russia
   - Irina Hakamada - Deputy Chairman, State Duma
   - Robert Conrad - Professor, Duke University
   - Niclas Sundstrom - Chief Economist-Russia and Economic-Political Strategist, Citigroup/Schroder Salomon Smith Barney
   - Alexander Zhukov- Chairman of the Budget Committee of RF
   - Anatoliy Vishnevsky - Head, Center for Demography and Human Ecology
   - Anders Aslund - Senior Fellow, Carnegie Foundation, Washington

All the speakers highly praised the Russian economy development after 1998. Such issues as consolidation of economic growth, creation of guarantees for sustainable economic growth in Russia became the focus of the discussion at the conference.

Anne Krueger highly praised the results of the Russian economic development for the last three years and the current economic policy of the Russian government. She has named the following priorities in the economic policy in Russia: banking reform, strengthening of the ownership rights, reform of the natural monopolies, etc. In a separate presentation she shared her vision of the development of the international finance architecture and the prospects for its restructuring.

Alexei Ulyukaev has analyzed the results of the year 2001 and has described major trends in financial policy for the near future as a main prerequisite for sustainable growth. Mikhail Zadornov has proposed the vision of this issue from the point of view of lawmakers. He has stressed the need to create a stabilization fund in order to guarantee the economic growth in Russia. He also mentioned the need to turn to a three year period for budgetary planning, to include the dynamics of tariffs of natural monopolies into budgetary planning, deepening of the fiscal federalism Yegor Gaidar has warned the economists about “the dangerous conceit” and especially the politicians who try to raise the economic growth artificially. Vladimir Mau has aired this issue in detail. He stressed that artificial stimulation of economic growth can result in major economic fiasco. Aimed at the economic growth, the economic policy should correspond a simple criterion - it should not be populist and should be understood by an investor who reads Financial Times.

Andrei Illarionov on the basis of the detailed analysis of macroeconomic factors of economic development for 1990s has revealed the threats that are in the way of economic growth in Russia at present. The main threat comes from the policy of appreciation the real of ruble and from a refusal to contain the growth of tariffs of natural monopolies. Arnold Harberger has developed a detailed system of arguments against the real ruble appreciation in contemporary Russia. On the contrary, Sergei Dubinin has insisted on the real ruble appreciation and increase in the tariffs of natural monopolies, which, according to his view, should stimulate structural reforms.

Alexander Pochinok has discussed the issues of strengthening reform in the social sphere. His main conclusion was unexpected for conventional ideas about the Minister of labor and Social Development. Instead of usual complains about the shortage of budgetary funds for social sector, he has called for a deep restructuring on present budget expenditure on social needs in order to radically increase the efficiency of their use.

Barry Eichengreen and William Easterly have given their views to the reasons for insufficient of international financial institutes and have offered their vision to the ways of reform of those institutes. Naturally, their recommendation differed considerably. Thorvaldur Gylfason has explained in detail the issues of the importance of natural resources on the future of economic growth. This influence, to his view, is in the majority of cases negative.

The work of the following panel have been organized in the framework of the conference:

   - Macroeconomic Determinants of Economic Growth
   - Institutional Aspects of Growth
   - International Financial Institutions in Russia: Past and Future
   - Budget and Fiscal Policy and Economic Growth
   - Myths and Realities of the Agrarian Sector
   - Social Dimensions of Economic Growth
   - Political Economy of Economic Growth
   - Regional Aspects of Economic Growth
   - Economic Growth and Natural Resources

Detailed information on the conference and presentations will appear on IET web site: www.iet.ru

Opening the international conference, Ye. Gaidar, Director of Institute for the Economy in Transition, has mentioned that the problems of post-socialist growth, its sustainability, factors accounting for growth are becoming more urgent. Twenty years ago, a large bloc of academic institutions in the Soviet Union was engaged in the study of long term problems of economic development. At the same time, practically no organization was concerned with prognostication about the state of the domestic economy in three or six months, or in a year.

According to the speaker, at present the situation is practically opposite. We have a large number of publications based on short term analysis and short term forecasts concerning the development of the Russia’s economy. At the same time, the lack of studies oriented towards a long term perspective is felt. Obviously, both the authorities and business demonstrate growing demand for studies related to the strategic issues of economic development.

There is yet another problem, which, according to Ye. Gaidar, should be not ignored. Over the last eighteen to twelve months, rather profound structural reforms were implemented in a number of important sectors of the economy. However, unfortunately, the potential of any government to implement profound structural reforms is limited. In the next eighteen months the intensity of reform process would unavoidably subside.

Any serious scholar understands that all current economic developments have roots in events of the early 1990s (and our present actions seriously influence the prospects of growth in 2005 through 2010). It is a much more difficult task to inoculate the society and decision makers responsible for principle political decisions with this understanding.

We need clearly realize the limits of our knowledge about the economic growth in general, and the post-socialist economic growth in particular, stressed Ye. Gaidar. Unfortunately, the sad regularity persists: the less somebody knows about growth, the more readily he or she gives out various economic and political recommendations concerning this issue.

The speaker has stated with regret that today we hardly know about economic growth more than Adam Smith knew in the end of the 18th century: that the wealth of nations, i.e. economic growth, first of all requires peace, low taxes, and reasonable laws. In general, the whole mass of knowledge we have accumulated over more than two centuries does not add much to the understanding achieved by the end of the 18th century.

We know much more about what we should avoid if we do not want to check economic growth than what should be done to boost it. We should not manipulate the exchange rate and allow the rise of the black market. We should not permit high inflation rates. We should avoid large budget deficit. It would be good to have less corrupted bureaucracy. It would be good to lean on a well functioning legal and judicial system.

At the same time, Ye. Gaidar stressed that it is necessary to remember that at present we are working on a very difficult problem – the problem of catch up post-socialist post-industrial development. In this area, the laws of development are studied considerably less, while changes occur much more rapidly. There exists an enormous risk that having chosen and implemented a sectoral priority we would have to face a disappointing fact: nobody needs these results, they are not in demand on the market.

In the last few years the concept of the “convergence club,” i.e. a group of countries where in a long term outlook less developed countries with lower GDP levels grow more rapidly than more developed countries. It seems that the substantive basis of convergence is the capacity of countries and respective national institutions to ensure an efficient exchange with market oriented information on technologies, which can be utilized by less developed countries in order to achieve higher economic growth rates than in countries nearly reaching the limit of their technological capabilities. According to Ye. Gaidar, at present the most important task for Russia is to secure its place in the “convergence club.” He concluded the presentation by saying that this problem seems to him more important than the problem of growth rates (for instance, 3 or 4 per cent) we need to achieve in 2002 – 2003.

A. Krueger (First Deputy Managing Director, IMF) has opened the plenary meeting of the conference. Having characterized the current economic situation in Russia, she has turned to the tasks Russia has to perform in order to achieve sustained growth. The speaker has singled out four priorities: financial sector reform, which is required to allow a strong and efficient banking system to develop (the central challenge in this area is insufficient competition); property rights and judicial reform; further
integration of Russia into the world economy (WTO accession is a priority in this area); energy sector and natural monopolies reform.

Concluding her presentation, Ms. Krueger has stressed that developments over the past year provide much reason to be optimistic about Russia’s future.

A. Uluykaev (First Deputy Minister of Finance of RF) has stated that in the beginning of 2002 the Russia’s economy experienced less shocks than in preceding years, since inflation could be curbed already in the second month (February). It became possible due to more stringent budgetary policy, especially with regard to expenditures. According to the speaker, the macroeconomic stability is rather harmed not by inflation, which is determined by the amount of expenditure, but by the volatile inflow of funds in the economy.

The tax reform has progressed. In this area, there were taken steps to decrease tax rates on profits of enterprises (accompanied by the abolition of privileges), to introduce flat rate of taxes on the extraction of mineral wealth, it was decided to abolish the tax on the users of motor roads since the next year, and the sales tax is to be abolished in 2004. According to the speaker, all these measures would seriously alleviate the financial situation of enterprises and improve the general economic situation.

Further A. Uluykaev has dwelled on the task to optimize budgetary expenditures. In order to resolve this problem, according to the speaker, it is first of all necessary to readjust the mechanism of formation of budgetary obligations, i.e. to review the whole system of mandates. In this connection he has informed the audience that the special compensatory fund is in operation in the framework of interbudgetary relations, the fund was established specifically to finance the priority mandates. The fund finances expenditures associated with payments to the disabled persons and child benefits. Starting this year, the fund would also finance payments to victims of political repression, the Chernobyl and other technological catastrophes. On the other hand, the optimization of budgetary expenditures presupposes the abolishment of a number of in-kind benefits, including those related to housing and public utilities, transportation, housing subsidies.

The speaker has paid special attention to such serious federal mandate as the unified tariff schedule. According to A. Uluykaev, the system of labor remuneration should be adjusted. Broader rights and power to set specific wages and salaries should be transferred from the federal to other levels.

Yet another most important issue, according to the speaker, is the adjustment of the mechanisms forming budgetary obligations. Last year, there was carried out the inventory of budget recipients, which revealed that budgetary funds are often misdirected (the only eligible recipients are organizations and state unitary enterprises financed from the budget). It is necessary to establish a strict rule that only federal ownership grants the status of budget recipient at the federal level, while ownership at the level of RF subjects is the ground for financing from the respective regional budget.

Besides, it is necessary to streamline the network of recipients. At present, 70 thousand enterprises receive funding from the federal budget. It is an enormous network, and it should be substantially reduced taking into account the organizational and legal status of recipients: only budgetary organizations are eligible for financing from the budget, all other entities should receive budgetary funding only in case they are involved in state procurement (according to the results of normal tenders). The eligibility criteria for financing should be the supply of goods or services, in which case such enterprises may be even granted certain subsidies, if necessary. In order to achieve this goal, it is necessary to introduce normal competition for budget funds among all enterprises regardless of their for of ownership, i.e. to introduce the principle: payment after service.

According to A. Uluykaev, in order to form optimal budgetary obligations it is also important to exclude organizations not providing public goods from the number of budget recipients and put the relations with such organizations on the contractual basis.

At the same time, it is necessary to seriously elaborate the issue of classification of budgetary obligations into two categories: permanent budgetary obligations (should be financed in all circumstances in spite of the world business situation) and renewable obligations (should be financed depending on the favorable development of business situation and considerable revenues). According to A. Uluykaev, the first serious step in this direction is the formation of a financial reserve in the framework of the state budget. This reserve would allow to accumulate funds at periods of favorable business situation and serve as a cushion in periods when the situation deteriorates.

Concluding his presentation, the speaker has focused on the issue of fiscal federalism, where it is necessary to resolve several urgent problems, first of all, to achieve a clear distribution of expenditure obligations and revenue powers between the levels of the system, to create new mechanisms for provision of financial aid (in 2002 there was established the fund for the co-financing of social expenditures associated with the settlement of important social problems. The speaker also has referred to the fund for reform of regional finances as a progressive mechanism).

V. Mau (Head, Working Center for Economic Reform, Under the RF Government) has started his presentation by agreeing with words of Adam Smith, who stated that economic growth needs peace, good laws, and low taxes. Over the last two decades, there were defined several other simple rules: 1) economic populism is bad; 2) natural resources are rather bad than good (only in case it is not a highly developed democratic country with transparent political institutions, or an absolute monarchy where the state treasury is a personal pocket of the ruling family); 3) compliance with the Washington consensus is rather good than bad (it is the established fact that economic growth in Russia started after the requirements set by the Washington consensus were fully implemented); 4) a democratic government should do nothing that may puzzle an ordinary reader of New York Times (i.e. any exotic measures requiring explanations why it should be so and not the other way must be avoided).

At present, the speaker has stressed, Russia faces extremely complex problems: it needs consolidate growth, achieve sustainable economic growth accompanied by serious structural reforms. Indeed, the essence of the crisis started in the mid-1980s was that the Soviet system was unable to adapt to the post-industrial challenge, rigid political and economic structure.

In the last ten to fifteen years, we have passed through not one, but four crises, for transformation processes. If the Russian specifics have to be referred to at all, they are the intertwining of four processes, i.e.: 1) grave macroeconomic crisis; 2) challenges of post-industrial society and adaptation to post-industrial structure; 3) post-communist crisis per se (post-communist transformation is a unique task, nobody has tackled this problem before and Russia, alongside with a number of other countries, had to settle it); 4) transformation in the situation where the state is weak and where both the national consensus and state control are lacking.

Three of the processes indicated above, according to V. Mau, have been completed. The remaining task is the adaptation of the economy to the post-industrial structure, and this problem will dominate our development for about two decades. The adaptation of the economy to the post-industrial structure, or, as the speaker has called it, the catch up post-industrialization, is an extremely difficult problem. In other words, it means to adapt Gershenkorn to the post-industrial society, although in a more complex situation, since Gershenkorn wrote his works basing on the centennial experience of the catch up industrialization. At present we discuss the issue of a catch up post-industrial development in the beginning of the road, having absolutely no historical experience to lean on.

Therefore, according to the speaker, it is extremely difficult to work out a strategy of sustained growth: first, because there are no precedents of catch up post-industrial development, and, second, because of the narrowing time horizon and principally lesser predictability.

   1) To avoid, in terms used by Ye. Gaidar, the dangerous conceit of economists, i.e. it is important to understand clearly that possibilities of long term planning and prognostication are very limited in the situation of post-industrial challenges;
   2) To acknowledge that the adaptability of institutions is more important than concentration of resources;
   3) To give up the traditional industrial policy where the authorities set sectoral priorities, where interest rates are subsidized, and resources are redistributed in favor of national pride;
   4) To stop making fetish of quantitative parameters of growth;
   5) To extend concentration of resources to the institutional environment and human development, i.e. develop state institutions, education, and health care, other things being equal.

Summarizing the presentation, V. Mau has aired “a rather trivial,” as he has said, conclusion: if you look for priorities, they are institutions, not sectors.

The speaker concluded the presentation by indicating certain priorities of the practical economic policy for a few next years. First, the development of political institutions and political reforms. Economic reform has already progressed rather far, however, without an adequate judicial system, government and military reform no improvement of economic institutions and economic legislation would produce a serious effect. Second, a movement towards institutions of the Western society. The endless discussion on the accession to WTO is going on in an attempt to find out who would benefit and who would not. In terms of the strategy of catch up post-industrial development, the accession to WTO per se, or viewed as a set of procedures (anti-dumping procedures, procedures allowing to support domestic producers, or develop competitiveness) is not that important. The accession is important as a step along the path to institutions of the Western economic society, followed by the entry (regardless of its form) to the common European economic market. Third, more active utilization of the institutional experience of the European community. A long discussion is possible about what institutions are better and “more standard”: European, American, or Chinese. However, Russia is a part of the European economic space. It is not necessary to introduce all institutions of the European community. Russia should discern the institutions, which are effective in Europe and suitable in terms of development of Russia’s relative economic advantages, from those unsuitable for Russia.

V. Mau has stressed that all processes indicated above should not result in retreat from the standard package of macroeconomic requirements and concessions to populism.

M. Gilman (Professor, the Higher School of Economics, Moscow) has dwelled on some important aspects of relations between Russia and IMF over the last decade. In particular, he has paid attention to the difficulties IMF encountered in the process of assessment of both the economic and political situation in the country and perspectives of its development.

According to the speaker, his analysis of the relations between IMF and Russia allowed to draw a conclusion that the role IMF played in Russia was rather limited in spite of its seemingly important character. The limited role of IMF may be attributed to the fact that after the collapse of the Soviet Union (Russia was in fact its successor) its administrative bodies also collapsed (although these bodies remained in place their organization deteriorated or in any case was inadequate to the complexity of the economic and political situation), and to the fact that IMF had never had such a large transitional economy among its members. The lack of clear understanding with regard to the delimitation of jurisdictions of different agencies was also a negative factor and often affected the quality of cooperative measures.

In spite of the difficulties indicated above, a considerable part of programs of economic reforms was completed. For instance, the stand-by credit of 1995 was granted to support the economic program of Chernomyrdin’s government, and this program was rather successful. The fact, that later reforms based on extremely important reforms implemented in the very beginning: price liberalization in January of 1992, unification of exchange rates in June of 1992, and liberalization of interest rates in June of 1993.

Prof. Gilman also has stressed that to a considerable extent the success of economic reforms in Russia might be attributed to the effort on the part of the Russian side. The role of foreign influence was very insignificant and should be associated primarily with the World Bank, which supported structural and institutional reforms. Among the most important IMF successes in Russia was the role it played in organizing a clear coordination of governmental measures aimed at the economic reform.

An important lesson to be derived from the experience of IMF cooperation with Russia and other countries is the understanding of the fact that the role played by IMF in implementation of economic reforms, even in spite of its rich experience, may and shall be limited since it is necessary to uphold the principle of responsibility of the national leadership for reforms.

A. Pochinok (Minister of Labor and Social Development) has stressed that as concerns the indicator of budgetary appropriations for social needs Russia is not lagging behind, but leads, and the proportion of expenditures in the federal and consolidated budgets is at present close to optimal. Therefore, it would be hardly possible to settle social problems by granting an enormous number of privileges, preferences and applying other measures associated with social protection due to a simple reason that no economy, including Russia, has sufficient funds. This development may result only in higher taxes, what would stop economic growth. Therefore, at present the most urgent problem is to distribute resources in a right way, implement a really targeted social policy, and enhance citizens’ interest to personally participate in social programs. The Minister concluded that in case it is done, there would be a future for economic growth in Russia.

A. Illarionov (Economic Counselor to the RF President) has presented “The Mystery of Russian Economic Growth (Decline).” According to A. Illarionov, growth is inseparable from decline and vice versa. Comparing Russia with other economies in transition he paid a special attention to the specifics of the dynamics demonstrated by the Russia’s economy in the last 12 to 13 years: the scope and length of the slump in Russia in comparison with other economies and the dynamism of the economic growth, which followed the slump. At the same time, the length of decline taking place in 1990 through 1998 was unprecedented both in the history of Russia and in the world. According to the speaker, the populist economic policy was a major factor behind the slump. The policies pursued in 1999 through 2000 principally differed from those implemented in the early and mid-1990s in terms of all their components – budgetary, debt, price, etc. The period from August – September of 1998 to October of 2001 was characterized by growth of the Russia’s economy.

According to A. Illarionov, a slowdown in growth observed in 2001 through 2002 also may be explained by changes in the economic policy: increase in state expenditures, outpacing growth in tariffs of natural monopolies, the real Ruble appreciation, etc. Therefore, it can be maintained that we know key regularities (although there are also others), we know what tools may and should be used in order to ensure economic growth and overcome the slump, and relevant policy would bring the expected results. The speaker concluded that it should be mentioned that we know this not only proceeding from theoretical arguments, but also from many examples of international practice and our own experience accumulated over the last 13 years.

S. Dubinin (Deputy Chairman of the Board of Directors, RAO UES of Russia) has focused his presentation on economic growth and the reform of natural monopolies. S. Dubinin highly prized the economic results achieved by Russia and then turned to an analysis of certain unresolved problems among which he indicated inflation of monetary nature as the most pressing one. The speaker admitted that so called natural monopolies contribute in inflationary growth, however, according to experts’ estimates this contribution was rather insignificant.

Further, S. Dubinin stated that our financial system was inadequate to the task of transformation of savings in investment and with satisfaction noted that the new head of the Central Bank was planning a banking reform.

As concerns natural monopolies, the speaker informed the audience that after a long period of debates the reform had at last started. However, these developments are taking place in a difficult situation: for instance, the natural gas sector is facing a problem of diminishing extraction at the majority of deposits. At the same time, there is registered a decline in investment in power engineering. These developments give rise to the question if the existing capacities are able to provide the country and its economy with electric power in case the massive economic growth continues. According to RAO UES estimates, after 2005 the country may face rather rapid mortality rates of capacities due to wear and tear. Besides, rising natural gas prices render a number of obsolete power station to operate at a loss however high tariffs may be. As a result, capacities are retiring by pure economic reasons – they are just noncompetitive, concluded S. Dubinin.

E. Gavrilenkov (BEA) has presented “Economic Growth in Russia and a Number of Other Economies with Inconsistent Economic Systems.” The speaker has aired his view that at present the Russia’s economy, to a certain extent, is looking more and more like the pre-crisis Asian model. According to E. Gavrilenkov, this model may bring about some good results in a short term outlook, however, in a long run it can not be excluded that the absence of private financial system may result in ineffective or misdirected investment. As a result, the current growth in Russia may be unstable. Therefore, the problem of the banking reform, or, more broadly, the reform of the whole financial system and related issues become especially urgent for decision makers.

Besides, E. Gavrilenkov stressed that the key factor behind the current economic growth observed already for some years is the development of existing large enterprises, which increase the load on their capacities. Russia faces the problem of underdeveloped small and medium-sized businesses. In the two last years both the number of small and medium-sized enterprises, and the employment in this sector have declined. Many experts associate the underdevelopment of small and medium-sized businesses with excessive regulation and bureaucratization of the economy. The speaker shares this point of view. According to the statistical data presented by the speaker, regions where the number of bureaucrats is above the national average face higher unemployment rates, declining foreign investment, and increasing out-migration.

In conclusion, E. Gavrilenkov stressed that deregulation of the economy, development of the banking system, reform of financial markets, and creation of a private financial system facilitate the sustainability of growth in the Russia’s economy and render it less dependent on external conditions.

M. Zadornov (Deputy of the State Duma) has presented his views on monetary policy as a guarantee of and incentive for economic growth. According to the speaker, the signs of a slowdown in economic growth has become noticeable in four to five last months. However, it is more dangerous that over the same period, there was registered some slowdown in the rates of increase in investment, what, alongside with household consumption, had been the major driving force of the economic growth observed in the last year.

Further, the speaker dwelled on the measures of economic policy able to ensure a stable growth of the Russia’s economy. He singled out five such measures: 1) introduction of the Stabilization Fund in the Russia’s budgetary practice (according to M. Zadornov, in Russia the Stabilization Fund may be formed simultaneously as a fund smoothing short term volatility on world markets and accumulating resources for future generations); 2) transition to a three year period for budgetary planning; 3) setting limits on the tariffs of natural monopolies in the course of medium term or year budgetary planning (the Duma has already approved the respective amendments to the federal law on tariffs on electric power); 4) further decrease in the tax burden accompanied by the assignment of tax and non-tax revenue sources to three levels of government (federal, regional, and municipal budgets); 5) settlement of the problem of the public debt, which, in essence, may be reduced to the problem of the external debt (at present, the aggregate expenditure for the repayment and servicing of the Russia’s external debt make 5 per cent of GDP).

At the conclusion of his presentation, M. Zadornov analyzed three concrete measures of financial and monetary policies, which have been discussed over the last few months as possible incentives for economic growth. These measures comprise the real and effective Ruble exchange rate (the deputy expressed his view that the argument about the accelerated depreciation of Ruble as an element of a policy facilitating economic growth was unjustified), the level of taxation of exporters (it is possible to use a part of the revenues received by the exporters of raw materials for the formation of the stabilization fund), and the level of non-interest expenditures (according to M. Zadornov, all arguments that this level in Russia is set too high are groundless. Moreover, it is possible to increase these expenditure even further, however, they shall correlate with the productivity of labor in industry and the economy on the whole, as well as the general macroeconomic situation).

I. Starodubrovskaya (IET) has focused her presentation “Extreme North: Is a Special Policy Needed?” on the key issues of the state policy with regard to the areas of Extreme North. At present northern regions and areas granted equal status comprise almost 70 per cent of the national territory. Therefore, according to the legislation, for all these territories there should be implemented the policy of state protectionism forming preferential conditions for the development of these regions. If this stipulation were implemented in practice, Russia would not be mentioned as a market economy.

The proposals envisaging a radical decrease in the number of regions granted the status of northern territories will not resolve the situation. The legislation stringently stipulating a too broad system of social assistance for the northern population (including its strata which can not be defined as the poorest), and the centralized determination of expenditure targets with regard to funds appropriated for the compensation for the factors responsible for higher prices and social costs associated with life in the North (seasonal supplies, programs of resettlement from the regions of the Extreme North) result in an insufficient flexibility of economic relations and complicate the implementation of competent policies in very difficult conditions of the North. A most illustrative example is: costs of the seasonal supplies, of the development of own fuel, energy, and industrial capabilities, and expenditures for the out-migration assistance are in essence alternative costs (the more fuel is extracted locally, the less fuel supplies from outside are needed; the more people migrate from the North – the less food supplies are needed, etc.). However, in the present situation where a considerable part or resources allotted for these purposes is targeted no optimization is possible. Leaders of the northern regions are interested not to achieve an optimal balance among different expenditures permitting to maximize the economy of resources, but to obtain more targeted appropriations from the federal budget for each expenditure item.

Therefore, according to the speaker, a special policy with regard to Northern regions (at least as that pursued at present) is not needed at all. In a country thus large and diverse as Russia, there should be pursued a normal regional policy taking into account the discomfort conditions of life, the occurrence of factors responsible for higher prices and depression, and other possible regional specifics (not only in the North), which would allow the regional authorities independently invent mechanisms taking into account local specifics under the existing financial constraints. As concerns the Extreme North, the state may have any geopolitical, military, or other priorities, or set special aims for national policies with regard to native Northern peoples. All these objectives should be financed and controlled in a centralized way, including the use of the mechanisms which at the moment for unclear reasons are extended to 70 per cent of the Russia’s territory.

V. Draganov (Deputy of the State Duma) has presented “Customs Policy and Economic Growth.” He noted that although in the few last years the state treasury to a considerable extent has been filled via the customs administration, the issues related to the actual effect of the customs policy and its influence on economic growth are out of discussion, since the aims and objectives of the customs policy are in a somewhat different sphere. According to V. Draganov, the very term “customs policy” is rather incorrect. In developed economies the customs policy is rarely mentioned, since the issue rather embraces the economic and administrative methods and tools used by the customs and aimed at the implementation of economic (including foreign trade) policies of these countries.

The distorted tariff policy, unwise implementation of non-tariff methods, enormously aggressive pressing of agencies implementing the customs policy resulted in a customs legislation inconsistent with the economic reform.

At present, an attempt is being made to radically change the situation in the process of discussion of the draft Customs Code by the State Duma. However, in this sphere even now there is much uncertainty and confusion. The speaker stressed that today even some specialists, economists, politicians, including some ministers, confuse the Customs Code with the customs tariff. Speaking about the Customs Code they mean our tariff policy. The typical questions are, for instance, how the new Code would protect the interests of domestic producers in the process of accession to WTO, when the tariff rates would be reduced, etc. And vice versa - other specialists, who know that the customs tariff is more important, disregard the Customs Code.

The Code currently in force not improves, but deteriorates trade, not democratizes and simplifies the customs procedure, but renders it excessively complicated. The Code permits a lot of non-state structures to engage in customs administration and in fact take over some state functions.

At present, the State Duma focuses its discussion on the inadequate governmental draft Code. According to V. Draganov, this draft should be radically changed basing on sound progressive ideas.

P. Kadochnikov (IET / RECEP)
Stabilization Fund in RF: Problems and Prospects

Significant volatility of oil prices on the world market result in considerable fluctuations of the federal budgetary revenues thus creating serious problems for the whole budgetary system. The analysis of the experience of a number of countries (Venezuela, Chili, Norway, Alaska (USA), etc.) facing similar problems has shown that such countries can use a special mechanism of accumulation of revenues in periods of high prices of raw materials, which permits to use the financial resources accumulated over such periods to maintain the state expenditure levels in unfavorable periods when prices of exported resources fall.

The direct influence of world prices on the budgetary revenues is reflected via the changes in profits of enterprises-exporters, the progressive scale of export duties depending on oil prices, etc. Besides, the favorable situation for enterprises-exporters results in increasing demand on the part of this sector and its employees for other goods thus triggering a temporary economic surge, i.e. producing the multiplier effect (indirect effect). It is an indication that probably the Stabilization Fund shall receive a share of the total tax revenues across all sectors.

In the process of formation of the Stabilization Fund a key issue is to determine the authority responsible for the managing of the means of the Fund. In Russia, it makes sense to vest this responsibility with the Central Bank upon resolving the problem concerning the sharing of profits derived from the invested resources of the Fund between the Fund and CBR. As concerns budgetary planning and management of the external debt, it would make sense to appoint the Finance Ministry to run the Fund. In the case the Stabilization Fund is used simultaneously for several purposes, it would be feasible to manage its resources via a specially created agency.

It is necessary to create the mechanism aimed at the formation of the Fund in a way excluding losses related to the servicing of the Fund in case it fails to accumulate sufficient resources. In order to ensure the safety of the resources and to check the rate of the real Ruble appreciation in the situation of high oil prices, the Fund’s resources shall be denominated in foreign currency and invested in first class highly liquid foreign financial assets.

Yet another problem, which shall be resolved in the course of the legislative fixation of basic rules and regulations of the Stabilization Fund, is the issue of reflection of resources flowing in and out of the Fund in budgetary revenues and expenditures.

For Russia, the base oil price may be set at, for instance, US $ 15 per barrel of Urals. Accordingly, the mechanism of the Stabilization Fund may envisage the following procedure of drafting the federal budget. Budgetary revenues are calculated proceeding from the estimated world Urals price. In the case the estimated price exceeds the base amount (US $ 15 per barrel), the expenditures (the sum of interest and non-interest expenditures) are planned in a way ensuring that their amount corresponds to the revenues received at the base price. In the case the estimated price is below the base price, both revenues and expenditures shall be calculated proceeding from the base price. Over the year, the expenditures may be increased up to the level of the base price at the expense of the Stabilization Fund resources in the case such opportunity arises. An additional advantage of such a mechanism is that its procedures of calculation will prevent the budget from assuming inadequate obligations in the periods of high oil prices.

In the course of the formation of the Fund, there should be created a system controlling the mechanisms of receipts and expenditures, as well as the system allowing to evaluate the effectiveness of investment and to control the use of the Fund’s resources.

The financial resources accumulated in the Fund may be used for two purposes: to repay the external debt and to maintain a relatively stable level of budgetary expenditures in unfavorable periods. The creation of the Stabilization Fund and investment of its resources abroad or repayment and anticipatory redemption of the external debt will help to alleviate problems relating to the active balance of trade and the real Ruble appreciation.

In order to work, this mechanism shall be legislatively protected from the possibility to evade the formation of the Fund by understating the estimates of oil prices and (or) revenues of the federal budget in the process of its elaboration and approval.

The analysis of the international experience demonstrates that at the initial stage (accumulation of sufficient amount of resources) the Stabilization Fund should be used only for the repayment of the external debt and financing of urgent expenditures. In the case the external political situation (world business situation) and the situation on the markets of mineral resource is favorable for a prolonged period, the Stabilization Fund will be able to accumulate sufficient amount of resources to use them for the financing of social programs.

S. Batkibekov (IET) has made a presentation on the main directions for improving the efficiency of budget expenditure. The speaker stressed that budget expenditures are the most bargained item in the state, since too many forces strive for free state resources, which are scarce. These resources are contended for not only by the government and the parliament, but by different factions within the government as well.

However, in spite of the difficulties, since recently budgets have been approved before the start of the next fiscal year. When the budgetary crisis broke out, everybody suddenly was interested how much money the state has, and why this amount is so little. The establishment of the fact that tax revenues are too low resulted in a tax reform, which succeeded due to a number of factors. First, there was reached a certain political consensus, since not only the government, but also taxpayers are concerned about taxes. Second, the tax reform had a driving force behind it in the person of S. Shatalov, who has promoted and still promotes reformist ideas. Third, tax revenues are relatively independent of structural reforms. As a result, it may be said that the tax reform has crossed its equator.

At the same time, according to S. Batkibekov, the budget reform is braked as concerns expenditures. Several factors are responsible for this development. For instance, the political will is lacking. Besides, the reform of expenditures in the general framework of the tax reform is very closely related to the structural reforms, in particular, with the institutional reform. As a result, the reform of expenditures had been postponed time and again, and even if anything had been done at all (for instance, in compliance with requirements set by the IMF or the World Bank in the framework of credits, in the course of implementation of various programs and projects), these attempts had been fragmented. The most impressive success on this thorny path was the approval of the Budget Code. The speaker also noted the development of interbudgetary relations and the reform of the treasury as positive moments.

According to S. Batkibekov, the reform is going on, but rather slowly. Exactly because of this, the RF President has instructed the government to work out a concept aimed at the improvement of the efficiency of budget expenditure. In essence, this concept envisages separate approaches to reforms in individual components of the budgetary sphere and to the problems of the budget process. The action plan annexed to the concept breaks down all measures by the components of the budgetary sphere (7 guidelines):

   1) Full financing of measures stipulated by the legislation;
   2) Introduction of the program and target principles for planning and administration of budgets;
   3) Improvement of the state procurement methods. It is proposed to provide financing on the tender basis and ensure fair competition, establish control over subcontracting and price setting, as well as the implementation of state procurement;
   4) Reform of state unitary enterprises and budgetary organizations;
   5) Improvement of accounting, including the state monitoring of all operations;
   6) Setting of reference marks for the determination of assignments, i.e. determination of target amounts and volumes for the federal budget;
   7) Improvement of mechanisms of treasury administration and control.

Concluding the presentation, S. Batkibekov dwelled on two points he thought were important. He stressed that the fragmented character of implementation of the budgetary reform permitted to move in certain areas (for instance, treasury related problems, state procurement) farther than in others. Besides, he specifically stressed the fact that the implementation attempts allowed to attract the same people who elaborated the structural reform (the Gref program).

The mineral resources and raw materials sector is a base sector of the Russia’s economy playing a most important role in the formation of the state budget revenues In this relation, the problem of building an effective system of taxation of the mineral resources and raw materials sector ensuring both the exaction of the resource rent generated in the process of extraction of mineral raw materials by the state (and, therefore, providing substantial and stable revenues of the state budget), and the retention of sufficient incentives for investment in this sector of the
economy.

The system of taxation of the mineral resources and raw materials sectors, which has formed in Russia over the period of economic reform is not sufficiently effective in terms of the objectives indicated above. Therefore, there arose the necessity to radically reform this system aiming to improve its effectiveness and bring it in compliance with international practices. A whole range of issues is related to the reform of the mineral resources and raw materials sector. These issues were covered in the presentation made by Yu. Bobylev (IET).

Summarizing his presentation, Yu. Bobylev has stressed that in perspective it would be feasible to transit to a tax system based on three key components: royalty (in the form of tax on extraction or payments for the use of mineral resources), tax on extra incomes from hydrocarbon extraction, and profit tax. The special tax regime applicable to the implementation of production sharing agreements shall become an additional component of the taxation system. This system will permit to ensure adequate state revenues and facilitate attraction of investments, at the same time, it will be competitive at the international level. All these factors will create prerequisites for a long term economic growth.

In his report, K. Yanovski (RCER) has stressed that institutional factors, including those relating to the guarantees of personal safety (inviolability) of person, significantly affect the investment climate. Failures to ensure these factors result in higher risks and negatively affect incentives for investment, especially, long term ones.

As it turned out, the most sensitive to these parameters are small firms, for which the burden of costs related to the protection of their natural rights and lawful interests is especially heavy. These factors produce a significantly less effect on the implementation of relatively large investment projects by foreign investors.

According to the speaker, the fact that these factors are significant even on the regional level, although they are set at the federal level, makes cross-country comparative analysis especially interesting and important.

A. Dvorkovitch (Deputy Minister for Economic Development and Trade of Russia) focused his presentation on the specifics of the strategic budgetary and investment planning, i.e. planning for 3 to 7 years. According to the deputy Minister, this type of planning is possible on three following conditions: first, the macroeconomic stability, or at least some knowledge about the future development of the macroeconomic situation (in this case it is the same, since if the macroeconomic situation is unstable all predictions have little significance). Second, there shall be a notion of the implementation strategy with regard to the planned structural and institutional reforms (since the structure and amount of budget depends on the way they are implemented, what, in turn, to a certain extent determines the prospects of the investment inflow to these or that industries). Third, the shall be a mechanism of implementation of these reforms, i.e. how efficiently the measures comprised in a legislatively approved program of reforms are implemented (the efficiency of implementation of the program of reforms determines the microclimate for investment activities).

Having analyzed these three elements in detail, the speaker concluded that Russia is only nearing the possibility of strategic budgetary and investment planning, since not all required prerequisites are yet in place. According to A. Dvorkovictch, it is necessary to work hard for two to three years in order to start the strategic planning.

O. Skvortsov (Deputy Minister of Transport of RF) has stressed the special importance of the road development for Russia. According to him, about 50 per cent of the country’s regions are still not connected with the outside world with paved motor roads. The scope of the problem is immense and in turn it creates a large number of social problems.

The experience of a number of countries has shown that the development of the road sector helped to develop the economy more rapidly and resolve a number of economic problems. The data collected in the course of the studies carried out in Russia also confirm that the level of development of motor transportation may significantly influence the general economic climate in the country. The economic analysis of the process is a rather complex algorithm which comprises several components and is based on the interaction of the road sector per se, motor transportation, and other sectors. Exactly this algorithm produces the so called multiplicative effect which ensures a high effectiveness of investment in the road construction.

M. Alexeev (Professor, Indiana University, Bloomington) has summarized his presentation on the fiscal independence of local governments as follows: both the initial size of the small business sector and the degree of political and economic uncertainty at the early stages of reforms might have resulted in rational reluctance by the upper levels of government in Russia to give a significant degree of fiscal independence to the lower levels, thus impeding the incentives of the lower government levels to foster local economic growth.

Russia’s reformers, accroding to M. Alexeev, have for some time understood the importance of fiscal independence of the lower budget levels, particularly the municipalities. They have also understood that the regional authorities did not have the incentives to provide this fiscal independence. To a large extent, many of the attempted and proposed fiscal federalism reforms in Russia since 1997 have been aimed at forcing the regions to provide greater degree of fiscal independence to their constituent municipalities. Without trying to diminish the importance of these reforms, the above discussion suggests that until the regions and the central government themselves come to appreciate the advantages of fiscal independence of lower levels of government, these reforms will at best be incomplete.

Arnold Harberger (Professor, University of California Los Angeles) has attempted to make a didactic description of the ratio between changes in productivity and real exchange rate. A. Harberger has admitted that he can not predict how the exchange rate in Russia would change in the few next years, since the situation is too clouded with uncertainty.

According to A. Harberger, the first rule of a good economic policy is the respect for major economic forces at work. The law of demand and supply is, certainly, the law no government can abolish. Therefore, the best economic policy is to carefully and sensitively monitor the signals sent by the economy itself, and by implementing reasonable political measures facilitate the moving market forces of demand and supply instead of fighting against them.

Artem Shadrin (IET) has presented “Problems of Development of the Subnational Borrowings System. Institutional Aspects.” The speaker stressed that the aging of objects of social and economic infrastructure at the regional and local levels requires urgent measures aimed at the ensuring of sufficient levels of investment, what is possible only on condition of development of the market of sub-national
borrowings.

In spite of the fact that the international credit ranking of the Russian Federation improves, high levels of credit risks associated with the majority of sub-national authorities prevent them from the implementation of long term massive borrowings at acceptable interest rates. A key factor behind high levels of credit risks is the insufficient legal protection of the rights of creditors loaning funds to sub-national authorities in case of defaults.

The existing procedure of enforcement of court rulings concerning the recovery of funds from budgetary accounts in cases where the assignments for the repayment of debt obligations were not included in the budgetary expenditures or sequestered in the process of administration of budgets. For instance, Articles 286 and 287 of the Budget Code stipulate that the amount of funds exacted from budgets in accordance to court rulings can not exceed the difference between the amount of funds in the budgetary account and the aggregate amount of funds shown in the monthly financing schedule comprising all budget recipients.

In practice, this limitation renders the creditors’ rights fictitious. For instance, as in March of 2002, in spite of improving macroeconomic situation in the country, 20 regions failed to meet their liabilities with regard to “rural” bonds issued yet before the crisis of 1998.

Therefore, A. Shadrin thinks it necessary to amend the Budget Code to the effect that executive court writs for amounts below a certain share of the total amount of budgetary revenues (for instance, 10 per cent) shall be unconditionally charged off budgetary accounts that being the ground for further sequester. The credits non-repaid over the year due to the exhaustion of the limit set for the charge-off shall be transferred to the next year until they are repaid
in full.

The consistent settlement of the problem of non-financed mandates and improvement of stability of revenues of territorial budgets (as it is envisaged by the “Program of development of fiscal federalism in the Russian Federation for the period till year 2005” approved by the RF government resolution No. 584 of August 15, 2001) shall become a factor facilitating a decline in credit risks associated with obligations of territorial authorities in a medium term outlook.

On March 21, the agrarian panel “Myths and Realities of the Agrarian Sector” held its meeting in the framework of the conference. Opening the meeting, Eu. Serova (Head, Center AFE, IET) said that the panel is convened to discuss the forming structure of the Russia’s agriculture and the perspectives of the sector for the few next decades. She stressed that the discussion shall rather be not normative (i.e. setting a standard, or desired forms), but positive (i.e. describing the existing trends).

A. Fomin (Deputy Chairman of the Agrarian Committee, the State Duma) focused his presentation on the current problems of the agrarian policy in Russia. He mentioned that at present there is in fact no definite policy at all. Over the years of reform, non-repaid loans and credits to to the agrarian sector made two AIC (agri-industrial complex) federal budgets. The productivity of labor in the agrarian sector is extremely low, therefore the country needs a policy aimed at the development of alternative employment in rural areas.

The country does not have a perspective AIC budgetary policy, the speaker stressed, all budgetary issues are settled on the year-on-year basis. According to A. Fomin, it is necessary to change the state social policy with regard to AIC. Agribusiness has started to realize that is bears a significant social responsibility in agriculture.

The law on the turnover of farmlands is very important, but it needs a wide discussion even before it passes the first reading.

According to A. Fomin, Russia has to join WTO, since it creates economic advantages for the country. The task is to make the accession advantageous also for the agrarian sector.

I. von Braun (President, IAAE, Center for Development Research, Bonn) has aired his view that Russia is a very heterogeneous and complex country with different conditions of development existing in different regions. However, Russia does not present an exclusion to the global rule: small farms primarily comprising its agrarian sector are most efficient in technical terms. Giant agrarian structures would not be effective unless they decentralize management. Integration of internal agri-industrial markets in Russia will facilitate an increase in the competitiveness of the Russia’s AIC. “International Tendencies in the development of the Structure of Agro Production.”

At the same time, according to the speaker, the official agrarian politics shall embrace even the smallest secondary farming plots.

Agriculture is a science-intensive sector. OECD countries spend about 1 per cent of their gross revenues for the agrarian sciences. Russia also needs to finance R&D in AIC.

A. Epikhina (Head of Department of Goskomstat) has informed the participants that RF Goskomstat is working on the harmonization of Russia’s agrarian statistics with the international standards and characterized the major forms of agricultural producers in Russia.

According to A. Epikina, the problems of statistical registration are related to the lack of respective legislation – a new law on peasant (farmer) units. Russia needs a law defining the term “agricultural producer” (for instance, in Poland this category includes producers having more than 0.1 ha).

At present, a new classification of branches and activities in the area of agriculture is being introduced, at the same time, there is continued work on registers of legal entities and individuals, including those belonging to the agrarian sector.

Irina Khramova (Project Manager, Center AFE, IET) has presented “Agro Holdings: Vertical Integration of Business Diversification?” She stressed that the rise of holdings is not a new phenomenon in the Russia’s AIC. Yet in the mid-1990s, there was observed rather numerous instances of creation of vertically integrated holdings, although not in agriculture.

Over the few past years the dynamics and scope of the process have sharply increased, there has grown the number of companies-integrators. The financial crisis had produced a stimulating effect: profitability in agriculture increased, it became profitable to invest in agricultural production. Over the last three years, the dynamics of investment in fixed assets in agriculture have outpaced the respective indicator in food industry and the economy on the whole.

There were observed different external motives for investment. Among the most frequently registered motives were the following: creation of a raw materials base for own processing, repayment of credits (recovering of debts), tax privileges, low entry barriers in the sector in a short time outlook.

In terms of economic theory, a high investment activity in agriculture may be explained by at least two factors:

a) imperfection of markets, high transactions costs, lack of contractual guarantees, etc. render vertical integration less expensive;
b) high financial risks related to the formation of investment portfolios render the diversification of business less expensive;

Due to the considerable attractiveness of investment in agriculture, at present non-agrarian companies diversify their businesses by organizing agricultural production. In the first case, the changes in the market situation and gradual overcoming of high market risks will not result in the termination of vertically integrated projects and outflow of investment, since the incentives for vertical integration remain in any case. In the second case, declining market risks on the one hand and diminishing attractiveness of agriculture as investment target (the abolishment of tax privileges, growing price of the land, increasing costs of non-land assets, etc.) on the other hand may result in a sharp outflow of investment from agriculture already in a short term perspective.

S. Drobyshevsky (IET) has focused his presentation on the internal factors of Russia’s monetary policy. According to Drobyshevsky, an analysis of processes observed in the monetary sphere in 1992 though 2001 permits to arrive to the following conclusions relating to the policy pursued by the RF Central Bank:

   1) The statistical data registered over the period indicated above confirm that the monetary policy did not directly affect the rates of growth or real output volumes. At the same time, there are no grounds to state that money plays a neutral role in the Russia’s economy;
   2) The most probable channels of money transmission are not directly related to the monetary policy, but rather result from changes in the fundamental principles of the Russia’s economy functioning occurring after the crisis of 1998;
   3) Over the post-crisis period (1998 through 2001), inflation (with a considerable structural component) positively affected the real output growth rates. In this connection it is necessary to accelerate the process of reforming of natural monopolies and liberalization of prices and tariffs related to their services;
   4) As average inflation rates decelerate, it is necessary to improve the coordination of CBR and the RF government as concerns the measures aimed at the formation of an environment facilitating growth in the real output;
   5) Over the pre-crisis (1998) period, the policy pursued by CBR permitted to achieve a rapid decline in inflation rates, however, due to the choice of the option of financial stabilization did not allow to resolve the imbalances on the internal money and forex markets. Since 1999, CBR has pursued the policy of targeting the Ruble exchange rate. The key flaw of this policy is a considerable dependence of internal monetary policy on oil and other staple Russia’s exports price dynamics;
   6) However, continued policy of targeting the Ruble exchange rate (in fact, the floating exchange rate with a slow Ruble revaluation) is the most preferable option in the present situation (high prices of staple exports and a considerable favorable balance of trade, forthcoming large external debt payments). In a short term perspective, this policy will permit to accumulate gold and forex reserves and prevent a sharp decline in the Ruble real exchange rate.

S. Chetverikov (IET), has dwelled on an analysis of the redistribution of funds among the federal and regional budgets in the framework of interbudgetary relations and the evaluation of stabilizing qualities of redistribution instruments.

The budgetary system of a modern federative state (the Russian Federation comprises a large number of administrative and territorial entities with different socioeconomic and natural climatic conditions, and different levels of economic development) is characterized by a significant redistribution role played by the central budget. The redistribution of state financial resources among the budgets of RF subjects is aimed at both interregional equalization of levels of provision of state services answering the preferences of individuals residing in the country’s territory, and the settlement of problems encountered in the area of implementation of regional economic policies.

The key forms of redistribution comprise the transfers from the Fund for Financial Support of Regions, non-targeted financial aid from the federal budget provided on a regular (for a certain period) and free basis. The central government may also equalize regional revenues using a progressive system of tax payments. The progressiveness may be ensured both by introducing a non-taxable minimum in the situation of a flat marginal rate of tax, and a progressive marginal rate of tax depending on the increase in income. The results of a thorough analysis of major financial flows between the federal and regional budgets provide evidence that progressiveness is present in the system of interbudgetary relations.

William Easterly (Senior Fellow, Center for Global Development and Institute for International Economics, Washington) has focused his presentation (“The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics”) on the role played by international financial organizations (IFO) in providing financial aid to developing countries. For instance, he discusses “five benevolent panaceas”: the panacea of the benevolent aid, the panacea of the benevolent government, the panacea of the benevolent conditions, the panacea of the benevolent intervention, the panacea of benevolent market. Basing on certain illustrative examples from Pakistan and Zambia, the major recipients of international financial aid, the speaker argues that the current policy fails both to bring about prosperity, and achieve other aid objectives.

W. Easterly also challenges the generally accepted view that an increase in the share of the educated population is an evidence of economic development. Even in spite of the fact that over the last decades the Africa’s education has grown faster than the respective indicators in the South East Asia, the rates of growth in the African economies and prosperity of populations were slower than in Asia.

The speaker concluded his report with an appeal to economists and IFOs to rethink the existing dogmas concerning the role of IFOs and the international financial aid in the modern world and their capacities to resolve problems encountered by the poorest nations.

Christoph Ruhl (Senior Economist, IMF Moscow Office) presented a report “Foreign direct investment and economic growth in Russia” dwelling on major problems and perspectives of foreign direct investment in the Russia’s economy. Ruhl touched upon such aspects of foreign direct investment as the weakness of Russia’s financial and economic institutions, underdeveloped financial markets and the banking system, the effect of foreign direct investment on economic growth in Russia, internal constraints on and possibilities of the attraction of financing, as well as possible repercussions of declining rates of growth in the world economy.

E. Shkrebela (IET) presented «Reform Process of the Profit Taxation» focusing on the provisions of the Tax Code that can produce a significant effect on the decisions enterprises make on investment and enterprises’ choice of the type of financing and the availability of funds they need to finance investment.

According to the speaker, in spite of a considerable shift towards neutrality, efficiency, and fairness of the tax system achieved in Article 25 of the Tax Code approved by the State Duma in comparison with the current taxation procedure, there remains a number of less urgent problems requiring a serious discussion.

E. Shkrebela concluded the presentation with a number of qualitative speculations concerning possible future developments. According to the speaker, in spite of the abolishment of privileges and the use of accrual method, it is hard to expect that the tax base will increase due to the following factors: certain restrictions on the deduction of a number of expenses were lifted, and it was permitted to rise depreciation rates, at the same time, the majority of assets are subject to non-linear methods of depreciation. Besides, there were created certain new opportunities for and retained a number of possibilities of tax optimization already in existence. After the marginal rates of taxes on labor incomes were reduced to 14.7 per cent (there were taken into account income tax and social payments related to wages and salaries exceeding Rub. 600 thousand a year as calculated in relation to the tax base), in certain cases it gives rise to incentives to register capital gains as wage and salary incomes, and a gradual replacement of fixed assets remaining from the Soviet era with new ones evaluated at their market values will result in an increase in depreciation.

However, what really matters, E. Shkrebela stressed, is that the shift towards neutrality and fairness of the tax system would be translated into an increase in investment in the economy at large (although it is not excluded that in certain organizations, especially those enjoying tax privileges, investment will decline).

Institute for the Economy in Transition announces the All-Russian Contest for the best Thesis on Economics.

Graduates of Russia’s economic institutions for higher education and economics departments of institutions for higher education are invited to participate.

Institute for the Economy in Transition establishes a prize “For the best thesis on Economics”

All graduates of Russia’s institutions for higher education defending their theses on economics in 2002 are eligible to participate in the contest.

   · First place – Rub. 20 thousand.
   · Second place – two prizes, Rub. 10 thousand each.
   · Third place – three prizes, Rub. 5 thousand each.

Chairman – Dr. (Econ.) Ye. T. Gaidar, Deputy Chairman – R. M. Entov, full member of the Academy of Sciences Academic Secretary – A. I. Yashin, Members of the Commission: Dr. (Econ.) V. A. Mau, Dr. (Econ.) A. D. Radygin, Dr. (Econ.) S. G. Sinelnikov-Murylev, Dr. (Econ.) Ye. V. Serova, Dr. (Econ.) A. V. Uliukayev, Dr. (Econ.) S. V. Shishkin Contestants shall submit their theses and personal information (full name, date of birth, institution for higher education, department, specialty, topic of the thesis, a copy of diploma, mail address, contact telephone) to the contest commission by September 15, 2002, at the following address: 103918, Moscow, Gazetny per., 5. “Institute for the Economy In Transition” (thesis contest). Or by e-mail at: administrator@iet.ru (re: thesis contest).

For additional information call: (095) 229-9464, or fax (095) 229-7671.
Good luck!

· Diploma with distinction on economics (average mark at or above 4.75, additional technical or juridical education is a plus).

Senior students and aspirants are granted an opportunity to combine work with education.

For curriculum vitae: e-mail alexeev@iet.ru or fax 203-88-16 (reference: for the Academic Secretary)

The Institute for the Economy in Transition is a leading Russian research center in the area of economic theory, elaboration of the national economic development strategy and recommendations on the programs of economic policy. The unique feature of the Institute is the combination of purely academic research with the elaboration of concrete practical recommendations to governmental agencies of different levels (federal, regional, local), as well as enterprises.

The Institute consists of 10 laboratories incorporated in four principal research departments:

More than 60 researchers, including 11 Doctors and 26 Candidates of science are working in the IET.

IET includes a postgraduate and correspondence departments specializing in “Political Economy” and “Economics and National Economy Management”