Bryan Caplan and David Henderson  

Russia’s Hope

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by Michael Munger
Guest Blogger
Things seem to be picking up for Russia, heart of the former Soviet Union and the world’s only third-world superpower.
  • This year, using a purchasing power parity basis, Russian GDP stands at $1.287 trillion, or 11th largest in the world.
  • Their real growth rate in 2003 was 7.3%. The growth rate has averaged 6.5% per year over the past five years, after the 1998 crisis.
  • Since 2000, demand by consumers and investors have been consistently strong. Real fixed capital investments have gained more than 10% per year, on average, over the last four years. Real personal and family incomes have seen increases that average more than 12%.
  • Financially, Russia has also moved a long way toward putting its house in order. Its foreign debt has declined from 90% of GDP during the 1998 crisis to around 28%. (The “foreign debt as percent of GDP” figure for the U.S. is 23%, and climbing fast). (data source)

Much of this boomlet is due to increased oil prices, of course. Recently oil has been trading at more than $40/barrel, with the end of July seeing prices of nearly $45. Russia has significant exports, making it the world’s second largest exporter of crude (after the Saudis). These oil export earnings have meant that Russia has increased its foreign reserves from only $12 billion to some $80 billion. Given how soft the ruble has been (often, it has been a non-traded currency), these foreign reserves go a long way toward establishing Russia as a legitimate global economy.

Despite these successes, Russia is still in trouble. Unsolved problems include credible commitments to guarantee private investments, and the survival of democratic institutions. A recent piece by David Storobin, his July 21, 2004 post on The Global Politician, which is the best and most succinct summary of the problems that I’ve seen.


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COMMENTS (6 to date)
Robert Schwartz writes:

The real Russian problem is demographics not politics. birthrates, life spans, morbity and mortality are all unfavorable.

If Russia were a business, I would say that it was to heavy with obolete and unproductive assets and did not have enough good young workers. I would unload assets. Mostly land in the far east. Pay off debt, and invest capital in health care for the young (maternity wards and pediatric units not nursing homes), in promoting healty life styles among prime ages (combating alcholism, smoking and high fat foods) and education.

The alternative will be to have the Chinese take the land while the slavs and Islamists fight bloddy civil wars.

Lord Acton writes:

How much of its growth is due to its flat tax (also a low tax, at 13% for the individual rate)? Growth rates like the ones Arnold cites will compound very quickly and are the best and surest way to address any issues with "birthrates, life spans, morbity and mortality."

If Estonia, Slovakia and Iraq experience similar growth, the US will soon be mocked for its old-style social democracy and stagnation. Flat-taxers, copies of National Review in hand, will quote Reagan to us with foreign accents.

Boonton writes:

High growth rates are easy to achieve when you've done a lousy job in the past. Take a farmer who uses a mule and let him in vest in a tractor and you'll find his yield will grow very nicely. This isn't caused by a flat-tax but by the fact that communisms mismanagement of the economy has left plenty of 'low-hanging fruit' for capitialists to pluck.

Lawrance George Lux writes:

Russia is in deep trouble, but not from the usuual list most Economists use. The Oil price is a poor vehicle for economic expansion. Oil as energy source is a mandatory cost for production. Due to the equalization process of the Laws of Supply and Demand, high Oil prices will always lead to devaluation of Currencies forced to pay those prices. Russia must triple her capital investment in the immediate future, if she wants to capitalize on the record Oil prices. This would lead to a immense problem for Russia, as all innovative Sector labor wants immediate lifestyle changes commersiat with the West. Russia could not establish a Production Repayment schedule equal to the task. Putin is not stupid, and realizes this reality of the need for an authoritarian regime to suppress expectations. lgl

Arnold,

I recently found your blog and one of your article quotes my paper on Russia. [Russia's Hope, August 8, 2004. http://econlog.econlib.org/archives/000541.html].

I thank you for your kind words in describing my article as "the best and most succinct summary of the problems" in Russia.

One small request. I would appreciate it if you directed your link to our main English-language site, www.globalpolitician.com.

In the future, you may use or quote any of our articles, so lon as you use them in a responsible manner (meaning that you do not misquote us, edit the work to change the meaning of what we meant to say, etc) and provide a link back to www.globalpolitician.com

If you have any papers or articles that you would like to publish in our journal, we would be glad to do so.

David Storobin, Esq.
Editor-in-Chief of Global Politician
www.globalpolitician.com

Hi, David.

One small request. I would appreciate it if you directed your link to our main English-language site, www.globalpolitician.com.

I've changed the link from the Eurasian Politician to The Global Politician.

I thank you for your kind words....

For the record, the kind words were written by Michael Munger, who was filling in for Arnold that week.

Lauren
Editor
Library of Economics and Liberty

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