Examination of Witnesses (Questions 48
- 59)
THURSDAY 11 OCTOBER 2007
Professor Julian Cooper and Professor Phil Hanson
Q48 Chairman: Professor
Hanson and Professor Cooper, we are very pleased to see you here.
A number of us have known you for a long time and we are sure
there are very few people in the country who are as well qualified
as you are in knowing developments of initially the Soviet and
now the Russian economy. I think you know the way that we work.
We are taking a record of the evidence which you will have a chance
to see and to have your comments if we have misrepresented you.
Can I start on the first question and ask you if you would like
to say something about the main problems currently faced by the
Russian economy; how long can the present rates of growth continue;
and what are the problems which might lead to their decline?
Professor Hanson: I think there are big question
marks. The way I would put it is that the Russian economy is a
"curate's egg", and it may or may not be a sustainable
curate's egg. What I mean by that is not simply that it is a dual
economy in the obvious sense in that there is the natural resource
sector and the rest, but in a slightly different sense, in that
the rules of the game are different in different sectors. The
rules of the game, particularly in the natural resource sector,
but also in some other sectors, are very much more to do with
direct state control, a somewhat unpredictable situation, and
considerable uncertainty about property rights. I think in most
of the rest of the economy, loosely speaking, in what is below
the politicians' radar (which is quite a large part of the economy)
there is quite a lot of "business as normal" anywhere
in the world. I think this accounts for a lot of the very different
stories that go around about the economy. There are a number of
factors which would tend to slow growth regardless of that "rules
of the game" problem. The labour force is beginning to decline
just recently. Spare capacity, which was under-utilised in the
recovery period, has now largely been used up. The real effective
exchange rate has strengthened, making competition for non-natural
resource sectors really difficult and, in general, the fact that
the state has involved itself so heavily in the oil industry has
tended to, I will not say kill the goose that lays the golden
egg, it is not as drastic as that, but it has certainly in various
ways slowed down the growth of the volume of oil production. Earnings
remain high because of the price of exports. There is a balance
of factors tending towards some slowdown but I do not see a sort
of enclosure, I just see some slow down.
Professor Cooper: There is a large measure of
agreement. Putin has been a very fortunate President because he
has overseen the growth of the economy by 6 to 7% a year over
this entire period, partly helped by oil prices but not only that,
also by the fact that he has been supported by a very competent
team of economic managers and a Finance Minister and Economic
Minister and Head of Central Bank who have very sound macroeconomic
management, and of course Mr Kudrin, the Finance Minister, has
now been promoted, and so there is some guarantee that will continue,
but I also agree that there are some quite serious, deeper problems
if you look a bit further to the future. My sense is that the
rate of growth is beginning to slow down and partly because of
capacity constraints there is a growing shortage of skilled labour;
the labour force is beginning to contract, and this is going to
become more and more of a problem in the coming period, and some
problems are now beginning to be experienced such as a serious
shortage of skilled technical labour and managerial personnel
as well. Another problem is the weakness still of the banking
sector. It is still a rather fragile banking system and the credit
crisis that now we are experiencing Russia is beginning to feel
as well, particularly in the consumer credit field. I think there
is some underlying concern in some of the financial circles in
Russia of the potential impact of this credit crisis on Russia
in the coming months, so that is another source of anxiety. I
think the deeper problems are that firstly manufacturing industry
is in a very poor state indeed, and much of it is simply not competitive,
and the rate of investment there is not very high at the present
time, and also the fact in terms of economic policy over the recent
period there has not been much reform but any changes that have
been made have increased the role of the state in the economy,
and this seems to me to be on the whole an unhealthy development.
Particularly now as Mr Putin is overseeing the creation of a number
of state corporations, there is a danger that within 12 months
we will see about a dozen or so large state corporations playing
a very dominant role in the Russian economy.
Q49 Lord Anderson of Swansea:
The other constraints presumably would include uneven regional
development and on the infrastructure side what can you say about
the legal infrastructure for doing business and also perhaps the
transport infrastructure? How modern is that and will it be?
Professor Hanson: Just to pick up the last point
first, there is now the beginning of a major state infrastructure
investment programme which is being done on a public/private partnership
basis in which a number of major Western construction concerns
are bidding, for example on a section of highway near St Petersburg.
That will probably make some difference. As far as the business
environment more broadly is concerned, there are two very good
measures, both of them associated with the World Bank. One is
the Ease of Doing Business ranking, where Russia looks pretty
poor on an international perspective, and that is made up of a
number of scores on a whole range of different indicators.
Q50 Lord Anderson of Swansea:
Including corruption?
Professor Hanson: Including corruption. I was
going to mention separately another thing which is undertaken
by the World Bank and EBRD together, the Business Environment
and Enterprise Performance Survey, which shows an increase in
corruption between 2002 and 2005. That is not the standard transparency,
international corruption perception; that is going and asking
businesses what their experience is of paying bribes. Bribe frequency
has gone up in the period during which a lot of this increase
in state control has happened. I think that is an unpromising
situation.
Q51 Lord Anderson of Swansea:
And protection of minority shareholders, that sort of legal environment?
Professor Hanson: I would put it like this—and
Julian may take a different view perhaps because I think this
is a very difficult question—I have heard the manager of
a major Western fund operating in Russia for a long time say that
he would rather go to court in Moscow than New York.
Q52 Lord Chidgey:
It would be cheaper!
Professor Hanson: I think the big problems that
we get our attention drawn to, the sort of treatment that Shell
has experienced and TNK-BP and so on and some Russian companies
as well, I think that occurs when the judiciary get the message
that them up there, the Kremlin, are interested in a particular
outcome and then they just do whatever the message tells them
to do, and then the property rights become unclear. However, when
there is not a message from on high from the presidential administration,
I think a lot of things go through in a fairly reasonable way,
give or take quite a bit of corruption (but it is more predictable).
Q53 Lord Hannay of Chiswick:
We have not in our questions put the demographic issue to you,
but perhaps could you just give a comment on that as it affects
all these others? I notice you referred to a shortage of skilled
labour but, if my understanding is correct, there is a demographic
problem that goes much wider than that, but is possibly longer
term than we are looking at. Could you comment?
Professor Cooper: I think it is an extremely
serious problem facing Russia and I think Mr Putin is aware of
it. Mr Medvedev, the Deputy Prime Minister, is supposed to be
finding some answers to this problem and so on, but I think with
fairly limited success because the problems are so deep rooted.
The United Nations latest update of its forecast is that by 2050
Russia could have only 110 million people compared with 142 million
now. That trend will continue for practically the rest of the
century. This is a very, very unfavourable picture. It is partly
because of a very low birth rate, but the birth rate in fact is
not that much lower than many advanced Western European countries.
The problem is that there is a very high death rate, and it is
the fact that the death rate, particularly of the cohort of men
from the age of about 20 to 35-40, is extraordinarily high compared
to international standards, partly because of alcohol, increasingly
because of smoking, and partly by the extraordinarily high accident
rates we have in Russia at the moment—industrial accidents
and road accidents—and this very high death rate has been
at a high level for a long time now and shows little sign of falling.
I think the demographic future for Russia is an extremely worrying
one looking to the future, and it will have and is having now
already economic consequences. It also has consequences for Russian
security. Will Russia be able to maintain the size of armed forces,
able-bodied men, that it is able to have at the moment and still
have a viable economy, if we are talking about a situation where
the people of working age of that cohort is greatly reduced? I
think it is an extremely serious problem.
Q54 Lord Hamilton of Epsom:
Just going back to the question of companies and how a large number
of Russian companies have been registering in London. What is
the thinking behind that from their point of view?
Professor Hanson: Part of it is straightforward
raising funds for investment. When conditions are reasonably healthy
over here (and there has been a postponing of some of them lately)
and in the recent past it has been quite a good option for raising
money. Obviously the stock market is more liquid and wider and
in general more helpful here than in Russia, so that is part of
it. Part of it is cashing out. There have been some calculations
to the effect that quite a lot of the dollars raised in IPOs have
simply been the original founder of the business taking a personal
fortune out of it and getting out. The other thing that is going
on, of course, is borrowing. While the state has enormously reduced
its debt to the outside world, the private sector debt has gone
up, and part of that "private sector" is the likes of
RosNeft and Gazprom, which are state-controlled, so I think one
of the difficult things to assess here is how much of that sort
of activity is of a healthy kind and how much is not. The other
thing, if I could just mention one related thing quickly, is that
a number of Russian companies are going global. They are becoming
really serious international players: Rusal is the largest aluminium
producer in the world; Severstal and Norilsk Nickel, mainly metals
companies in fact. They almost certainly have to run their plans
past the Kremlin before doing anything but, by and large, I think
what they are doing is expanding in the sort of way you would
expect any large company with a strong market power in its own
home market to do when it has the possibility of doing so, and
I think that is quite a normal development.
Q55 Lord Lea of Crondall:
The statistics are a bit confusing but economic growth normally
would measure national income output and expenditure to have to
be the same thing, so if you have got a 6% economic growth rate
with a declining labour input, productivity per man and woman
(as conventionally measured) must be very, very high indeed, 8
or 9% logically. Can you comment on whether the elements of productivity
increase, which are very high, are to do with technology or to
do with management and labour efficiency, because there is no
reason for a slowdown of economic growth for demographic reasons
on that front, and so can you distinguish the different elements
of economic growth, because otherwise we will not understand the
picture?
Professor Cooper: In fact, the growth of labour
productivity over recent years has not been that high in Russia.
It has been 5 or 6% a year rate of growth of labour productivity
in the economy as a whole. One problem for Russia now is that
the rate of growth of labour productivity is being outstripped
by far by the rate of growth of real wages. This means that industrial
costs are rising quite rapidly in Russia, and it is one of the
reasons why competitiveness of the non-energy non-commodity groups
is being eroded rather fast at the present time. Another problem
for the Russian economy at the moment is the rate of technological
innovation, which would be one way of boosting productivity, is
really rather low, and Russia has not been successful.
Q56 Lord Lea of Crondall:
So you are implying it is balance of payments constraints even
though they have got an oil surplus, otherwise why do you mention
competitiveness?
Professor Cooper: Russia wants to be able to
export goods, and particularly goods other than energy and metals
and chemicals and so on, and is finding it increasingly difficult
to do so. The only manufactured goods of that kind that Russia
is able to export still on any scale are armaments, and mainly
to India and China. There is not much else that Russia is able
to export, other than energy and metals and chemicals and so on.
Q57 Lord Lea of Crondall:
And that is wage costs rather than technology?
Professor Cooper: Partly because of lack of
modernisation, since the end of Communism very little investment
has gone into this sector of the economy. Now investment is booming
in Russia—this year investment will probably grow by about
18%—and associated with that is quite a large growth of
imports, and part of those imports now are machinery and equipment,
so I think the re-equipping is beginning but still has a very,
very long way to go. The capital stock in much of Russian manufacturing
industry is a very out-of-date capital stock with very little
modernisation taking place. Even in the defence industry, producing
arms which are sellable to China, India and Venezuela, the capital
stock is now extremely aged with not much new technology there,
so this is very profound problem for Russia.
Q58 Lord Chidgey:
I have a supplementary on Lord Hannay's question about demography.
You mentioned to us that the death rates are very high in Russia,
but could you make a distinction between the demographic statistics
in the Moscow region, where the great centralisation is, and the
rural areas? I understand there is a significant difference, particularly
for example in unemployment where it is much higher in the regions,
and of course the other social consequences of that.
Professor Hanson: Of course in almost every
aspect of life in Russia today there is a big difference between
Moscow and the rest of the country, particularly the more rural
areas, and this is certainly the case, so this very high male
mortality does seem to be pretty well across the board, but it
does tend to be a larger problem in the big cities and towns,
the big industrial industries and big centres of car ownership
and so on. Clearly there are quite important regional differences
here.
Q59 Lord Chidgey:
How much has the economic reform programme affected this? I am
thinking particularly of the withdrawal of much of the social
services support, pensions and so forth; has that had a marked
impact on the general well-being and suicide rates amongst the
nation?
Professor Hanson: I think the unrest that there
was over so-called reform of social benefits was very much to
do with a botched attempt to monetise benefits in kind. There
needed to be that sort of change, and the initial move was in
fact quite inadequate in terms of the funding that went into it,
so people were going to get less in money terms than they got
in kind (although that varied regionally in fact) and there was
enough discontent about that for that to be rejigged. I do not
think that is a prime problem. What you do get is because of the
very large disparities across regions in the revenue base for
regional government, the centre is redistributing from the centre,
and a large number of Russia's regions depend quite heavily on
transfers from the central budget, and those transfers have a
weak equalising tendency. The last time I actually did the figures,
which was probably the figures for 2005, so I will not claim to
be totally up-to-date on it, show that it tends to be equalising
but only weakly, so that there are huge disparities, first of
all, on average between regions but I think, more particularly,
where people will observe the biggest differences is between the
major cities, including the capital cities of each region, and
the hinterland of small towns and countryside where, with some
exceptions, conditions are pretty dire. There is quite a lot of
movement of people, as you might expect, including of course movement
from the far north and the far east, westwards and southwards.
There is also movement in general into the towns.
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