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July 10, 2002
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How Much Growth is Normal? In Russia? Elsewhere?

by Michael S. Bernstam and Alvin Rabushka

On July 9, 2002, Dow Jones reported that Mr. Christof Ruehl, the World Bank's chief economist for Russia, told investors attending a conference on Russia that a lack of investment would constrain the economy's growth potential. Mr. Ruehl said "The overall lesson would be to not expect any miracles, but a normalization of growth rates." Normal growth in Russia, as forecast by leading officials in the Russian government and other Russian economic experts is 3-4%.

The arithmetic of 3-4% growth will make it difficult for Russia to catch up with its West European neighbors. Sustained 4% growth doubles economic output every 18 years; at 3%, output doubles every 24 years. These rates do not leave one breathless.

Taking 1991 as a starting point, by 1998, the year of the Great Default, Russia's gross domestic product declined about 40%. The economy grew 3.5% in 1999, 9.0% in 2000, and a slower 5.0% in 2001. Three years of positive growth have restored GDP to about 72% of its 1991 level. As growth decelerates, at annual growth of 4%, the economy will not reach its starting point of 1991 until 2010.

Russian officials and economic experts have advanced several reasons to explain Russia's slowing growth. Among others, these include the exhaustion of excess capacity in the economy, the real appreciation of the ruble which has eroded the price competitiveness of local industry, a slowdown in the growth of investment, and uncertainty about whether the reforms passed by the Duma will be implemented throughout the Russian countryside. In addition, there is a growing view that Russia, now officially declared a market economy by the U.S. government and the European Union, has become a normal economy, which means 3-4% annual growth.

What exactly is normal growth? In Russia? And elsewhere?

In Chapter 2 of From Predation to Prosperity, we presented data showing the relationship between private income (the obverse of socialism) and cumulative income in 42 post-Communist economies countries during 1990-1999 (see figure 2.1). The results were dramatic: the higher the percentage of private income (the smaller the percentage of socialism) in an economy, the greater its economic growth. China sits at the top of the chart, while Russia is well behind.

During 1978-1999, China averaged 8% real growth, doubling output every nine years. During its first seven years of existence as a separate country, Russia underwent a massive, Depression-level contraction.

Other countries not displayed in figure 2.1 include the Asian tigers of Korea, Taiwan, Hong Kong, and Singapore. They averaged real annual 8-9% growth over three decades. These are also economies with a large component of private income.

Russia's sustained contraction during 1991-1998, followed by a trend of declining growth during the past three-and-a-half years, should be set in the context of an economy defined by a low level of private income, about one-quarter of GDP (or a high degree of socialism, about three-quarters of GDP). In the realm of socialist economies, 3-4% annual growth may well be normal. Indeed, if oil prices were to fall below $20 a barrel, what is normal annual growth in Russia might be a lower 1-2%.

How to increase normal growth is a matter of policy. Increasing the share of private income in GDP is the quickest path to higher growth. This requires breaking down the network of enterprise socialism, which thrives on the issue of receivables and subsequent arrears, that continues to dominate the Russian economy.

Russia is a normal economy in the universe of other socialist economies, those with a high degree of common income. It has yet to become a normal economy, characterized by a preponderance of private income.