Rents and instability : the Russian growth model tested again Julien Vercueil, INALCO, Paris

Russia's double paradox Russia, a paradoxical emerging country Three decades of economic trajectoires : Russia’s record compared China India Russia South Africa Brazil

Explaining trajectories : productivity, institutional changes and « growth models » A Growth model (in the short to medium run) is a way of combining productivity growth and institutional change : no « one best way », but several coherent combinations of institutions and economic trajectories (Serra and Stiglitz, with Rodrik, 2008) Question n°1 that links productivity and the institutional framework : where does productivity growth come from? Question n°2: how are productivity gains redistributed ? Each emerging economy provides its own answers to these questions

BRIC’s catching-up trajectories compared: some clues of a rent-based growth trajectory (2,1) : R&D/GDP (2,1) (2,08) (2,0) (1,0) (1,16) (0,97) (0,81) (0,73)

From the Dutch Disease to the Rent based Disease Sources of productivity growth in Russia (Kudrin and Gurvitch, 2014) : +2,5 % /year directly coming from windfall gains Standard way to analyse this problem : « Dutch Disease » model – a static model without institution Source : Total Economy Database 2017, author’s elaboration

Main characteristics of a rent-based growth model Oil and gas rent : extra revenues obtained from the ownership of a particular kind of asset (subsoil natural resources) Main challenges : Exogeneity [external shocks disconnected from productivity gains] Redistribution [multiple distorsions : monetary, fiscal, financial, by sectors (Kudring and Gurvitch, 2014)] Instability [volatility of international prices]

Instability and Russia’s rent-based growth model Financial instability : Exchange rate and oil prices Financial markets and oil prices, banking system and exchange rate Buffers : Currency reserves of BCR – but limited Monetary instability : Exchange rate crises and inflation (1998, 2008, 2015) Buffers : Monetary policy and Interest rates – but limited Fiscal instability : Oil prices and fiscal revenues (federal and local) Buffers : Sovereign funds (Reserve fund and National welfare fund) – but limited

Instability and Russia’s rent-based growth model (continued) Growth instability (elasticity of GDP to oil prices) Institutional lock-in : Windfall gains seem to play a role in the perpetuation of the low-quality of institutional framework in Russia Low level of fiscal pressure on economic agents => paternalistic style of government, low pressure from taxpayers for better quality of public management Weak « checks and balances » at all levels of government Proximity between oil & gas major’s managers and the Government => economic and political goals can easily be confused High level of corruption - more or less tolerated by the population

An illustration of the paternalistic style of government in Russia

Conclusion : how to exit from the rent-based growth model ? Contradiction between institutional lock in and the instability of a rent-based growth model : how to solve it ? Long term solution : exit from the current growth model by fostering industrial diversification Short term solutions : exchange rate flexibility is not enough => capital controls ?

Thank you ! References : Kudrin A., Gurvich E. (2014) : « A new Growth Model for the Russian Economy », Russian Journal of Economics 1 (2015), 30-54. Serra N., Stiglitz J. (Eds) (2008) : « The Washington consensus reconsidered. Toward a New Global Governance ». Oxford: Oxford University Press. Rodrik D. (2008) : « A practical approach to formulating growth strategies », in Serra and Stiglitz (2008), 356-366. Vercueil (2010:2015) : « Les pays émergents. Brésil-Russie-Inde-Chine : mutations économiques, crises et nouveaux défis ». Paris : Bréal, 2015 (première édition 2010) World Bank (2016) : « Russian Economic Report », n°36, November 2016.

A simple framework for analysing emerging growth models including INSTITUTIONAL CHANGE AND POLICIES including INSTITUTIONAL FRAMEWORK (and macroeconomic policies) DEMAND-SIDE POLICY ECONOMIC OPENING POLICIES including SUPPLY-SIDE POLICY National territory Rest of the world FOREIGN ENTREPRISES INVESTMENT AND INCOME REDISTRIBUTION CREATION AND RESTRUCTURING OF DOMESTIC FIRMS SUPPLY TYPE 1. EXTERNAL DEMAND DRIVEN GROWTH MODEL TYPE 2. DOMESTIC DEMAND DRIVEN GROWTH MODEL PRODUCTIVITY GROWTH EXTERNAL DEMAND PRODUCTION GROWTH DOMESTIC DEMAND DEMAND TYPE 3. RENT BASED GROWTH MODEL