I. Intro: The need for Government Leadership II. Macroeconomics of an Open Criminalized Economy III. Industrial Policy: Potential and Pitfalls IV. Quality of Government V. Conclusion

 As we have seen from Parts One and Two of our book “government leadership is indispensable.”  Broad responsibilities of the government include:  Shape market institutions  Regulate essential services when competition does not suffice  Meet social needs

I. Intro: The need for Government Leadership II. Macroeconomics of an Open Criminalized Economy III. Industrial Policy: Potential and Pitfalls IV. Quality of Government V. Conclusion

 The state of the nascent Russian market economy has been well described  Pomer defines the Heuristic model to clarify the macroeconomic consequences of an open criminalized economy  Major variables of interest are aggregate demand, inflation, and multipliers of both exports and exogenous spending

 Find parameter estimates for endogenous variables that best restore demand for Russian production = increase GDP  Reducing corruption and capital flight are paramount to accomplish this increase within the constraints of the model  The outcome on the multipliers is a major component on the simulation analysis

 foreign trade multiplier (equations in appendix) “ The ratio of the resulting increase in domestic product to an addition to exports. This is a class of formula rather than any one specific formula. In the simplest possible economy with only one form of leakage, say a savings propensity s, the foreign trade multiplier (FTM) is 1/(1 − s).” (Oxford dictionary of Economics, 12/4/09, encyclopedia/foreign-trade-multiplier)

Main equations to note: Capital flight, Spending functions and multipliers are all interdependent Quick explanation of the appendix using the book to demonstrate the effects of a one-fifth reduction in import propensities

 Important NOTE: The model is a simulation used to analyze consequences of various actions. The model has NO predictive value.  Model was run using data from 1997, why not 1998?  In general the model describes intuitive results, i.e. a reduction in criminal activity or capital flight has a positive effect on the multipliers thus increasing GDP (also import propensities)

I. Intro: The need for Government Leadership II. Macroeconomics of an Open Criminalized Economy III. Industrial Policy: Potential and Pitfalls IV. Quality of Government V. Conclusion

 Helping industries that have a certain strategic or social significance maintain demand is an important role of the government.  Certain industrial sectors are not likely to grow without the governments help.  Japan and Southeast Asia used industrial policy to help achieve rapid growth.  A couple of these industrial policies were protecting domestic markets and investment subsidies.

 During the transition period in Russia meaningful import protection would have lead to the adjustment of domestic industry.  5 months after the removal of trade barriers in Russia import tariffs were put in place.  The tariffs rates were low and had a low compliance rate.  Less Than 1 percent of GDP came from import duties, when imports were 20 percent of GDP.  Another significant part of restraining imports was the drastic decline of the ruble’s real exchange rate.  Compliance with tariffs is a large issue for Russia.

 Government loans can help a countries economy.  They can forestall dismissal of surplus employees  Corruption was a large part of the problem with government lending in post soviet Russia  When giving out loans there needs to be a “strategic vision” that emphasizes technological growth.  Instead of giving loans the government could also subsidize interest payments.  Regardless the repayment of loans should be strictly enforced

 The Russian airplane technology was not able to keep up with Boeing and Airbus, this lead to the industries collapse.  If the industry were revitalized it would provide many jobs and a boost to Russia’s economy.  Ilyushin Aviation Complex designed a 350-seat wide-body jetliner.  They planed to build 20 of these jet liners with a billion dollar loan the company received from the U.S. import export bank.  Boeing got worried it would lose competition this lead to the Clinton administration temporarily suspending Russia’s 30 percent import tariff on foreign planes.  To allow Russian airline companies to finance the purchase of Russian made planes the government could subsidize leases on Russian made aircraft.  "export credits to promote foreign sales of Russian aircraft"

 Many other countries protect there automotive industry.  Japan and Korea practically prohibit purchase of foreign made cars.  The Russian government should be careful in helping the automotive industry.  An example of bad handling of helping the auto industry is Ukraine and how they took on a joint venture with Korea’s Daewoo corporation.

I. Intro: The need for Government Leadership II. Macroeconomics of an Open Criminalized Economy III. Industrial Policy: Potential and Pitfalls IV. Quality of Government V. Conclusion

 Really intuitive  Industrial policy is not socially optimal if government is corrupt or serving special interest  Conflict of interests is another obstacle in providing sound industrial policy, especially in US where politicians need financial support to win elections and are then responsible for industrial policy. (ex. Fossil fuels)

I. Intro: The need for Government Leadership II. Macroeconomics of an Open Criminalized Economy III. Industrial Policy: Potential and Pitfalls IV. Quality of Government V. Conclusion

 The Russian government prior to 1998 had a narrow focus on eliminating inflation.  Corruption and capital flight have greatly hindered Russia’s economic growth.  The Russian government needs to support certain industries carefully because support can be good but it can just prolong the life of failing industries.