Russia’s economy: facing down challenges; The head of the OECD says Russia has work ahead to fulfill its leadership potential

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(Moscow News – themoscownews.com – January 21, 2013)

Angel Gurria, secretary general of the Organization for Economic Cooperation and Development, addressed the Gaidar Forum in a keynote address on Friday.

[The global economic outlook] has deteriorated again, and the word “again” is probably the more operative one. We are indeed far from being out of the woods. We predict a hesitance, uneven recovery for the OECD area over the next two years, 1.4 percent in 2013, 2.3 percent in 2014….

In this grim context, the Russian economy will continue at about 4 percent…. Of course, a lot depends in this particular case, in that projection, on oil prices.

But hard times are also times of opportunities, and in Russia, like the OECD, governments [must] act decisively to address the long-standing social problems that have weakened their economies. They must also act together, particularly with the G-20, to put the global economy on a renewed growth path, and here Russia’s leadership will be requested, will actually be needed. Russia is a critical player on the international scene, and its leadership is even more prominent now in 2013, with the presidency of the G-20, but also, in 2014, you will be hosting the G-8, so you’ll be having a lot of summitry for some time, for the next 18 months.

There are high expectations on Russia’s presidency, and a growing feeling of skepticism on the G-20’s capacity to fulfill its mission is being put to the test. Now, this is a little unfair, because when the house is on fire, it’s very easy to know what to do: you get a hose…. You try to put out the fire.

Right now, the options are more difficult, it’s not obvious: you have countries that are growing, countries that are in recession and countries that are so-so…. What to do together? Everybody doing the same thing is difficult, because now everybody’s in a different situation. Before, everybody was in a crisis going down, and then you had to row very hard. Now it’s a little bit less obvious.

To be able to play this leading role with the G-20, Russia needs to modernize its economy…. It has low productivity and low per capita income, low access to the use of [information and communications technology]. It suffers extreme inequality as well as poor outcomes in health and the environment. Its trade growth has fallen well below 4 percent and remains heavily dependent on natural resource extraction. The share of oil and gas in exports has increased further since the crisis….

Very unfavorable demographic trends… will weigh on growth potential going forward and will put the social system under extreme pressure. To modernize its economy, Russia thus faces critical challenges: a structural challenge, a social challenge, an environmental challenge and an institutional challenge….

Diversifying the economy will require raising productivity growth, and there is considerable room to do so. In this regard, it is crucial to increase competition, including by making product market regulation less restrictive and reducing the role of the state in the economy. This should be coupled with a serious reform of state-owned enterprise governance to ensure, inter alia, that they operate under competitive neutrality rules….

I think the hot political potato with the G-20 is going to be stateowned enterprises…. Opening further the economy is also crucial. In this regard, WTO accession should have very positive results….

Right now Russia suffers from an exceptionally high income and regional inequality, and from health incomes well below those of OECD countries. In a nutshell, Russia needs to invest urgently in the quality of its human capital. This requires, first of all, a more efficient and better-funded health care system….

You need balance to make sure that those that are today in the dual labor market, and that have the short-term contracts with no guarantees, etc., etc. ­ this is a problem around the world, including in Japan, in Italy, in Mexico, everywhere ­ that they have a minimum of guarantees. Some of the workers inside the system have perhaps too much labor protection, and now a growing number have no protection….

Now, last but not least, the education system needs a serious overhaul. With the highest level of educational attainment in the world, Russia’s educational performance, as measured by our PISA [Program for International Student Assessment], ranks below most OECD countries….

Besides developing its human capital, Russia needs to preserve its natural capital. It still has one of the most energy-intensive economies in the world. It is the fourthlargest user of energy and the thirdlargest emitter of greenhouse gases, both in absolute but also in relative terms per unit of GDP produced, etc. Moreover, it has one of the highest rates of premature mortality attributable to air pollution….

The institutional challenge in Russia remains very, very important. Russia needs to improve on three related points: 1. the efficiency of the public administration; 2. the business climate; 3. the question of transparency, integrity, anti-corruption, whatever you want to call it….

A more open, competent and accountable public administration… is a pre-requisite to design and implement the necessary reforms to achieve a sustainable and inclusive growth….

Doing business in Russia is difficult, and is considered by investors as not only difficult, but risky ­ but of course the opportunities are so great that many of them still come ­ due to the heavy administrative burden, the widespread lack of transparency, sometimes proven cases of corruption, and the generally weak rule of law….

In all of these areas, the OECD accession process provides a useful opportunity to take stock of convergence, to identify both the progress as well as the areas where the gaps are still large. Drawing on OECD experience and peer review process may be particularly useful to Russian policymakers. It will help them design and implement these critical reforms.

OECD accession should thus not be seen as an end in itself, but rather as a conduit for improving policymaking and economic performance.