Translation: Russia’s Growth Rate may Plummet in the Next Decade

According to several experts, Russia may be facing a period of protracted low growth rates now that its GDP per capita has recently exceeded $16,000. Vedomosti’s Olga Kuvshinova has the details.

Russia may Experience Minimal Growth in the Next 10 Years

A variety of reasons are brought up to explain the Russian economy’s slowdown to 1.6% growth in the first quarter by experts and officials: A stalling in investment, private consumption, weak external demand. But there is a one factor that is more critical, according to Ivan Chakarov of Renaissance Capital. It is, in fact, quite typical for quickly growing economies to slow down once they exhaust their “advantage of backwardness” – that is, the possibility of obtaining high profits thanks to low costs. After this, countries collide against barriers to growth, falling into a so-called “middle-income trap.” This is precisely what is occurring in Russia now, according to him.

This trap is typical set off when a country’s GDP per capita approaches $16,000. This year, according to Chakarov’s calculations, it will constitute $16,016.

The countries of Western Europe slowed down in a big way in the 1970s, South Korea – in 1995, Singapore and Hong Kong – at the start of the 1980s, Taiwan – at the end of the 1990s. All of these cases, according to Chakarov, were simultaneous with the crossing of the $16,000 per capita mark (in 2005 prices).

Russia is the first of the BRICs to fall into this trap, notes Chakarov. China will hit this problem in 2020, Brazil – in 2024, and India – in 2038.

Countries that fall into this trap typically lose almost two thirds of their previous levels of yearly growth, says Chakarov, citing research from the National Bureau of Economic Research (NBER) in the US. As regards Russia, this could mean that our previous rate of growth of approximately 4.5% (adjusting for the recession in 2009) may fall to 1.6% – that is, exactly the same as the figure for the first quarter.

Russia may be entering a decade in which rates of growth do not exceed 2% a year, with the rate of growth incomes per capita falling to just 1.9% relative to 5% for the previous decade. Chakarov worries that this could compel politicians to increase borrowing to consolidate their authority, as Greece did during 1980-2010. The U-turn regarding rgw pension and other reforms that could have forestalled the trap indicates that as regards Russia, such a scenario cannot be excluded. “Russia may become a new Greece,” he believes.

Greece reached an income level of $16,000 per capita at the start of the 1980s. In the next decade, quick growth turned to stagnation and recessions, with unemployment increasing by a factor of 2.5, inflation increasing by a factor of 1.6, and industrial growth plummeting from 10% to 1%. Greece started to increase its national debt, which went from approximately 20% of GDP at the start of the 1980s to 170% by 2011, and in so doing became the focal point for the Eurozone debt crisis.

According to NBER experts, a slowdown in growth rates typically happens at a GDP pre capita level of $15,000-16,000, but it doesn’t necessarily have to occur suddenly. It is less likely in countries with a relatively high level of secondary and higher educational attainment, as well as in those countries which have a high share of hi-tech products in their exports. Moving up the “technological ladder” is one way to escape the middle-income trap.

The theory of comparative advantage can vary according to a country’s level of developments, says Dmitry Belousov 0f the Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF). He believes that Russia has already left behind the first stage, that of competitiveness based on cheap resources. The second stage revolves around price competitiveness on the consumer markets, and attractiveness on the capital markets. The third stage is about advantages in the sphere of innovation. “I wouldn’t fetishize GDP per capita,” Belousov says. Russia is now likewise leaving the stage of price competitiveness, as energy and labor converge to European levels while energy efficiency and labor productivity continues to lag far behind. “Right now, our overriding priority is investment. We have to change a lot in the institutional sphere, so as to increase our investment attractiveness. The launching of the investment process will create the groundwork for the development of innovation, but we still have a long way to go until we reach that stage,” Belousov says. He considers that Russia will not be able to grow at 1.5% a year for a long time: So many commitments have been made, and so many expectations created, that under such a slow rate neither the government, nor business will have sufficient resources.

Though it’s possible to grow by increasing debt, it is not a long-term solution, notes Belousov; under today’s consumption levels, such a road will end in a balance of payments crisis – even if oil prices remain high – and, eventually, the start of an inflation-devaluation spiral. The last devaluation actually had a similar character, but it was concealed under the cover of the global crisis, “just as a good collective farm manager hides a shortfall in the harvest by blaming it on a wildfire caused by lightning.” But lightning won’t always strike at such opportune times, warns Belousov. “If we build up competitiveness – not on account of price levels, but via an acceleration in investment, then there is a chance that we could bypass this stage,” he concludes.

There is a chance of Russia sporadically falling into recessions even without shocks due to accumulated internal problems, according to Valery Mironov of the Higher School of Economics: The rapid growth of labor costs, and capital flight in the face of repressed internal competition. Fighting these problems by pumping money into the economy is meaningless. The April consensus forecast from the Center of Development (27 experts from investment banks, companies, and research centers) suggests that Russia’s growth rate will not exceed 3.5% all the way up to 2019. The Ministry of Economic Development however forecasts that the economy will accelerate to 4.1% growth by 2015-2016.