Boom times on way for reforming Russians

Russia could be set for an economic boom if it sticks to the path of economic reform, the West's leading economic club said yesterday.

The Russian economy stabilised in the second half of 1994 and began to recover in early 1995, says the Organisation for Economic Co-operation and Development. In 1996, the growth rate could accelerate to up to 10 per cent.

In its first survey of the Russian economy, the OECD says it is imperative that Moscow persists with reform and does not allow inflation to get out of control. "If macro-economic stabilisation is successful during 1995 and the momentum of liberalisation is maintained, the Russian economy could enter a period of rapid growth." However, if those conditions are not met, "the upturn could falter" and output "could even fall again in 1996".

The OECD warns that inflation, which was still over 8 per cent in April, is declining more slowly than the government predicted: "The targeted reduction and stabilisation of inflation will be hard to achieve."

Macro-economic stabilisation was "indispensable" but painful. The rise in real interest rates would lead to initial losses in competitiveness and could cause a big rise in open unemployment. Stabilisation would be enhanced by a move away from crisis fiscal and monetary management to a medium-term programme.

The OECD contests the view that the dramatic collapse in GDP and industrial output since 1990 can be attributed to the government's attempts to implement a regime of shock therapy. It argues that the reported fall in GDP of 50 per cent since 1990 had in any case been "strongly exaggerated". Output was over-reported under Communism, but enterprises were now more interested in understating production to reduce taxes. Electricity consumption had only fallen by 20 per cent from its 1989 level.

More important, the serious decline was mainly because of the "sheer magnitude" of the structural changes involved in moving from from the military-industrial complex promoted under Communism to an economy that conforms more closely to the pattern of production in Western economies. The cosseted industrial sector had taken a beating from the drastic reduction in defence expenditure.

The decline in the share of industrial output in GDP and the increasing share of resource-based goods in exports represent "inevitable and generally beneficial changes in structure rather than the destruction of wealth- creating capacity". It is much better to export raw materials and semi- processed goods at world prices than to absorb huge amounts of energy and other resources in "inefficient domestic production of manufactures with exports at subsidised prices to selected countries".

The report sees encouraging signs that the painful transition away from Communism is well under way. One is the rapid growth of the service sector, which has grown from 33 per cent of GDP in 1990 to 50 per cent in 1994, when for the first time production of services exceeded production of goods. Initially retail services were the most dynamic part of the service sector but more recently financial services had grown rapidly, increasing by one-third in 1994 over 1993, according to official statistics.

A further sign of welcome structural change is the redirection of trade towards OECD countries. In 1994, exports to developed market economies were up by 22 per cent compared with 1993.

Capitalism looms, page 19