Capitalism blooms in Russia's chaos

ECONOMIC VIEW

It is deeply unfashionable to be optimistic about Russia. Yet it is a sign of our times that the OECD, the rich countries' "club", should now be producing its first economic survey of the country.

True, Russia is not yet a member of the OECD, and true, it would not qualify for membership. But it is already possible to see a world where Russia has become a "normal" market economy and, for the truly optimistic, a full-status developed one. It is natural that the OECD should seek to chart the progress of what will in time become one of its most important members.

Because that day is some way in the future, this report has a rather different feel to it from most OECD studies. It has, for a start, rather fewer graphs and statistics than usual. The graphs it does have seem usually to head downwards instead of upwards and the authors acknowledge that the statistics, like the graphs, may well be misleading. There is also a slightly pained tone to the text absent from other reports. It noted, for example, that Russians were suffering from reform fatigue and added "it seems that many ministries and institutions are suffering from 'foreign adviser fatigue' ". This made the gathering of information "significantly more difficult".

The result is a touch-and-feel analysis rather than a number-crunching one. In a way this is refreshing, because the story has to be told in words rather than in figures. Not only did the figures of the pre-reform Soviet Union grossly inflate the real output of the government-controlled sector; they also excluded the large informal economy, much of which operated outside the law. Since the formal economy was over-stated and between 20 and 35 per cent of the GDP was military spending, the official figures have plunged. But though the old informal, extra-legal economy has seen rapid growth, since some of this remains outside the law, it is hard to estimate how much growth there has really been.

Still a big picture emerges and it runs like this. Take 1991 as a base. Official figures say GDP has halved. Production figures of specific items, including consumer goods, would tend to confirm this. Thus bread production has fallen by 32 per cent. If, however, you look at consumption, things are different. Bread consumption, far from going down, has risen by 12 per cent. Practical things that you can measure reasonably accurately, like electricity consumption, are now about 80 per cent of the level at the beginning of 1991. The service sector, hard enough to measure in an economy like ours, let alone in Russia, has undoubtedly grown fast, but almost certainly not fast enough to offset the decline in industry.

And real living standards? They have fallen. Even allowing for things that are difficult to measure, like the time once spent queuing, people on average are worse off. But they are perhaps 15 per cent worse off, not 50 per cent worse off. Differentials have widened, but not by as much as the figures suggest, for much of the official class's income before 1990 came in perks rather than pay. Finally, though personal incomes certainly fell fast during the early stages of reform, it seems they have stopped falling and may be rising.

Looking ahead, the OECD is tentatively bullish. The economy is growing at the moment. Exports rose 17 per cent in dollar terms in the first five months of this year compared with the same period of 1994. Imports rose by 13 per cent on the same basis. The OECD thinks that with the right policies, growth could speed up to 10 per cent next year. If that were to happen Russia would be the fastest-growing large economy in the world. With the wrong policies, however, the upturn could falter.

It needs little imagination to work out what the OECD thinks the right policies are: cut the budget deficit, keep interest rates up, cut back inflation, build business confidence, encourage repatriation of flight capital, crack down on corruption and crime, and so on. If it does, the future is bright. It is still all to play for.

This is surely right. The transformation of what was essentially a war economy onto a peace-time basis was always going to be difficult. The worst fear, that 70 years of a command economy had so eroded the entreprenurial spirit that establishing a market economy would be virtually impossible, has proved unfounded. There is plenty of get-up-and-go. The main trouble is that this spirit is most evident in the extra-legal economy: bringing that inside the law, setting reasonable rules of behaviour, takes time.

But it is happening. In the financial services sector, the reputable share dealers have established settlement procedures amongst themselves. They know which registrars are reliable and trade in shares where the register is properly administered and the title to shares can be properly established. Commercial self-interest is producing a legally effective framework for share trading. And it is getting better. While the settlements system is expensive by Western standards, it is much more secure than it was, say, two years ago.

If you step outside the chaos, you see a large country with enormous human skills and great natural resources. It has a trade surplus. It has relatively low foreign borrowings. Its citizens hold large external funds. Tax and other reforms are taking place gradually, which will correct some of the present internal imbalances in the economy. Given where Russia started five years ago, and given that there was no adequate road-map of how it should travel, surely the achievements so far are not too bad.

What Russia needs is a perception of success. It is perfectly possible that just such success will come in the next year. And once the pendulum swings, suddenly it will become fashionable to welcome Russia to the capitalist world.