By Alexey Gaskarov
Here is an English translation on interesting and serious article, written by Alexey Gaskarov - russian socialist and antifashist, who is inprisoned over a year by now for the "6th of may case". The publication of this article in any French left-wing academic or analitic magazine will be politically important as well - the text written also in prison.
In anticipation of looming recession, Russia sees intensification of the debate about vectors of economic development and possible new drivers of growth. As a rule, there are two points of view presented in the official public space: nominally neoliberal, dominant in the period of growth during the first decade of the 21st century and presented by institutions such as the New Economic School, School of Economics, Gaidar Institute, the Institute of Contemporary Development, etc., and nominally Keynesian, which is already characteristic of post-crisis development with the intellectual centre around such structures as the Institute of Economics of the Russian Academy of Science, Expert Magazine, Moscow State University.
Stated approaches are characteristic of the two groups of the Russian elite, which from the point of view of “conspiracy theorists” are now split: respectively, liberal (Medvedev, Kudrin, Dvorkovich, etc.) and “power-wielding”, which is in fact a team of industry lobbyists (Sechin, Yakunin, Belousov, etc.). Both approaches are united by the fact that they are equally unsuccessful, and do not solve the basic problems of economic development – diversification of the economy, overcoming of poverty, improving working conditions, improving social standards, development and implementation of innovations, improving competitiveness of domestic producers. But most importantly, neither of these doctrines consider investments in human capital in a broader sense of the word, and not only in a limited class of entrepreneurs as a source of growth.
In Europe and Latin America, this niche is occupied by socialist and left-wing parties. In a country with manageable “sovereign” democracy a request for socially-oriented economy is realised by social movements through the Kremlin-controlled parliament parties. Sometimes, under the public pressure, or solving their own political objectives, the government conceded raising wages for public sector employees or implementing national projects, but Russia has never had a system of policies aimed at achieving sustainable development by increasing the level of education, social security, access to finance, and many other factors that would expand the boundaries for self-realization for the bigger part of the population.
Now, when all other concepts of development have come to a stall, it's time to generate new alternatives. However, we should not give up entirely the existing economic heritage. Besides obvious blunders, there are a number of achievements that are worth developing. To begin with we would like to focus on these moments.
Available Capital
The tasks of the neoliberal course have been to reduce the influence of the state on the economy creating maximum freedom for business, integrating Russia into the global market, and to stabilizing the monetary and credit policy. Free trade and international competition should have made domestic manufacturers able to produce competitive products and enter new markets. All risks of “entry” were planned to be covered for the account of the proceeds from the sale of resources.
As a result, Russia ranked 6th in the world in terms of GDP managed to achieve a relatively low inflation, stable ruble exchange rate, a balanced budget and significant financial reserves, which altogether resulted in a fairly painless bump on the bottom of the crisis. The reverse side of growth as per neoliberal recipes can be compared to an airbag in a vehicle. In the case of an accident the airbag worked, and the driver survived, but then he's not going anywhere.
Opening of markets without a focused industrial policy has led to the defeat of the country in international competition and getting stuck in a role of a seller of resources with low added value in the international division of labour. As a result, in 2011, the level of industrial production in Russia was 20% lower than in the late USSR period. In fact, there was a refusal to develop own technology, which according to the theory of free trade has been effectively replaced by imports. It is symptomatic that 40% of the GDP comes from the sale of resources, 25% – from trade, while the share of sectors with high added value is constantly decreasing.
The idea to import technologies for the account of the natural rent did not pay off, as no one is going to share breakthrough developments that are the key to competitiveness of developed countries. And spending foreign exchange earnings in the country is simply impossible, and therefore endless reserve funds with low returns are created.
The situation is aggravated by the absolute faith of liberal politicians in that entrepreneurial activity and commercialization of scientific achievements should be the basis for the growth. This resulted in an extensive infrastructure of business incubators, Skolkovo and ROSNANO emerged, but these institutions experience the shortage of ideas. All of them are ready to sell, but not to create. Of course, the commercialization is necessary and important, but why destroying academic institutions; restructuring the higher education system, and why the role of an entrepreneur has suddenly become more important than that of a scientist and an engineer? As an illustration to support the latter thesis, one can give an example of the recent economic amnesty. It is clear that there is no independent judiciary system in Russia, and a lot of people are imprisoned on the dubious grounds, but slow growth of the economy, which could be stimulated by freeing business people, was used as a justification of a decision.
Ornate neoliberal logic sometimes leads to quite paradoxical results. For example, low wages of the majority of employees in Russia is not perceived as a social problem, but as a competitive advantage in the international market. The same refers to social and environmental standards, which in many ways form the living standards of a country, but increase the cost of production.
Despite the fact that the ultimate beneficiary of the free-market policy is a small part of the population, relying on economic liberties can be considered the strength of neoliberalism, that is the situation, in which no one dictates to nobody what to produce and how and to whom to sell, as well as absence of attempts to stimulate growth through monetary methods. The latter is especially important if you look at the economic policies carried out by the Left in various historical periods. The military coup in Chile in 1973 became possible partially because of volatile prices with inflation amounting to tens of per cent. Venezuela and Bolivia are now facing the same problem. High inflation impedes incentives and long-term investments, automatically increases the lending rate and, of course, annoys people.
It is important to note that the mere existence of two points of view on development of the economy within the power elite has never made the policy solid.
New Industrialization
Despite the dominance of neoliberal ideas in the first decade of the 21st century, about half of the country’s GDP was created in the public sector. The idea of establishing state-owned corporations, which were to concentrate resources on traditionally strong for Russia military markets, did not match the mainstream economy. But a really drastic return to nominally Keynesian economics, which provides for a significant increase of the state's role to promote growth, occurred in the last few years.
Putin's inner circle embraced such people as Sergei Glazyev and Andrey Belousov – the latter even served as the minister of economic development. Alexei Kudrin has left the government. The head of the Central Bank was replaced.
The new economic policy course is based on the following ideas:
first, it is proposed to loosen monetary policy significantly. In Russia, even taking into account the higher inflation, the cost of borrowing is much higher than in developed countries, which consequently has an impact on the cost of domestic goods. To solve this problem it is proposed to reduce the refinancing rate and other rates of the Central Bank– at the same time the monetary regulator becomes responsible for the growth of the economy, which, by and large, is not common to this institution.
Second, the government plans to “uncover” reserves for investments in infrastructure projects – CRR (Central Ring Road), high-speed railway track Moscow-Kazan, etc. The policy of funds allocation becomes more flexible – now they can be invested in more risky securities of Russian corporations with greater yield than that of U.S. Treasury bonds.
Third, to promote exports the rouble exchange rate is adjusted downward, which automatically increases the cost of imported goods in the country, and improves the competitive position of Russian goods in the short term.
And finally, at least on the rhetorical level, the importance of a targeted industrial policy is recognized – with the state support of key industries, tariff protection, flexible taxes and other tools, the lack of which allowed Western competitors to capture markets once.
The problem is that even if the stated ideas will be implemented, their impact on the growth will be marginal.
Russia has already joined the WTO, and within this structure is almost impossible to protect the national market. And the tools that the EU countries use – technical standards – have been hopelessly failed by our government. For example, in Russia, back in 2002, the law on technical rules replaced the mandatory state standards, which involved the development of technical rules in 11 major industries. By 2013, only 2 of them were adopted.
It is difficult to expect any significant growth of investment projects after the rate cut. The main creditor of significant projects for the state – Vnesheconombank – requires 1.1 trillion roubles for additional capitalization due to the fact that about 40% of the projects are loss-making (the portfolio for 2013 – 1 trillion roubles, problem loans – 400 billion roubles.). So it appears that there is a shortage of economically viable projects.
If compared with GDP (about 60 trillion roubles), the proportion of “mega-projects” seems insignificant. It is planned to spend totally 1.36 trillion roubles for infrastructure construction, and the costs will be stretched in time for at least 10 years.
Perhaps, it is too early to make conclusions about the results of the “Keynesian” revolution, but the government has already announced plans to drastically reduce the budget and increase the retirement age.
The Left Alternative
Typically, the product output in the models of economic growth depends on two factors – labour and capital. More advanced versions contain some quality parameters, such as the level of innovation and the level of education of the population. A mercantilist attitude towards labour as a factor of production, which should be cheap, is common for the two approaches outlined above. Low salaries – low cost – higher sales – capturing the market. To the Left economic growth is not the primary goal of economic policy, which should first ensure the well-being of society as a whole, not just the owners of capital. But this does not mean that struggle for decent wages reduces the growth rate of the economy.
The Economy of Demand
Globalisation and removal of trade barriers have forced domestic producers to switch focus to foreign markets. The competition usually takes place in terms of price, and production cost reduction is achieved through cutting wages.
This is the way the classic crises of overproduction occur, which are especially noticeable in countries where it became possible to carry out liberal reforms of labour legislation and significantly reduce the role of trade unions. Lower wages reduce domestic demand, and there is nobody to buy all that has been produced. This is one of the defects of the market, which Keynes pointed to, and which is subject to regulation, but the Russian capitalism has followed the path of inflation of consumer credits, and the problem was simply delayed.
In Russia, the average wage level is 2.5 times lower than in the EU countries, which secured their growth and modernization due to the “welfare state”. High wages, and high employment rate ensured the growth of consumption, which, in turn, enabled the economy of scale, and the profits were invested in innovations.
Russian elites are oriented to the Asian growth patterns, and usually Hong Kong or Singapore are given as an example, where the best conditions for doing business in the world are created, and therefore there is a high per capita GDP along with colossal property stratification. In Hong Kong, the share of the poor is over 18%, and this city has the highest Gini index, which measures income inequality. The idea is very simple: excess wealth is good because the concentration of capital increases investment activity. This thesis, which is not undisputed by itself, is not feasible in Russia, because the concentration of capital leads to its outflow abroad, but not to investments in innovation.
Income inequality obviously slows down the development of small and medium-sized businesses, for which there are simply no available markets. Russians, driven into tight economy, are forced to live in the dark panel houses, buy low quality products in Auchan, eat at chain restaurants, and drive there in budget cars bought on credit.
In Russia, the discussion about the growth of real wages is often superficial. Namely, the worse your work is – poor performance is meant – the fewer you get. In reality, labour efficiency, which is the ratio of added value to the number of employed, depends on many factors, among which one of the key factors is the capital-labour ratio. And Russian oligarchs have a big problem with that. As from about the 1980s, in Russia, the number of new facilities has not kept pace with the number of those retiring.
This is especially noticeable in the sector of natural monopolies, such as utilities, where up to 70% of fixed assets are worn out, and depreciation period comes to 40 years.
Thus, trade unions and mature labour law that indicate mandatory minimum wages by industry are important institutions, which are necessary to develop and not to destroy, as it is happening now, to ensure economic growth.
Progressive Taxes
Another obstacle to growth is the Russian tax policy. In Russia, the tax burden is 35% of GDP. In most suitable for life Scandinavian countries, it is a little less than 50%. In economically developed countries such as the U.S. and Japan, the tax burden is at the level of 25-30%, but the level of GDP per capita there is many times more, but social systems still leave much to be desired. That is, in Russia, in spite of all efforts of business lobbyists to make us think otherwise, taxes are low. Also, it should be taken into account that the larger part of the tax revenue are taxes on mining and export duties, which in fact are the people's rent, and not taxes in the literal sense of the word. This situation is well described by the recent debate about raising the mandatory social security contributions for entrepreneurs. The Government has increased the mandatory contributions to 40 thousand roubles a year, and immediately emerged public statements from business associations, such as “Support of Russia”, Chamber of Commerce, and the like, that this is a robbery and destruction of business. In Russia, the average real wage in the city is around 25,000 roubles. The rate of insurance contributions is 30,000 roubles per month. This means that the annual premium per employee amounts to 25,000 * 0.3 * 12 = 90,000, that is more than two times higher than for self-employed people. But it seems that there is simply no one to point to the discrepancy.
Low taxes mean destroyed infrastructure, and lack of education and healthcare, low pensions, and, respectively, low standard of living of the majority of the population. The reverse side is also clear – excessive taxes can reduce the incentives for economic activity. But Russia again has its own specifics. During the 1990s owners of capital became people who are not economic geniuses, but those who found themselves quicker and smarter. These people would never do business, if the rate of return were 10%, not 100% or even 1000%. Most of the Russian industry markets are oligopolistic with elements of cartel agreement. The basic strategy, which is taught in business schools for top managers of corporations, is to avoid competition. Therefore, it does not exist, and all markets are occupied. Often, companies are steered by incompetent people, but those, who at least know what NPV is, are engaged in development of mobile applications, social networking and other sectors of the “new economy”. That is, even if profitability of a business declines due to taxes and leads to exit of a number of players from the market, their place will sure be taken by those who are able to work more efficiently. Speaking the language of macroeconomics, the Russia is definitely not at the top of the Laffer curve, which corresponds to optimal tax rates, and changes in this area are possible and necessary.
But the most surprising is that the main budget forming tax – individual income tax - in all developed countries has progressive nature, while in Russia it remains for a long time a flat rate of 13%.
In the U.S., revenues in excess of $380,000 are taxed at 35%; in Japan, revenues over 17,000 yen are taxed at 40%. Start for the poor begins with 10% and 5%, respectively. As mentioned above, the problem is not in abstract social equity. The way, in which incomes are distributed, affects development of industries: will this be an exaggerated growth of the financial sector or the production of mass consumption goods and services.
Introduction of a progressive system may not change the share of taxes in GDP, but may only affect proportions of revenue from population with different incomes.
Change of tax policy will increase the well-being of a large number of people, and will increase domestic demand, will concentrate in the hands of the society more resources to invest in development projects without the risk of acceleration of inflation, and will solve social problems.
High Social Standards
In Russia, in spite of allegedly high paternalistic attitudes, the topic of social guarantees was of little interest. In 2005, when the policy of benefit cuts was initiated in order to reduce the tax burden, no one came out on the streets, except for those whom the subject concerned directly – pensioners. The country of established capitalism promoted individualism and self-confidence. It was “trendy” to require “something” from the state. In leading countries in terms of life standards the attitude was very different. Social protection increases risk appetite of the population, and this is the foundation of entrepreneurial activity. No one will start a business, and create something new, if it is highly probable to end up with nothing.
Absence in Russia of adequate minimum wages and the real unemployment welfare, not those, of course, that allow you to do nothing at all, distort the real picture of the labour market and impede innovation. A banal scheme is in action – why invent a tractor, if you can hire cheap diggers, and, seemingly, there’s no unemployment.
Another example is measly scholarships. Approximately by the third year students are forced to go to work, and as a result, few complete their education according to the educational standards, and the labour market has a huge amount of incompetent “experts”, and this has a direct effect on the competitiveness of the economy.
Finally, access to education and healthcare are direct investments in human capital, on which quality the economic growth depends. But even such obvious things are disputed by the Government. The authorities are concerned about the growing number of “lawyers and economists”. What a problem – no one wants to work at the assembly line for measly wages. Let's reform the educational system! And a question emerges – why the market itself cannot manage employment?
The Economy of Participation
Improving the quality of human capital makes possible the redistribution of responsibility within firms and corporations. The problem of a market economy is that it creates incentives for the development of a small percentage of owners of means of production, and the others only sell themselves in the market for a salary. As a result, some want to work less and to be paid more, and others find themselves in the opposite situation. This creates a classical scheme when the productive forces (human capital) are superior in the development over the relations of production – relations of pure wage labour.
Some advanced corporations have long ago understood the situation and built personnel motivation based on their participation in the profits of the capital through a share option plan, entitling employees to shares of the enterprise. In the U.S., about 10% of GDP is created in the so-called people's cooperative enterprises, where the workers along with managers may influence the making of strategic and operational decisions.
The purpose of these models is based on the following idea – if private property has such a motivational potential, then for development and growth it is necessary to ensure that all the participants in the economic process are the owners, who thus could significantly reach their potential and achieve their own goals, in economic activity as well.
Currently, public institutions for business support and the legislation are completely not set up for creating of such enterprises. If you want to open a co-operative, you will have to overcome many barriers associated with registration, accounting and reporting, tax obligations, and it is certainly unlikely to get some incentives and support. Thus, the first thing to begin with is to create conditions, in which set-up of collective enterprises would be at least as difficult as organization of usual private firms. Second, it is necessary to give the right of priority purchase of shares by employees of state enterprises when they are privatized. Clearly, all these ideas have been discredited in the 1990s, when vouchers were handed out to the public that did not understand anything, or more recently, when the so-called people's IPO of VTB was carried out, and people lost half of their investments. But then the purposes of those who initiated these processes were quite different.
Now, the main task is to involve more people in economic processes on the basis of actually democratic and potentially breakthrough institutions of collective ownership. It is worth mentioning that this is not the same entity as the stock ownership. The difference lies in the participation in the production process of a nominal shareholder in the collective enterprise (a co-op). The expectation of success of such projects is based on a significantly greater motivation of the participants, but at the same time it is clear that not all are willing to sacrifice part of their salary or savings to invest in their own company, but such a possibility must certainly exist.
Summarizing all the above mentioned, it should be stressed that the strategy of investing in human capital through progressive tax policy, improving social standards, building institutions of citizens’ participation in the capital of companies is the most important factor in the development of real democratic institutions. After all, the concentration of ownership and income always leads to the concentration of power, but in a society where higher education is unaffordable for most, wages are only enough to recover for a new working day, it is hard to expect real political activity and formation of mass civil institutions from the population.