Russia: The Challenges of Transformation

2 The Long Road to Normalcy: Where Russia Now Stands

41 chapter two The Long Road to Normalcy: Where Russia Now Stands Vladimir Popov A “Normal” Country? The world economic recession hit Russia harder than other countries due to the collapse of oil prices, the outflow of capital caused by world recession, and poor policies to cope with the shock. The reduction in GDP in 2009 totaled 7.9 percent, as compared to 2.5 percent in the United States, 4.1 percent in the European Union, and 5.2 percent in Japan. Emerging markets, however, did much better than developed countries. China grew by 8.7 percent, India by 5.7 percent, the Middle East by 2.4 percent, and sub-Saharan Africa by 2.1 percent. Only the economies of Latin America, Eastern Europe, and the former Soviet Union contracted, by 1.8 percent, 3.7 percent, and 6.6 percent, respectively. From 1989 to 1998, Russia experienced a transformational recession— GDP fell to 55 percent of the pre-recession 1989 level. From 1999 to 2008, the Russian economy was recovering at a rate of about 7 percent a year and barely reached the pre-recession peak of 1989 (fig. 2.1 and fig. 2.2).1 Now, even with some luck, pre-recession GDP won’t be surpassed until 2010–12. In sum, therefore, for two decades there has been no increase in output. In 2004–05, Andrew Schleifer and Daniel Triesman published an article titled “A Normal Country: Russia after Communism.” They compared Russia to Brazil, China, India, Turkey, and other developing countries, and argued that in terms of crime, income inequalities, corruption, macroeconomic instability, and other typical curses of the Third World, Russia is Figure 2.1 2008 GDP as a percentage of 1989 level [Source: EBRD Transition Report] 0 50 100 150 200 250 Moldova Tajikistan Georgia Ukraine Serbia Bosnia Montenegro Macedonia Kyrgyzstan Russia Bulgaria Croatia Lithuania Latvia Romania Hungary Kazakhstan Czech Republic Estonia Armenia Slovenia Belarus Albania Uzbekistan Slovakia Mongolia Poland Azerbaijan Turkmenistan 165 145 1990 1995 2000 2005 2009 125 105 85 65 45 25 Azerbaijan Turkmenistan Uzbekistan Belarus Central Europe Kazakhstan Estonia Tajikistan Lithuania Armenia Russia Kyrgystan Ukraine Moldova Georgia Latvia Figure 2.2 GDP change in FSU economies, 1989 = 100% [Source: EBRD Transition Reports] 44 Popov by far not the worst—indeed, somewhere in the middle of the list, and better than Nigeria, although worse than China. In short, Russia is a normal developing country. The USSR was an abnormal developing country. The Soviet Union put the first man into space and had about twenty Nobel Prize winners in science and literature. Out of about forty living laureates of the Fields Medal (awarded since 1936 and recognized as the “Nobel Prize in mathematics”), eight come from the former Soviet Union, which had less than 5 percent of the world’s population. The USSR had universal free health care and education —the best among developing countries—low income inequalities, and relatively low crime and corruption. By 1965 Soviet life expectancy increased to seventy years—only two years below that of the United States, even though per capita income was only 20 percent to 25 percent of the U.S. level. The transition to a market economy in the 1990s brought about the dismantling of the Soviet state: the provision of all public goods, from health care to law and order, fell dramatically.The shadow economy, which the most generous estimates place at 10 percent to 15 percent of the GDP under Brezhnev , grew to 50 percent of the GDP by the mid-1990s. In 1980–85, the Soviet Union was placed in the middle of a list of fifty-four countries rated according to their level of corruption, with a bureaucracy cleaner than that of Italy, Greece, Portugal, South Korea, and practically all the developing countries . In 1996, after the establishment of a market economy and the victory of democracy, Russia came in forty-eighth in the same list, between India and Venezuela (fig. 2.3). Income inequalities increased greatly: the Gini coefficient increased from 26 percent in 1986 to 40 percent in 2000, and then to 42 percent in 2007 (fig. 2.4).The decile coefficient—the ratio of the incomes of the wealthiest 10 percent of the population to the incomes of the poorest 10 percent—increased from 8 percent in 1992 to 14 in 2000, and then to 17 in 2007. But the inequalities at the...