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Foreword Consider Russia’s economic transformation in the past ten years.In 1999,Russia ’s economy was essentially bankrupt; it was leaking foreign exchange reserves; it was heavily indebted to the International Monetary Fund and highly dependent on financial assistance from the West; and it had been shrinking at about 6 percent a year since the breakup of the USSR. Today, Russia’s stock of foreign reserves—which it has been accumulating at an average rate of almost 50 percent a year—now stands at about 25 percent of its total GDP. Russia holds one of the largest current account surpluses in the world, and it is one of the largest financiers of the U.S. current account deficit. And its economy has been growing at almost 7 percent since 1999. The average Russian citizen is almost twice as rich as he or she was in the depths of the post-Soviet recession. Russia has come a long way in the last decade. But the good times that Russia’s economy has enjoyed have been driven by a series of idiosyncratic factors that have been—and still could be—mostly fleeting. After the 1998 crisis, the collapse of the ruble led to the expansion of exports and importcompeting sectors. Falling GDP created spare production capacity in Russian industry that could later be brought into production at lower cost. As these early benefits began to be offset by an increasing real exchange rate and rising production, oil and gas prices started their steep climb. The Russian oil and gas sector—less than 40 percent of exports in 1998—make up about 64 percent of Russia’s exports today, earning the Russian economy more than $230 billion in revenue, or about $1,600 a year for every citizen. vii 11148-00_FM_rev.qxd 6/6/08 2:24 PM Page vii viii FOREWORD That level of resource wealth is staggering, but oil and gas exports alone will not make Russia a permanently wealthy country. Despite Russia’s efforts to stabilize oil and gas revenues through its stabilization fund, volatility due to unpredictable changes in oil and gas prices (along with the continuing appreciation of the real exchange rate) can easily undermine non-energy investment and inhibit the emergence of a vibrant private sector outside of the oil and gas sectors. Natural resource wealth often creates powerful incentives to capture and control the power and wealth that resource abundance provides. But more important, oil and gas wealth can divert both investment and attention away from building the economy that Russia will need to compete in the twenty-first century. Competition in the new global economic environment is getting increasingly intense—a process that has been under way for some time.As this book makes clear, only a business environment that creates incentives for firms to invest productively, create jobs, and expand can deliver competitiveness and prosperity. In the past, China, India, and other emerging economies would compete solely on the basis of their low-skill, low-wage activities, slowly working their way up the value-added ladder. In the current environment, however, nations can quickly enter international markets by absorbing technologies , production processes, and management practices from around the world. This volume—the result of collaboration between the World Bank and the Brookings Institution—argues that global competition has created a number of challenges for Russia, some of which Russia is ill-suited to meet unless its economic policies change. Globalization has dramatically increased the importance of productivity as a source of sustainable prosperity. Technology diffusion, skill acquisition, and the absorption of knowledge have become vital sources of economic growth and wealth. The results of knowledge and technology creation can contribute most to growth when they spread throughout the economy and are absorbed by a variety of economic agents, such as entrepreneurs, researchers, and firms of all sizes. But Russia’s labor productivity, although slightly ahead of that of Russia’s neighbors in the Commonwealth of Independent States (CIS), ranks behind the productivity of most of Central Europe, all of the advanced industrialized countries, and countries such as Brazil and South Africa. Russia’s“total factor productivity,” the share of productivity not directly explained by the quantities of labor or capital used in production, also ranks much lower than that of the advanced economies that Russia aspires to emulate. At the same time, rapid technological change and growing skill intensity in many activities has increased the value of workers’ skills and education. 11148-00_FM_rev...

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