In a previous blog we discussed the factors that have pushed issues of corruption to the centre of policy debates about sound economic management. A related question deals with the sources of corruption: where does it come from, what are the factors that have nourished it and turned it into such a powerful impediment to sustainable economic development? Economists seem to agree that an important source of corruption stems from the distributional attributes of the state. For better or for worse, the role of the state in the economy has expanded in a major way over the past century. In 1913 the 13 largest economies in the world, accounting for the bulk of global economic output, had an average expenditure ratio in relation to GDP of around 12%. This ratio had risen to 43% by 1990, with many countries’ ratios well in excess of 50%. This rise was associated with the proliferation of benefits under state control and also in the various ways in which the state imposes costs on society. While a larger state need not necessarily be associated with higher levels of corruption—the Nordic countries illustrate this—it is the case that the larger the number of interactions between officials and private citizens, the larger the number of opportunities in which the latter may wish to illegally pay for benefits to which they are not entitled, or avoid responsibilities or costs for which they bear an obligation.
In a recent blog, our colleague Birgit Hansl adds her voice to the chorus of economists warning us of Russia’s coming deceleration. If she is right, this is especially bad news for Russia. If the recent past is an indicator of what may happen; this looming slump will have dramatic effects on the structure of the economy.
A slowdown in Russia means a wiping out of gains made during booms. Russia’s economy has experienced several booms and busts in the recent past. We found that young firms, even if they are efficient, were more likely to die off during a slump. Not so for incumbents. They had staying power independent of their relative efficiency. So much for the new blood that the economy needs to diversify!
Russia's economy is concentrated and dependent on the extraction of natural resources. Recent trends are not promising. Growth in Russia has been limited to a few sectors and to a few firms. Russia is much less diversified today than it was during the Soviet Era, both within and across sectors. The bottom quartile of the manufacturing sector, ranked by operating revenue, contributes 0.6 percent of total manufacturing output while the top quartile contributes 80 percent. In addition, the average share of output for the bottom quartile of firms (in terms of operating revenue) in a manufacturing sector is 0.06 percent while the share of the top quartile is 94.7 percent.
Russia’s fortune and growth prospects remain tied to its most important economic partners in the Euro area and its main export products: oil and gas. In the last decade Russia grew at around 6 percent (if we exclude the crisis year of 2009 - 4.7 percent on average otherwise).
In the past, given the buoyant oil revenues, Russia followed a pro-cyclical growth model of stimulating domestic demand, partly through public investment projects and partly through increasing public wages and other public income sources such as pensions.
If the prices of oil and gas were to drop in the near future, Russia’s growth model might be in need of urgent adjustment.