Illarionov Waves Invisible Hand

Frontier Centre, Role of Government, Uncategorized, Worth A Look

Whether he is a Thatcherite or a Reaganite he would not say, but President Vladimir Putin’s economic guru clearly thinks along the same lines as Adam Smith: The invisible hand of supply and demand will fix it all.

Andrei Illarionov, the man behind Putin’s challenge to the government to double the economy within a decade, unveiled on Wednesday what he says is the first step to achieving that lofty goal — slash public spending.

All the government has to do, essentially, is remain on the sidelines, spend less and stop interfering in the marketplace, because what it has done so far to put the economy back on track is nothing to write home about, was the message Illarionov had for reporters during a PowerPoint presentation at Alexander House.

“The role of the public sector is excessive,” he said. “We should reduce the role of the public sector to an optimum level.”

That “optimum level,” however, is nothing less than roughly half of what federal, regional and municipal governments currently spend, or some 37 percent of gross domestic product.

If the nation is to achieve and sustain annual economic growth of 8 percent, which would double the economy in 10 years, Illarionov said the percentage of GDP that the public sector accounts for should be chopped to between 20 percent and 22 percent.

Moving briskly through dozens of graphs projected onto a screen behind him, Illarionov provided what he called irrefutable evidence of the ills of excessive public spending.

Since 1950, of the more than 120 countries for which statistical data is available, about half, or 68, managed to double their economies within a 10-year span, he said.

“There is no reason why we should remain in the bottom half of the table, which groups countries that have not achieved such rates of growth,” he said.

Since not one of these 68 nations had a public sector that accounted for more than 22 percent of its GDP, reducing public spending should be an obvious call to make for the government, he said.

China, for example, the world’s best-performing economy over the last two decades, maintained a public sector percentage of the economy of 26 percent between 1979 and 1991, a period in which overall growth averaged 7 percent. As public spending dropped to 14 percent, growth rates rose inversely to 9 percent. When public spending went back up to 19 percent, growth rates dropped back to around 7 percent.

If the government heeds Illarionov’s call — which is a big “if” — it is not clear which budget items would be sacrificed. In China’s case it was subsidies to state enterprises and households and defense spending that were victimized.

For Russia, the recipe may be different.

“I would not dare to indicate which expenses could be slashed,” Illarionov said.

Household subsidies, such as artificially low utility prices and health-care benefits inherited from the former Soviet welfare state, are a prime suspect as they account for roughly a third of all public sector spending.

Other issues policymakers need to address, he said, include the government’s anti-monopoly policies, its exchange rate policy, its debt repayment strategy, and the quality of state institutions.

He also had intense criticism for the current Cabinet’s economic performance.

Illarionov broke down economic growth into two factors, including “foreign grants” that result from changes in global prices for exports and imports, and the “policy factor,” or the effect of government intervention.

If adjusted for favorable changes in commodity prices, specifically oil and natural gas, Russia’s economy has been declining since 2001, not growing, he said, adding that it shrank by 2.8 percent, 2.3 percent and a projected 3.7 percent in 2001, 2002 and 2003, respectively.

In absolute terms, the economy shrank at an annual rate of 12 percent in 1992-94 and 2.9 percent in 1995-98, before resuming growth, which has averaged 6.2 percent since 1999.

If the government keeps public spending as a ratio to GDP unchanged at 37.2 percent, it should expect negative annual growth rates of 0.8 percent if the “foreign grant” factor is ignored, he said.

The Frontier interview with Andrei llarionov