MOSCOW, January 12, 2017 – Increased productivity and greater investment in human capital and services are essential to achieving sustainable and inclusive economic growth to benefit all of Russia’s citizens, says the World Bank Group’s Systematic Country Diagnostic for the Russian Federation, “Pathways to Inclusive Growth” launched today at the 2017 Gaidar Forum.
The Diagnostic provides a comprehensive analysis of the economic conditions, challenges and constraints facing Russia in the short-and medium- term, identifies general causal chains related to Russia’s interlinked development challenges and opportunities, and proposes a set of broad policy priorities and actions.
Since 2012, growth dynamics in Russia have weakened significantly, following a sustained period of high and inclusive economic growth throughout the first decade of the 2000s, which was bolstered by a favorable external environment and strong macroeconomic fundamentals.
The end of the global commodity super-cycle, particularly the sharp drop in oil prices - Russia’s main export -caused the Russian economy to slip into recession, ushering in a period of difficult economic adjustment. Limited economic diversification and heavy reliance on oil have made Russia vulnerable to terms-of-trade shocks.
The 2014 economic crisis exposed the vulnerability of Russia’s economy. The social contract that has characterized Russia – where the state is entrusted to provide jobs, services and a large system of transfers and subsidies – may be increasingly difficult to sustain under the current fiscal pressures. Declining savings and falling credit growth have contributed to bleak domestic demand, with slowing investment also impacted by high net capital outflows. The resulting low rates of investment limit Russia’s potential for medium-term growth and amplify the need for new drivers of growth.
The Systematic Country Diagnostic for Russia identifies two main pathways: (i) increasing productivity for diversified growth and (ii) deepening human capital gains and improving access to services. It also identifies three requisites for sustainable growth: improved governance, fiscal sustainability and better management of natural resources. Progress in all of these areas is critical for Russia to get back on the path toward sustainable growth and expansion of shared prosperity.
Increasing Productivity for Diversified Growth
This first pathway identifies areas where new policies are necessary to achieve a recovery in productivity – with a focus on the regulatory regime for businesses, infrastructure and connectivity, constraints on innovation by firms, and skills development for individuals.
Russia has substantial potential to revive productivity growth by removing economy-wide, firm- and individual-level constraints on it. Economy-wide productivity constraints include remaining investment climate bottlenecks, market and trade distortions, eroding physical capital, and connectivity deficiencies. Firm-level productivity constraints are associated with limited innovation activity, as well as constraints on individual productivity.
Private businesses in Russia consider the lack of skills to be one of the most severe constraints on their expansion and growth. Despite the very high level of formal education of Russian workers, the current quality and content of education does not develop the skills demanded by the labor market.
“Creating a more conducive investment environment, improving infrastructure, especially transport connectivity, enhancing innovation capacity and developing skills that are demanded by the market are essential to boosting productivity, and thus are key for fostering economic growth in the coming years,” said Cyril Muller, World Bank Vice President for Europe and Central Asia, at the launch of the Diagnostic in Moscow.
Deepening Human Capital Gains and Improving Access to Services
The second pathway identifies areas for policy reform that can help reduce vulnerability, by deepening human capital gains and improving access to public services. Investment in human capital and complementary labor market reforms are essential for increasing the equality of opportunity.
The labor market can again become a source of raising incomes for the vulnerable segment of the population – with improved health and education services and a strengthening of Russia’s social protection system. The main challenge for Russia’s complex social protection system is to improve efficiency and sustainability, focusing social assistance programs on the most vulnerable in society.
“Better jobs are the key to continued shared prosperity,” said Ana Revenga, Deputy Chief Economist for the World Bank. “Investing more effectively in human capital will enable workers to stay healthy, live longer and build skills throughout their working lives.”
While some health-related indicators have improved in Russia in recent years, life expectancy, especially for males, is low and national averages cloak large differences in health outcomes between regions and socioeconomic groups. While pensions have had a larger impact than social assistance on the alleviation of poverty, the adequacy of pensions is low, and the fiscal position of the pension system is aggravated by a relatively low statutory retirement age (55 for women and 60 for men).
Requisites for Sustainable Growth
Sustainable advances along both pathways, however, depend also on progress in improving governance, maintaining fiscal sustainability, and better managing environmental and natural resources. Measures to reduce corruption, enhance regulatory quality, strengthen corporate governance, and improve accountability and capacity in public service delivery are essential elements of a better governance environment.
In the current challenging fiscal landscape, a strategy for managing fiscal risks and improving the efficiency and effectiveness of spending at the national, regional and local levels is increasingly urgent. Over the long-term, the safeguarding of Russia’s vast natural resource wealth and the environment is critical to overall progress and for future generations to come.
“Reform is urgent even though the payoffs of policy actions in many areas will only be evident in the medium- and longer- term. Action should be taken before inequalities and vulnerabilities increase under the pressing fiscal challenges, before demographic changes put too much strain on labor market demands and fiscal resources, and before the opportunity to embed the results of a decade of successful growth fades away,” added Cyril Muller. “In this context, I am encouraged to see the efforts to develop a comprehensive economic strategy to address the key constraints to higher economic growth going forward.”