- Dear Mr. Prime Minister, dear colleagues on the esteemed panel, dear forum participants.
- Thank you for the invitation to address this distinguished audience.
- In contributing to this panel’s discussion today, I would like to focus on three important questions.
- First, what would be a credible scenario for the world economy in 2016?
- Second, what will such a scenario imply for Russia and the progress it made over the past 15 years?
- And third, and most important, what can emerging markets do to navigate the uncertainty of the global economy? Drawing on experiences around the world, what policy options would governments have to address the emerging challenges?
I. Our just-released Global Economic Prospects report estimates expected global growth and discusses downside risks over the next few years.
- Global growth fell short of expectations in 2015, decelerating to 2.4 percent from 2.6 percent in 2014.
- The slowdown was mainly due to disappointing growth in emerging and developing economies.
- It was accompanied by lower commodity prices, weaker capital flows, and shrinking global trade.
- Growth in developing and emerging economies slowed to 4.2 percent in 2015, marking their weakest performance since 2009 –a pace well below the rates in the 2000s.
- Four of the five BRICs countries – all of them except India – are experiencing slowing or contracting activity, as are many other developing countries.
- This reflects the worldwide nature of the recent slowdown, throughout the integrated global economy.
- Estimates suggest that a sustained 1-percentage-point decline in growth in the BRICs countries would reduce growth in other emerging and developing economies by around 0.8 percent and global growth by 0.4 percent.
- Global growth is expected to recover to 2.9 percent in 2016, and 3.1 percent in both 2017 and 2018.
- However, it’s important to note that these projections are subject to considerable downside risks.
- Further weakness in global commodity prices could result in even sharper fiscal and currency adjustments, resulting in a downward spiral of fiscal tightening and economic contraction.
- Financial market volatility could increase due to rising risk perceptions in markets and sudden reversals of capital flows.
- Given the rapid increase over the past five years, corporate borrowing in emerging markets could come under pressure,
- and could affect both foreign-exchange and local banking-sector stability, if rising dollar interest rates or USD appreciation make it more difficult for corporates to roll over these liabilities.
- Significant spillover effects from the continued weakness in the BRICs economies is another potential risk, notably with the continuing effort to rebalance the Chinese economy toward strengthening domestic demand.
- In addition, the migration crisis, continuing conflicts, and geopolitical instability could have significant adverse effects on the global outlook.
- These factors seem likely to have a sustained impact on consumer and investor confidence – and they could further raise risk aversion by key investors.
II. That analysis brings us to our second question: What will this global context mean for Russia in 2016 and beyond?
- With one of largest subsoil wealth reserves in the world, Russia’s economy drew on those natural resources to drive strong growth throughout the 2000s, with only a brief interruption in 2008-2009.
- Russia not only registered high real GDP per capita growth of around 5 percent a year between 2000 and 2013, but growth in the first decade of the century was also inclusive.
- Since 2000, Russia has been witness to unprecedented growth in household welfare, lifting many out of poverty and allowing many others to join the ranks of a growing middle class.
- Poverty was reduced by more than half and fell from 35 percent of the population in 2001 to 11 percent in 2013.
- At the same time, the middle class more than doubled in Russia from 30 percent to 70 percent of the total population.
- A strong role of the public sector and a robust social contract were important characteristics of Russia’s economic development.
- Russia’s public sector is large and employs about one-third of all formal workers, providing important employment stability for part of the population, but also leaving crowding out a growing private sector.
- A generous social contract, with free health and education for all, led to major improvements in education achievements (such as school enrollment and completion rates), and it produced significantly lower infant-mortality rates.
- However – amid falling commodity prices and rigorous global economic conditions – the sustainability of this growth model and social contract has come under increasing pressure.
- The costs of the existing social contract will be difficult to cover in the coming years, since the sources of government funding from the extractive sectors have shrunk.
- As a result, the fiscal deficit, and Russia’s financing needs, have also increased.
- Russian authorities managed the external pressures well with a set of policies which successfully stabilized the economy.
- For example, the transition to a free-floating exchange rate reduced current account imbalances and helped stabilize reserve levels.
- Meanwhile, measures to support the financial sector appear to have contained systemic risks, and there are some signs of stabilization.
- Downward pressure on federal revenue ushered in a period of difficult fiscal consolidation. A temporary frontloading of expenditures during the first half of 2015 cushioned some of the impact of a 5 percent real expenditure decrease.
- However, falling oil revenues constrained the government’s ability to counter the decline in real income, and nominal increases in pensions and social benefits were below the headline inflation rate.
- This accelerated an already troubling rise in the poverty rate, which climbed from 12.6 percent in the third quarter of 2014 to 14.1 percent in the third quarter of 2015,
- This represents 20.3 million people – or an increase of 2.3 million people, compared to a year ago.
- But key policy challenges remain: how to bring down persistently high inflation? How to jump-start investment and credit growth? And how to transform the budget to one of medium-term sustainability in the face of diminishing fiscal buffers?
- Russia’s growth prospects in 2016 are very challenging as commodity prices are not expected to recover and global growth projections are being revised downward yet again.
- Following the projected 3.8 percent contraction for 2015, we see a further 0.7 percent contraction in 2016, before a return to modest growth of 1.3 percent for 2017.
III. And these realities bring us to our third question: What policies in 2016 could support the return to healthy growth rates Faced with similar situations, what have other emerging markets done? I see three broad areas where reviewing policy approaches could yield benefits:
- making further progress on prioritizing expenditure and improving government efficiency;
- prioritizing policies in the real economy and the financial sector that support expanding new productive activities, which are stimulated by currency devaluation; and
- carefully monitoring the welfare implications of policy choices, including on poverty.
- Let’s consider each of these three broad areas, one by one.
- First, improving expenditure management would help reduce fiscal pressures.
- Risks to fiscal sustainability are rising as existing buffers deteriorate and oil-price projections remain low.
- A comprehensive review will help think through expenditure priorities, which can lead to a change in the structure of medium-term expenditures, as well as increased expenditure efficiency.
- In many countries, these reviews have been instrumental for targeting spending to programs and priorities that show results.
- Second, it is important to return to medium-term fiscal planning and a set of meaningful fiscal rules.
- This is needed to provide predictability not only to government agencies who provide services, but also to firms contracting with the government and to citizens who benefit from public transfers and services.
- Following a federal fiscal deficit of 3 percent in 2015 and a projected similar deficit for 2016 in Russia, subnational finances will become increasingly fragile, with several regions already facing debt sustainability issues.
- A well-designed, medium-term fiscal and economic development program would help subnational governments adjust to the new fiscal reality. It would also help both to ensure an orderly resolution of regional debt obligations and to avoid the interruption of public services currently provided by regional authorities.
- Such countries as Brazil and Mexico provide lessons on successful subnational fiscal adjustment programs.
- The second area of reforms is to help private firms take advantage of the relative price adjustment generated by the recent devaluation by promoting the reallocation of productive factors and fostering firm innovation.
- For example, studies have shown that the largest contributor to firm export propensity in Russia is productivity: A 1 percent increase in Total Factor Productivity is associated with an increase in export propensity of up to 11 percent.
- Russia made great strides in the past 4 years in improving the business climate through regulatory simplification efforts by the government both at the federal and subnational levels.
- Russia improved markedly in the Global Doing Business rankings - from 123d to 51 globally over that period.
- Despite these past efforts, Russia continues to lag behind in a number of areas such as the ease of obtaining construction permits, electrical connections and trading across borders -- the latter being also impacted by Russia’s unique geographical challenges, including its territorial vastness.
- Reforms to address inefficiencies in the business and investment climate could lead to greater productivity of new investments and could boost formal private sector employment.
- For example, about a quarter of management time in Russia is spent on regulation requirements.
- Reducing the cost, time, and number of interactions with authorities have had considerable positive impacts for businesses in many countries.
- Additionally, new private firms would benefit from a competitive level playing field.
- For example, in Russia, due to the dominance of large, older public firms, younger firms have lower probability of survival than in other countries.
- And it is those new firms, which in other countries account for a large fraction of fast-growing innovative firms.
- A firm commitment to the rules of the game for investment and competition will help private firms feel comfortable making medium-term innovation and development plans linked to tangible investments.
- Finally, for a resource-rich country like Russia, distorted energy prices are a big factor in hurting sustainable productivity and are making Russia twice as energy intensive as comparable countries. Increased uptake of energy-efficient technologies would also help Russian firms become more competitive.
- The third reform area is about growth not being just an end in itself, but about how citizens of Russia will be able to benefit from it. This is crucial if Russia is to avoid a reversal of its shared prosperity achievements of the last 15 years.
- Here targeting non-pension social protection spending will be important.
- Pensions are by far the largest transfer provided by the government, and they have had a significant positive effect on income equality. Thus, making the pension system fiscally sustainable would be of key importance.
- Additionally, geographic disparities in social and economic outcomes and service delivery are still quite significant and reflect Russia’s particular geographic challenges and historical background.
- For example, poverty rates vary considerably between regions - from 7.7 percent in Moscow to as high as 35 percent in the Tuva republic.
- Rebalancing fiscal responsibility and decision-making for service delivery between the central and regional governments could help improve the quality of public services and improve accountability and transparency.
IV. In conclusion, working across the world, we see opportunities for countering the challenges of 2016 of lower commodity prices and a slow global recovery through improved spending and productivity.
- This includes focusing on interventions which improve equality and protect the most vulnerable.
- Over the last year, Russian authorities proved they have the capacity and ability to successfully navigate a difficult external environment.
- A clear medium-term policy framework would promote further fiscal and economic consolidation and ensure the sustainability of inclusive growth in Russia.
- I am convinced that our Russian colleagues will continue to progress on these important reform areas and I wish them all the best for these endeavors in 2016 and beyond.
Thank you very much, Mr. Prime Minister, the esteemed panel, and participants of this event.