Article by Dmitry Medvedev.
The structural crisis and the Russian agenda
The world we live in
The quality of growth: strategy, directions and priorities
Macroeconomic prerequisites for growth
Priorities of structural reforms
Retention and development of human capital
Non-economic modernisation factors
The structural crisis and the Russian agenda
The new reality: Russia and global challenges
The times we live in are defined by new priorities, new challenges and new approaches to problems facing Russia and other countries. This article is an attempt to analyse the large-scale changes in the world economy that are directly affecting the situation in this country. While creating opportunities for accelerated development, these changes are also imposing on us restrictions that we are forced to consider.
Therefore, this article will not unfold a detailed programme of action or describe specific economic instruments. There are other formats for this, above all, the decisions drafted and implemented by the President and the Government practically on a daily basis. Naturally, the Policy Priorities of the Government of the Russian Federation to 2018 remains one of the most important policy documents. As for our everyday work, it is based on the plan of priority measures for ensuring sustainable economic development and social stability in 2015, which is often referred to as the Government’s anti-crisis programme.
The times we live in are defined by new priorities, new challenges and new approaches to problems facing Russia and other countries.
Numerous points of tension, as well as local, regional and other crises are keeping the world in an unstable position that cannot quickly be overcome. As for Russia, the situation is unlikely to deteriorate quickly (although precisely this was predicted not long ago). Likewise, Russia is also unlikely to reach the trajectory of growth that was typical for the past decade.
Geopolitics and sanctions are not the only issue; they can account for only part of the problems, because they are the result of more general and fundamental causes, stemming from a deep transformation of the system of world order.
What accounts for the particular complexity of the tasks facing Russia? It's not a matter of simply overcoming emerging difficulties or recurrent problems, crisis phenomena, shortages and disproportions. For all the importance of this work, and in the midst of fairly complex circumstances, it is important for us to formulate strategic goals that we would eventually like to reach, even if the goal seems remote and the road we have to travel to get there seems difficult. Meanwhile, the formulation of this goal is fairly simple: to join (it is tempting to say "break through into," but military terminology is out of place in this context) the group of countries with the highest living standards. Membership in this group is determined by the per capita GDP and the level of economic efficiency, where labour productivity is the main indicator.
The Policy Priorities of the Government of the Russian Federation to 2018 remains one of the most important policy documents. As for our everyday work, it is based on the Government’s anti-crisis programme.
Without a doubt, Russia is one of the most developed countries of the modern world according to many socio-economic parameters and the level of development of human resources and culture. However, the Russian economy remains largely ineffective, and its labour productivity is lagging behind the leading countries, not by some percentage but by several times. This problem did not just emerge in the last few years or even decades. Despite all the sacrifices that were made, neither the centralized-administrative economy, with the absolute domination of the state, nor the subsequent inertia-based raw material model, made it possible to bridge this gap, although the gap in living standards has been clearly narrowed in the past 10-15 years.
It is in this historical and economic context that the aforementioned strategic goals can be described as unprecedented. They are unlikely to be reached if the economy remains in the inertia-driven development model and continues merely to react, in one way or another, to external factors. Practice shows that no “catching-up development” is possible on this road, which is fraught with the risks of a growing gap.
What accounts for the particular complexity of the tasks facing Russia? It's not a matter of simply overcoming emerging difficulties or recurrent problems, crisis phenomena, shortages and disproportions. For all the importance of this work, and in the midst of fairly complex circumstances, it is important for us to formulate strategic goals that we would eventually like to reach, even if the goal seems remote and the road we have to travel to get there seems difficult.
These risks are bound to increase if we focus on explaining the existing problems only by considering objective circumstances, such as the length of our borders, climate, distances or low-populated areas. Global experience shows that these factors are not a final verdict. Canada and Australia have entered the ranks of highly developed countries, despite their low population and vast unpopulated areas. Japan, on the other hand, has a huge population but no free territories or substantial natural resources. It is possible to cite “objective circumstances” in any situation and with any resources: a lot of land is bad, because it is difficult to cultivate it; little land is bad because there is no place to live or sow; few natural resources is bad, because a country will be dependent on imports; abundant natural resources is also bad, because the rest of the economy will not develop; a small population is bad, because there is not enough labour; a large population is bad, because it's impossible to feed everyone…
Our goals require serious reforms. This is now obvious to everyone. We will have to switch to a development model that will allow us to compete more successfully than we did before. This is not at all the old paradigm of “catch up and overtake” in the production of meat, milk, tractors and cast iron. We must learn to be better and faster, and this is the only way of reaching our goals in the changing world of today.
Naturally, it is necessary to be balanced and careful in reforming an economy based on raw materials when their prices are so low. Above all, we must think about how these reforms will affect our people. The state should honestly and without any illusions assess its ability to help those for whom it is difficult to adapt to the new conditions.
The situation is changing very rapidly, and not everyone is ready to accept these changes quite so quickly, whether for psychological or objective reasons. Children, people with disabilities, elderly people and low-income families are those social groups, above all, against which we should measure our future decisions.
Our goals require serious reforms. We will have to switch to a development model that will allow us to compete more successfully than we did before. We must learn to be better and faster, and this is the only way of reaching our goals in the changing world of today.
People are always sensitive to structural shifts in the economy, the social sphere and the labour market, but now we are facing additional difficulties linked with external factors. Therefore, the Government’s task is now twice as difficult: to carry out strategic changes and prevent a serious drop in living standards, even in the midst of these difficult circumstances.
Russia’s development is part and parcel of global processes. The global agenda cannot be formed without Russia's participation. And Russia cannot form the global agenda single-handedly, nor can it simply ignore it by focusing on its own interpretation of success and fairness.
The term “new normal" is being increasingly used in discussions of current and future problems in global development. It came about five years ago after an acute phase of the global crisis and quickly gained ground. New normal means a new normality and perhaps even a new reality. These are the key characteristics that will predetermine global economic development in the upcoming period – essentially, until the next major structural crisis. One can argue about this term’s appropriateness, but in the past few years it has gained a foothold not only in the economic and political discourse. The concept is visibly expanding geographically and conceptually.
It is becoming increasingly obvious that the world’s leading countries are entering a new growth trajectory. This not only concerns new growth rates but also the quality of this growth – the emergence of new production sectors and new geographical patterns for their location.
Russia’s development is part and parcel of global processes. The global agenda cannot be formed without Russia's participation. And Russia cannot form the global agenda single-handedly, nor can it simply ignore it by focusing on its own interpretation of success and fairness.
Developing countries are entering a new growth trajectory. They are bringing significant changes to the global economic architecture. Thus, whereas earlier, practically any US economic crisis impacted the global economy as a whole and the American market was therefore the only focus of attention, today, crisis phenomena can be observed even in a situation where the US economy is not in decline – for example, with the serious slowdown of the Chinese economy.
To all appearances, we are witnessing the first phase of such a crisis. Suffice it to consider what is happening in the Chinese and global economy in the past several months. All the world’s stock markets, without exception, and national currencies in many countries reacted strongly to the situation on the Chinese stock exchange and the yuan’s devaluation. Volatility on the world oil market is also a factor, even though it is in part related to the role of the Chinese factor in the global economy. It is already clear that attention to the Chinese economy will continue to grow. Its transition to a new stage of development is manifesting itself, in particular, in slower growth rates. The economic model as such is changing.
Structural crisis periods are marked not only by the growing danger of dramatically lagging behind, or increasing the existing lag. At the same time, there is also a chance to qualitatively improve one’s situation on the world’s economic and political map. Crisis is always a threat and an opportunity. Breakthroughs “from the third world into the first world” (to quote Lee Kuan Yew, the author of the Singapore miracle), as a general rule, happen amid structural crises, when the possibility arises to spot innovation and put it into practice; importantly, not only technological but also institutional innovation. This is corroborated by the practice and the experience of countries that have emerged from backwardness – Germany, Japan, the USSR, Finland, South Korea and Singapore.
The energy sector – a sensitive sector for us – shows how the global picture is changing.
What appeared to be exotic, an advertising campaign and a local event, is today changing the world economy, transforming global political balances.
Structural crisis periods are marked not only by the growing danger of dramatically lagging behind, or increasing the existing lag. At the same time, there is also an opportunity to substantially improve one’s situation on the world’s economic and political map. Crisis is always a threat and an opportunity.
Large-scale liquefied gas shipments have begun to unite hitherto isolated markets on different continents. The production of shale hydrocarbons has started to convert fuel importers into fuel exporters. Today, hundreds of small- and medium-sized innovative companies are making perhaps a greater impact on this market (and the economy of many countries in general) than the world’s largest energy corporations. Moreover, these companies are showing a high level of stability: An almost two-thirds drop in oil prices has not led to mass bankruptcies. Of course, the situation can change if prices continue to fall. However, the effectiveness of new technology has proved significantly higher than many expected. And this is a serious lesson: One should not keep saying that the earth still stands on three elephants, while the outline of a fourth is already clearly visible.
It is also wrong to ignore the possibility of a sharp increase in the effectiveness of solar energy, whose prospects were viewed skeptically in the past, or the consistent development of electric, hybrid and hydrogen engines. If progress in these fields continues at the same pace, while oil and gas prices do not drop further, the world could encounter a revolution on a far greater scale than even the “shale” revolution.
The energy sector shows how the global picture is changing. Hundreds of small and medium-sized innovative companies are making perhaps a greater impact on this market (and the economy of many countries in general) than the world’s largest energy corporations. An almost two-thirds drop in oil prices has not led to mass bankruptcies. The effectiveness of new technology has proved significantly higher than many expected. And this is a serious lesson: one should not keep saying that the earth still stands on three elephants, while the outline of a fourth is already clearly visible.
Another important trend has emerged: Some well-known energy companies have begun to review their strategy, preferring to create relatively small capacities – cheaper and more flexible in market terms. Big and expensive energy projects take years to build and decades to recoup their costs: During this time, demand, energy prices and the policy of the state where a project is being implemented can change drastically. Previously, these parameters seemed to be more stable, but now the planning and forecasting horizon is far shorter. As energy strategists say, “the world has become faster.”
Modernisation spans all spheres of society’s life – technology, the economy and the humanitarian sphere. Within the limits of one article, it is only possible to enumerate these trends, but each merits independent discussion.
The main condition for finding an adequate response to current challenges, such as the growing level of uncertainty and variability, is to encourage creativity, enterprise and lifelong learning. This is true for governments, businesses and individuals. People are creative animals, and it’s a major duty of the state to encourage creativity in all areas of life.
Among the technological innovation trends, the following should be singled out:
- greater technological unpredictability, which narrows opportunities for centralised technological (scientific and technical) forecasting;
- the spread of digital technology to all spheres of the material world (if you will, the virtualisation of the life of people, companies, and even states);
- new industrialisation, i.e., the emergence of industrial technology and sectors that prioritise the availability of quality R&D projects and clients over labour costs (high labour costs);
- increasing innovative technological transfers from the civil to the defence industry sectors, whereas in the past the process was in reverse (innovations first appeared in the military and industrial complex).
We should closely monitor development trends in the social sphere, as it is responsible for the quality of human capital and hence the country’s competitiveness. These include:
- global competition for human capital, which is becoming the main condition for achieving strategic goals in any country. This competition is getting tougher. We can assume that it will reach a new level in the near future, for example, when computer translation is improved and workforce mobility is boosted by the narrowing of the linguistic divide between countries;
- the development of a new social welfare state that will satisfy the standards of modern industrialised countries. Its fundamental element will be the provision of personalised services, primarily in education and healthcare;
- and lastly, growing inequality is becoming a major issue on the economic and political agenda, because it influences socio-political stability and could hinder economic growth.
The recent key economic innovations include:
- the personification of goods and services is replacing standardised wholesale production. Of course, this personification differs from the pre-industrial craftwork. It is production geared to the requirements of an individual consumer;
- the creation of new financial instruments that expand the limits of investment in new projects. To a degree, it is financial innovations that have provoked the global crisis, yet the world’s nations will not abandon them for more primitive instruments or the practice of bans, but will continue to develop ever more sophisticated regulation instruments;
- the creation of new industrial sectors, where capital turnover ratio is higher than in the sectors that use traditional technology, is narrowing the divide between operating expenses with capital expenses. This, in turn, dramatically increases the flexibility of response to market and technological changes, as evidenced by the creation of new shale oil and gas technology;
- the development of a new globalisation model and the corresponding form of protectionism. Regional and interstate free trade associations, which can resolve issues that have been stuck at the WTO for decades, are gaining prominence. Exchange rates are becoming a much more powerful instrument for protecting the market than customs duties. Instead of trying to protect their customs territories, states are now working to protect added-value chains generated by national businesses.
We also need to highlight macroeconomic challenges,
for uncertainty has been growing here, just as in the sphere of technology. I’m
referring, in part, to the far from obvious solution to the following dilemma:
How to prevent the antirecession policies, which many countries have adopted in
the form of bailout packages since 2008, from sending inflation sky-high, even
if some countries should fight inflation and others deflation ? The future of
quantitative easing is dim, as it’s unclear how to break this habit. Meanwhile,
some countries offer money at extremely low interest rates, yet business is not
eager to borrow. As for large multinational companies, they have accumulated
huge reserves by avoiding investment projects.
Considering Russia’s geographic and geopolitical standing, we not only can but must develop the Eastern dimension of cooperation more energetically.
In other words, this is a period of uncertainty, temporising and wariness of new realities. It is not company or bank debts, but sovereign debts that have become a problem. It’s a moot question if reserve currency countries will or can repay their debts, but all the other countries will definitely be unable to do this. There is no honest and convincing answer on how the global economy and the global monetary system will react to this non-standard situation.
How should the state and society respond to these challenges? What should they do to keep up the pace or, better still, to surge ahead?
The main condition for finding an adequate response to current challenges, such as the growing level of uncertainty and the growing number of variants, is to encourage creativity, enterprise and lifelong learning. This is true for governments, businesses and individuals. People are creative animals, and it’s a major duty of the state to encourage creativity in all areas of life.
Creating a favourable environment for the economic actors pretty much describes the model that should provide the new quality of growth. This requires consolidation of our efforts in four areas that define the nature of the country’s social and economic development: macroeconomics, structural policies, human capital development and public administration.
These specific features of the current phase of technological progress that have given rise to the key trend for an all-round liberalisation of the economy and the reduction of red tape. There is no other way, considering that the “world is becoming faster.”
Of course, there are many examples of a policy or decisions that are not consistent with, or even contradict these goals. Sanctions are one example of this. It’s very difficult to provide examples of sanctions that are effective and achieve the stated goals. All sanctions are lifted, sooner or later, letting relations resume a natural course.
This equally applies to our relations with the West. Although our current relations are a manifestation of a crisis, we are certain to resume cooperation. Russia will not withdraw from Europe economically, politically or in terms of mentality. Nearly 250 years ago, Catherine the Great issued her famous Nakaz or Decree that stated, “Russia is a European power”, and this remains true despite the major changes that have taken place in the world. It would be futile to try to break Russia away from the European civilisation and its cultural diversity. Relations can change, but the strategic goals must remain the same: cooperation, partnership and, in a favourable situation, a common economic space.
In the next three years, inflation should be brought down to 4 percent. This is an important condition for prosperity growth, for access to credit for businesses, and for greater predictability of economic life in general.
Considering Russia’s geographic and geopolitical standing, we not only can but must develop the Eastern dimension of cooperation more energetically. I’m referring to such countries as China, Vietnam, Japan, the Republic of Korea and all other Asian-Pacific nations, as well as the SCO and BRICS countries that are located in other parts of the world. It would be wrong to interpret this activity as Russia’s intention to change its course. When we highlight the importance of this cooperation vector, we don’t only mean our historical ties, the history which Russia shares with many of these countries, or the current situation in the world. The global agenda, market dynamics and the direction of financial, trade and technological trends show that an incorrect assessment of the importance of relations with these countries and regions would have strategic consequences.
The quality of growth: strategy, directions and priorities
Most key parametres, guidelines and risks in Russia’s social and economic development are named in the Policy Priorities of the Government of the Russian Federation to 2018. Long-term challenges and solutions will be reflected in the Strategy of Russia's Socio-Economic Development to 2030.
First of all, we are tasked with ensuring dynamic and sustainable economic growth in the medium and long term. And here we need to be aware of two risks.
We also need to keep the two most important macroeconomic achievements of the last fifteen years – a balanced budget and low government debt.
On the one hand, there is the risk of artificial acceleration. We know from our own experience of 1986-1989 that an impulse to quickly warm up the economy can be disastrous – even if for some time, for a year or two, the growth rate actually spikes. But the Soviet Union paid for that short-term acceleration with an exponential growth of its external debt, which Russia had to take on after the disintegration of the USSR.
On the other hand, the psychological adaptation to low and even zero growth is also dangerous, and so is their acceptance as inevitable. This much is evident from the economic and political debate underway in recent years. If this kind of psychological setting becomes predominant in society, it opens the way to a prolonged recession. That's why the key task now is to ensure not only a faster pace, but a new quality of economic growth.
It would be unacceptable to achieve a balanced budget at the cost of a substantial deterioration in its quality.
There has been much talk about the need for a new growth model. And this is actually true, as both external and internal conditions for Russia’s development have changed seriously, even fundamentally. There is no need to mention the well-discussed depletion of opportunities for successful development based on the inflow of financial resources from foreign markets. I can only add that this growth is not very sensitive to the investment climate.
Now the conditions in which our industrial companies operate, their incentives to increase productivity are coming into focus. A comfortable environment for the economic actors pretty much describes the model that should provide the new quality of growth. This requires consolidation of our efforts in four areas that define the nature of the country’s socio-economic development: macroeconomics, structural policies, human capital development and public administration.
Macroeconomic prerequisites for growth
Creating a comfortable environment begins with ensuring macroeconomic stability. Low inflation and a balanced budget remain a priority for the country's sustainable development.
In the next three years, inflation should be brought down to 4 percent. This is an important condition for prosperity growth, for access to credit for businesses, and for greater predictability of economic life in general.
We have decided not to raise taxes in the coming years (a downward adjustment is possible, albeit selectively, which is already happening, or at least being discussed). We also need to contain the growth of fiscal charges of non-tax nature.
We also need to keep the two most important macroeconomic achievements of the last fifteen years – a balanced budget and low government debt. And we should be talking not only about the federal budgets, but also about regional budgets that are burdened with debt.
The structure of the budget expenditures and their efficiency is no less important than a balanced budget. First, there is a need for clearer spending priorities in terms of their impact on long-term growth. Research and experience of many countries shows that investment in people, including healthcare, education, science and infrastructure should be the priority here. Of course, budget constraints prevent us from fully addressing these priorities today. But this does not make them less important. Therefore, it would be unacceptable to achieve a balanced budget at the cost of a substantial deterioration in its quality. Second, the problem of increasing the efficiency of budget spending, which is certainly nothing new, has now become even more urgent.
Given the current economic growth deceleration, budget
problems should not be solved at the expense of increasing the fiscal burden.
We have decided not to raise taxes in the coming years (a downward adjustment
is possible, albeit selectively, which is already happening, or at least being
discussed). We also need to contain the growth of fiscal charges of non-tax
nature.
Priorities of structural reforms
Macroeconomic stability is essential but not sufficient for successful development. Low inflation and a healthy budget do not automatically lead to growth.
It is crucial to create modern mechanisms to finance economic growth and modernisation. This is important in any situation, but even more so now. Russia is struggling with the shutout of several external sources of financing at a time as well as with lower oil prices. It would be only reasonable to assume that at least the oil market will remain low or even extremely low for a long time. This clearly requires greater attention to domestic sources of financing and domestic savings, and a higher rate of accumulation in the economy.
Public investment cannot be the main source of growth for all time. Neither can the government be used as a printing press: the freedom of uncontrolled emission of money is one of the most dangerous freedoms.
Undoubtedly, state investment should play a role here, especially now, when they allow a certain degree of compensation for the low activity of private investors. We have taken this path, allocating additional resources, providing state guarantees, using specialised forms of financing (Industry Development Fund, project financing with the Central Bank support, and others). We resort to the National Wealth Fund, one of our last-resort funding sources and using such incentives as investment benefits and investment contracts.
But state investment cannot be the main source of growth for all time. Neither can the government be used as a printing press: the freedom of uncontrolled emission of money is one of the most dangerous freedoms. Any references to the Western experience of using money emission to stimulate growth are untenable. First, those were carried out during deflation (a direct opposite of our situation). Second, the results have not confirmed the effectiveness of that practice. And third, those measures have already led to more problems with solutions yet unknown (suffice it to mention the apocalyptic forecasts for the US dollar).
Moreover, the high share of government ownership in the economy in itself is becoming a cause of limited availability of investment resources. Companies co-owned by the state often face faster growth of costs than in the private sector, as well as a negative cash flow from some investment projects.
Despite the geopolitical complexity, sanctions and other constraints, we must not forget about the issue of attracting foreign investment. Underestimating its importance would mean that we accept the logic of isolation imposed on us.
Attracting private investors should come to the spotlight in the government policy at all levels. This problem has gone out of focus in recent years, since there was a strong inflow of financial resources. Now the federal government, the regions and municipalities have to carefully analyse what they can do to make businesses want to invest, and to do so in their jurisdictions.
Domestic savings are a vitally important source of investment. Therefore, the pension system development needs to be considered from this perspective. It is one of the key problems of the economy we are discussing. After all, pension savings and life insurance can be an important source of long money. In this regard, we cannot ignore issues of private pension funds’ reliability and efficiency. They still need to learn how to make pension savings work. Therefore, pension funds are the focus of the government’s attention, and it is the financial regulator’s job to effectively organise and oversee non-state pension funds’ operation.
Despite the geopolitical complexity, sanctions and other constraints, we must not forget about the issue of attracting foreign investment. Underestimating its importance would mean that we accept the logic of isolation imposed on us.
Attracting foreign investment should help resolve a
specific problem: to ensure technology transfer. Today Russia is not among the
world's technological leaders in many important areas. High-tech exports
account for no more than 1.5 percent of our total. Therefore, foreign
investment should be viewed as more than just the financial resources involved
(we attracted a lot of money, but did we use it wisely?). Technology and
know-how are worth more than that.
Import substitution is
another important element of the Government’s work. But
we must prevent it from becoming a short-term campaign. We should remember that
in the 20th century several Latin American countries implemented this policy to
close their markets to foreign competition and then subsidised domestic
production with borrowed funds, which resulted in financial collapse. We should
take this into account in order to understand that import substitution does not
mean replacing foreign products with more expensive and lower quality domestic
goods.
Of course, import substitution is unconditional for certain specific spheres and products, irrespective of the expense. But applying the same metric to the economy as a whole would be dangerous and even impossible. The best form of import substitution is the production of goods that would be competitive both on the domestic and foreign markets: exportability can be interpreted as the ability to compete with other goods, including imported ones. This import substitution could merit government support.
Import substitution is another important element of the Government’s work. But we must prevent it from becoming a short-term campaign. We should remember that in the 20th century several Latin American countries closed their markets to foreign competition and then subsidised domestic production with borrowed funds, which resulted in financial collapse. We should take this into account in order to understand that import substitution does not mean replacing foreign products with more expensive and lower quality domestic goods.
Another important task is to boost competition. A market economy that is uncompetitive has very low potential, if any. This has become a crucial issue, because the rouble's devaluation objectively reduced the amount of imports on the Russian market. Sanctions and import substitution are only strengthening the effect. Taken together, this can further reduce the competitiveness of the over-monopolised Russian economy. Another obstacle is the growing interference of the state in industries where its presence is completely unnecessary. The underdevelopment of small and medium-sized businesses is further aggravating the situation.
We should overhaul our regulatory authorities to boost competition. Seeking to comply with official/unofficial ticket quotas, regulatory employees tend to act contrary to common sense. These actions discredit the system of government oversight and clearly show that the agency’s true goals have long been forgotten or are disregarded. The recent proposals to limit the number of small business inspections and the application of antimonopoly laws against small companies are evidence that we are changing our attitude toward regulation.
And lastly, competition can only develop with a system of alternative employment or re-training for dismissed personnel, a more flexible employment market and measures of small business assistance. We need to move towards this, including by creating a national vacancy database that will include information about a job’s social benefits package and other conditions, and adopt regional workforce mobility programmes stipulating the recruitment of workforce from other regions. We have not yet done enough in this sphere, because we have little, or worse still, negative experience. The decreed and often forced movement of large groups of workforce certainly doesn’t meet modern market conditions, and the necessary infrastructure, primarily social elements, is underdeveloped.
We should overhaul our regulatory authorities to boost competition. The recent proposals to limit the number of small business inspections and the application of antitrust laws against small companies are evidence that we are changing our attitude toward regulation.
The absence or shortage of these conditions is a major
socio-political obstacle hindering the development of a competitive economy,
and can be used to justify retaining excessive workforce and ineffective
companies.
Retention and development of
human capital
The welfare state principles, which were developed over a century ago, are inconsistent with modern realities. Greater prosperity and new demographic trends call for major adjustments to existing approaches.
The competition for human capital, which has become more mobile, is exacerbating. It is not uncommon for people to live in one country and work, study and get medical treatment in another. We cannot remain on the sidelines of such competition. Moreover, people increasingly prefer to have a choice of different options in their own country. In general, we need to structurally upgrade respective industries.
Competition can only develop with a system of alternative employment or re-training for dismissed personnel, a more flexible employment market and measures of small business assistance. We need to move towards this, including by creating a national vacancy database and adopt regional workforce mobility programmes stipulating the recruitment of workforce from other regions.
In the sphere of education, we will need to overcome structural problems, which are becoming increasingly conspicuous. First, we are facing, to use the economic terminology, a surplus of university educated professionals, and a shortage of specialists with secondary technical training background. Second, higher education has become almost universal, which affects its quality. It is therefore necessary to improve its quality without making it less accessible.
Lifelong learning has become an important part of our life. Now the well-known adage, "to learn, to learn, to learn," will be true for people throughout their professional careers. There’s also an issue of adult and senior education, such as acquiring computer literacy or training in different skill sets. Modern universities should be capable of attracting both high school graduates and investors, who are willing to put their money in education. It’s an important criterion of their effectiveness. Universities and other institutions of higher learning that ignore the new reality or respond to it in a formal manner will lose in the toughening competition. Our universities, at least the leading ones, compete not only nationally, but also on the global market. This poses a major problem for our education and healthcare. If the demand for quality services concentrates outside the country, it will therefore decline inside the country, and the quality of such services will deteriorate.
Much will need to be done to meet these requirements, such as to create a mechanism of incentives for companies involved in developing the material base of educational institutions, including the formation of endowment funds, to support distance education modernisation projects, to create a national open education website, and to restructure and reorganise higher schools whose graduates are not in demand on the labour market.
In the sphere of education, we will need to overcome structural problems, which are becoming increasingly conspicuous. First, we are facing, to use the economic terminology, a surplus of university educated professionals, and a shortage of specialists with secondary vocational training. Second, higher education has become almost universal, which affects its quality. It is therefore necessary to improve its quality without making it less accessible.
Equally or even more complex problems will need to be addressed in the sphere of healthcare. Investments in medical equipment, the largest in Russia’s history, and an increase in doctors’ salaries are an essential but not sufficient condition for overcoming these challenges.
I can cite several paths in management and technology that the Russian healthcare industry will take in the future. They include the priority development of primary healthcare, the development of the so-called treatment protocols (clinical guidelines for providing medical aid), the development of telemedicine, the introduction of electronic medical records that can be accessed by any doctor or any hospital chosen by a patient.
In fact, the right to choose and competition between doctors and medical institutions is one of the important factors that make insurance-based healthcare attractive. I can’t say that insurance medicine is a perfect solution in all countries. However, judgements about its results can be passed only if it was introduced more than just technically.
The
introduction of insurance principles hasn’t been a smooth process in our
country. This has to do with the role of insurance companies, the impact on
prices and the quality of medical services. However, we have made the choice
and won’t give up. A working insurance model will become a reality only if
government guarantees for free medical care are clearly outlined.
The pension system and prospects for its
development are one of our fundamental social and economic challenges. There’s
more to it than just discussing the retirement age or the amount of budget
funds needed to cover the Pension Fund deficit. In fact, the issue can be
formulated as "special treatment for each age group."
With an absolute decline in the working age population in Russia, it is critically important to focus on people who are willing to continue to work. Extending active employment period is now not only a social, but also an economic issue. There are very few countries that achieve economic growth with a reduced working population. This is another major challenge facing Russia.
The introduction of insurance principles hasn’t been a smooth process in our country. This has to do with the role of insurance companies, the impact on prices and the quality of medical services. However, we have made the choice and won’t give up. A working insurance model will become a reality only if government guarantees for free medical care are clearly outlined.
Supporting senior citizens is a separate issue. They often need help that their relatives, even if they are there, are unable to provide. This help doesn’t always have to do with money. Primarily, it’s a matter of time and effort. They get help from volunteers and community organisations, but appropriate public services still must be available.
Just like demographic processes, pension systems are slow to change. In the future, we may be faced with a situation where the number of retired people will be equal to the number of employed people. Clearly, this will entail a sharp increase in the tax burden, reduction in the amount of retirement benefits, and other extremely undesirable consequences. To avoid this, our economy, finance, and social and pension systems must respond early to such prospects.
Non-economic modernisation factors
To ensure our successful development, it is imperative to sharply improve the quality of public services and the quality of governance.
First up, the issue is about providing personal and property security. Firm policy aimed at protecting property rights and limiting lawlessness in this sphere brings the most sustainable and lasting benefits for the economy, as does a smart system of checks and balances designed to protect businesses from undue administrative or law enforcement pressure.
It is extremely important to form a competitive jurisdiction in Russia, which requires an effective judicial system in place. This is a complex issue, since it involves institutional decisions and changes in the education system, and, most importantly, customs and practices.
Effective jurisdiction is a task no less daunting than economic efficiency. They go hand in hand, because the former is a prerequisite for the latter.
The pension system and prospects for its development are one of our fundamental social and economic challenges. There’s more to it than just discussing the retirement age or the amount of budget funds needed to cover the Pension Fund deficit. In fact, the issue can be formulated as "special treatment for each age group."
Forming a consolidated court system is an important step in modernising the judicial system. However, this is just the beginning, and organisational changes alone will not make a difference. Importantly, transformations in the judicial system should ensure an inflow of fresh, highly educated people. It is no less important to make use of modern information technology, which can improve transparency of the judicial system and its decisions.
Improving governance quality has been discussed extensively recently. This is also a complex issue, because it includes streamlining state administration bodies and forming decision-making mechanisms, including strategic planning, introducing modern management techniques and, finally, personnel training.
It is necessary to establish a system of accountability for authorities of all levels for their decisions. Of course, they must have access to relevant legal and financial resources. Funding and planning programmes, evaluating and promoting officials should depend on achieving quantifiable objectives (final results).
Today, one of the key government objectives is to stimulate investment activity. Success in this sphere largely depends on the willingness and the ability to work to improve the business climate and to persuade businesses to invest in the corresponding economic sectors and regions. This should be a basic criterion when it comes to evaluating the work of the executives at different levels of government.
With an absolute decline in the working age population in Russia, it is critically important to focus on people who are willing to continue to work. Extending active employment period is now not only a social, but also an economic issue.
The state decision-making system can hardly be considered truly comprehensive if it’s not based on integrity and consistency. The law on strategic planning provides foundations for creating a goal-setting system. However, it’s not about recreating Soviet-style bureaucratic planning. It’s all about self-control, so that the strategic objectives aren’t reduced to catchphrases at a time when current tactical decisions are in conflict with the long-term objectives.
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To sum up, some important conclusions can be made regarding the ongoing changes
in the world and at home, as well as the tasks that we are facing.
First, as a result of the global crisis, a “new reality” is emerging in the world, embracing not only the economy but also all significant aspects of life in modern society. The world’s leading countries are entering a new growth trajectory. This applies to the rates, factors and quality of growth. Many of the criteria that were used to assess development trends in the late 20th–early 21st century need reviewing. New technology and innovations introduced by small companies, among others, are radically changing entire markets and sectors within short timeframes. This leads to changes in market behaviour, including approaches to the implementation of major long-term projects.
Second, according to many social and economic parameters, Russia is a developed country, and so its problems should be compared, above all, to [those of] other developed economies. At the same time, we also have certain advantages of a developing economy that we can and should utilise, both to overcome the present crisis and meet long-term challenges.
Needless to say, this is no reason for proud complacency: our place in the world creates additional challenges and difficulties for us. In fact, Russia’s wish to be an organic part of the developed world arouses resistance from our potential competitors. The geopolitical tension of the recent period is to a large degree related to these circumstances.
Third, it is essential to form a new economic growth model responding to modern Russian and global realities. New, long-term “rules of the game” are being developed today in the midst of the global crisis. A new model is being designed, in the medium term, to ensure dynamic and sustained economic growth for Russia at a pace above the global average and accompanied by qualitative structural changes.
Fourth, human capital, which is the most important and at the same time the most dynamic factor of modern production, is emerging as a key field of international competition. This competition will be tough, as a clear understanding has evolved in the world, namely that leading positions will be taken by countries that are becoming the most attractive to well-educated and energetic people.
Fifth, the search for an effective response to the challenges of a rapidly changing world has created a key trend toward economic liberalisation. This is recognised not only by developed countries but also by many developing countries seeking to create appropriate conditions for innovation and transfers of both capital and technology.
Practice shows it is not enough to plot the right course. It is equally important to bring it home to society as a whole, and most importantly, to ensure its implementation. This is, in fact, our primary task.
All this points to the following priority tasks, the fulfilment of which is key to the country’s sustained development.
First, ensuring macroeconomic stability, including a balanced budget and the consistent reduction of inflation to the set targets. This will enhance predictability and trust in the national economy. In addition, lower inflation should be accompanied by the reduction of market interest rates, i.e., increasing the availability of loans to businesses and individuals.
Second, increasing the effectiveness of budget spending. Investment in infrastructure and in people should be considered among the top priorities. At the same time, a balanced budget should be ensured on the assumption that the fiscal load must not be increased in the next several years.
Third, consistent implementation of a course towards securing investment and enhancing its role in ensuring economic growth. The state is already utilising and will propose new forms of support for investment activity. However, state stimulation should not be excessive, but most importantly, the state cannot replace private investors. The effectiveness of the relevant elements of the state apparatus, including regional administrations, should be assessed based on their ability to secure private investment.
Fourth, domestic savings should become a major source of investment. This is a strategic goal for years to come, but it is important to move towards it. In this context, we will also address the issue related to the effective use of pension savings. The pension and insurance system is the primary source of “long money” in the economy.
Fifth, the development of the small and medium-sized business sector as a prerequisite of sustainable economic growth and at the same time, as a factor of social stability. The dynamics of the small and medium-sized business sector is one of the most significant indicators of the country’s economic and social health.
Sixth, stimulating competition. One of the primary causes of weak competition is concern about social stability in companies and the regions. This is why the development of a modern labour market is becoming both a social and economic problem. A formal approach towards it will impede the accelerated creation of highly productive jobs.
Seventh, stimulating the growth of sectors other than raw materials (in absolute figures and as a share of aggregate export volumes). Among other things, this would indicate that import substitution has really started working and bringing positive results.
Eighth, qualitative shifts in the effectiveness of state administration. A system of responsibility for the decisions that are made on various levels of government needs to be put in place. Assessment of officials’ performance and programme funding should be tied to specific results. The decision-making system should become integrated and consistent, so that tactical decisions do not come into conflict with the declared long-term guidelines.
Practice shows it is not enough to plot the right course. It is equally important to bring it home to society as a whole, and most importantly, to ensure its implementation. This is, in fact, our primary task.
