Russia: Five Reforms to Increase Productivity, Diversify Growth
With Russia exiting a two-year long recession after a recent crisis, the time has come to implement necessary reforms to increase productivity—the foundation of sustainable growth and higher living standards—and foster new sources of growth, the IMF says in its latest economic report.
The need for a new growth model was already apparent before the recession. In the past, high commodity prices favored an economy dominated by oil, gas, and mining. Indeed, the high rate of return on commodities discouraged the development of alternative and more sophisticated products. In addition, structural constraints have discouraged private investment and the development of the non energy sector, resulting in a slowdown in catching up with income levels in advanced economies.
Russia should tackle structural shortcomings in its economic structure, which have remained largely unchanged from before the crisis. The IMF report also offers some suggestions to take advantage of the emerging opportunities from a more competitive exchange rate.
Improving the investment climate. Reforms in Russia should start with strengthening property rights and contract enforcement to reassure investors. Russia should also reduce its burdensome business operating and licensing standards, and heavy regulation, which often discourage international participation in the domestic economy.
Investing in infrastructure. As the world’s largest country, Russia’s transport network—roads, railways, and ports—is vast but unevenly distributed across regions and of poor quality. Investing in this type of infrastructure would increase connectivity. It would also improve the profits of firms through reduced transportation costs, easier access to domestic and foreign markets, and enhanced mobility of labor, allowing people to relocate for better paying jobs.
Creating a more efficient goods market. Reducing burdensome procedures associated with trade, such as complicated customs clearing procedures on imports and exports, would increase exposure to international competition, thereby increasing the efficiency of domestic firms.
Strengthening trade relationships. Russia’s preferential trade agreements with neighboring countries should be extended beyond immediate neighbors. This would open the door to new foreign markets and integrate the country into global commerce. If Russian prices get more competitive, exporting Russian companies would be able to benefit more.
Supporting innovation. Russia needs to allocate more resources to research and development, focusing on science and technology. The ability of companies to improve efficiency and devise innovative products and services using new technologies is key for better productivity. But a prerequisite of that is a good institutional and business environment and an efficient goods market to secure the returns to innovation policies.