The idea that government can revive an economy by spending billions or trillions of dollars is all the rage in Europe, as well as in the United States. It's a failed economic theory now making its way east to Russia, where officials fear the looming economic slowdown.
According to the latest data, industrial production is sliding and projected growth as measured by the gross domestic product (GDP) plunged to 2.4 percent, half of the medium-term growth-rate target of 5 percent. This is the Russian economy's worst performance since 2009, and President Vladimir Putin's response has been to expand government spending on the Russian infrastructure.
Russia is the world's largest energy exporter, and the nation prudently puts proceeds of natural gas and oil sales into a reserve fund until it hits 7 percent of GDP. Economy Minister Andrei Belousov wants to cut the savings account to just 5 percent, diverting up to $15 billion annually into a stimulus.
The former communist country's scheme is nowhere near as damaging as the profligate borrow-and-spend bingeing that has been pushing so many European Union countries to the edge of the fiscal cliff. Russian infrastructure could certainly use improvement, but it's not clear the top-down approach will actually get to the most-needed repairs. As with "shovel-ready" projects here, such spending usually winds up backing projects that are more about spending for spending's sake, resulting in little economic growth. Shovels often have little to do with it.
Even assuming unrealistically large economic benefits, increased spending of $15 billion isn't going to do much to jump-start a $2 trillion economy. Under more realistic assumptions, the program is almost certainly destined to fail.
The stimulus scheme fails to address the real issues. Europe's debt crisis has squeezed demand for energy, which means the Continent is going to be buying a lot less from energy giant Gazprom, which plans to cut capital expenditures by as much as 35 percent this year. At the same time, Russia is having trouble attracting and retaining foreign investment. More than $1 billion of capital fled the country in the first quarter of this year, driven out by high risk and interest rates.
There's increasing pressure to cut real interest rates below the current 4 percent to 5 percent range. That risks driving inflation, already more than 7 percent, further skyward. Manipulating the money supply never yields long-term gains, and monetary easing could very well leave Russia with the same sort of stagnant economy now plaguing America.
A better idea would be for Russia to abandon the placebo of government spending, and emulate Canada, which achieved growth while cutting spending by implementing policies to enhance competitiveness and limiting the size of government. Russia should work to enhance the rule of law, which reduces risk and makes the country more attractive to both domestic and foreign investment the true and sustainable sources of long-term economic and job growth.
The Washington Times
© Copyright 2015 The Washington Times, LLC. Click here for reprint permission.