In this interview with EmergingMarkets.me, Philip Uglow, chief economist at MNI Indicators, a Deutsche Börse-owned research firm, explains what he believes Russia needs to do to achieve sustainable growth.
You have said Russia needs structural changes to its growth model. Could you outline what specifically such changes should be?
Russia’s weak business climate remains a key obstacle to investment and growth. Russia needs to gravitate from its consumption-led growth model towards a model which involves greater investment by the private sector.
Key structural changes:
– Investment is needed to modernise oil and gas production which increasing competition from offshore shale gas and the improving political situation in the Middle East.
A rule of law and policy framework conducive to attract capital is critical (further cutting of red tape, reduction of corruption and removal of other bureaucratic obstacles). Corporate governance should be strengthened to increase transparency and improve the investment climate.
– Tax regime changes, together with strengthened property rights are needed to attract foreign expertise.
– Private sector involvement: The public sector has been the chief job creator and increased hiring by the government has pushed down the unemployment rate in recent years. There is however, a need to mobilize private sector employment to enhance productivity levels and create better jobs. This is critical in light of the reduced budget surplus of the government thereby limiting room for further large fiscal expenditure programmes. Investments in human capital are critical for attracting domestic and foreign investments.
– Weakness also needs to be addressed in key areas, such as inadequate infrastructure (transportation and electricity), constraints on the availability of financing. Large PPP projects should be encouraged.
What do you think stands in the way of such reforms?
Improving the investment climate is a government priority and although some progress has been made, a whole hearted effort is needed. The government probably fears weakening control if more private participation is encouraged. The interference of the government needs to reduce and foreign investors need to be able feel secure.”