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OECD Tells Russia How to Do Better

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eng.news.kremlin.ruBy Jaya Ramachandran
IDN-InDepth NewsReport

PARIS (IDN) - As Russia gears up for the presidential poll, wading through the controversy surrounding Vladimir Putin, the 34-nation Organisation for Economic Cooperation and Development (OECD) is telling Moscow that "modernisation and social inclusion" are vital to the country's economic development.

That is the key message of two newly published reports – OECD Economic Survey of Russia and the first Review of Russia's Labour Market and Social Policy – launched in Moscow on December 12 by OECD Secretary-General Angel Gurría and Russian Minister of Economic Development Elvira Nabiullina.

"These reports are particularly pertinent as we work together towards Russia’s accession to the OECD," Gurría said. All the more so as "Russia is not yet fully exploiting the growth opportunities offered by its rich endowment of natural resources and the high skill level of its population." Modernisation will reduce the public budget’s dependency on oil revenues and stimulate diversification of the economy," he added.

This Economic Survey is the 8th since 1995, and this time, the focus is broader than usual. As part of the accession process, OECD has reviewed developments since the early 1990s, attempting to benchmark Russia's policies and outcomes against OECD countries in a large number of areas.

As an integral part of Russia's accession process, the Labour and Social Policy Review focuses on the country's main social policy challenges.

Highlighting some of Russia's achievements, the OECD Secretary-General said: "Many of Russia's socio-economic indicators and policies settings are within the range of those seen in the OECD area. In some areas Russia is even ahead of the game."

He referred in particular to education. Russian 15 year-olds do better in the Programme for International Student Assessment (PISA) of performance than their counterparts in several OECD countries. Enrolment in tertiary education is strikingly high. Labour force participation and employment rates are also relatively high, and Russia's unemployment rate is close to the OECD average, at 8.5 %.

Russia is catching up with OECD countries in other areas too. For example, the wide gaps in per capita income and labour productivity that exist between Russia and OECD countries have been closing for over a decade. Meanwhile, macroeconomic policymaking has become much more transparent, and institutions have been substantially modernised.

"In the macroeconomic area, Russia has managed its sovereign debt wisely by paying back almost all of its public debt and accumulating financial assets that exceed the remaining debt stock. A substantial part of the revenue windfall from the rise in oil prices prior to 2008 has also been saved," noted Gurría.

But there is no room for complacency, he added, because important deficiencies remain. While the overall budget is likely to be in surplus this year (2011), the non-oil deficit remains above 10% of GDP, much higher than the ceiling of 4.7% enshrined in the currently suspended Budget Code.

"To address this challenge and reduce vulnerability to sharp fluctuations in oil prices, Russia will need to consolidate its public finances faster, diversify its economy, and save part of the revenue from non-renewable resources," said Gurría, a Mexican national.

Deficiencies

Besides, there are still several structural areas where the gap between Russia and OECD countries remains wide, with no clear trend towards convergence. The OCED chief gave three crucial examples: the environment for business, energy efficiency, and social challenges.

First, Russia's business environment compares very poorly with OECD benchmarks. State involvement in the economy is pervasive, and the country's foreign trade and investment regimes are relatively restrictive.

OECD regards these as important weaknesses in governance, with endemic corruption and weak rule of law. And, these deficiencies are reflected in low levels of competition, sluggish innovation, low investment and dependency on natural resource extraction.

OECD is of the view that some progress has been made, but there needs to be a more concerted effort to cut red tape, deepen judicial reforms, eliminate corporate subsidies and liberalise international trade and investment.

"In this area, needless to say, completion of negotiations on accession to the WTO is a most welcome step. Let me just underline here that this is just one of a number of necessary conditions for OECD accession," Gurría said.

Second, the energy-intensiveness of Russia's GDP is among the highest in the world. Low energy prices that do not fully reflect marginal costs are leading to poor environmental outcomes and a highly carbon-intensive economy. To address this problem, OECD is recommending policy action to remove subsidies and export taxes on energy, and to introduce mechanisms such as a carbon tax or a cap-and-trade system for emissions.

Of course, the impact on the poor should be mitigated via the tax and benefit system, and public investment in energy efficiency, including the installation of meters to make demand more responsive to prices. "Low energy prices are not the solution. They just encourage overconsumption," emphasized Gurría.

Third, Russia's main social challenge is to ensure that the benefits of economic growth are shared more evenly. This calls for fighting comparatively high poverty, implementing labour market reforms and addressing the needs of an ageing population.

Russia's poverty rate of 17% is well above the OECD average of 11%. The introduction of "family capital" was a major step in tackling this problem. But more can be done, said Gurría. "A clear solution is to devote a relatively higher share of social spending to the working-age population and children, who make up the vast majority of the poor population. Other measures could include: extending child allowances, reducing the cost of day-care for working parents, and improving housing conditions," he added.

These measures would also contribute to reducing inequality, a major challenge for Russia and OECD countries alike. Gurría pointed to a new report launched on December 5, titled "Divided we stand: Why Inequality Keeps Rising?" The report finds that the average income of the richest 10% is now about nine times that of the poorest 10 % across the OECD.

The income gap has risen even in traditionally egalitarian countries, such as Germany, Denmark and Sweden, from 5 to 1 in the 1980s to 6 to 1 today. The gap is 10 to 1 in Italy, Japan, Korea and the United Kingdom, and higher still, at 14 to 1 in Israel, Turkey and the United States.

In Chile and Mexico, the incomes of the richest are still more than 25 times those of the poorest, the highest in the OECD, but have finally started dropping.

Income inequality is much higher in some major emerging economies outside the OECD area. At 50 to 1, Brazil's income gap remains much higher than in many other countries, although it has been falling significantly over the past decade.

Gurría said: "Indeed, sustained inequality inhibits growth and social cohesion, and Russia is no exception here."

The Way Out

The answer lies in fostering employment of under-represented groups and in high-quality public services, he added. But the tax system also plays a fundamental role by making the strongest shoulders bear their fare costs. This, he said, can be achieved in Russia by increasing progressivity in the personal income tax and the maximum earnings thresholds over which social contributions are due.

He also stressed the need for reforms to improve labour market outcomes and inclusiveness. Russia is still a long way behind, as it spends only one quarter of the OECD average in effective active labour market policies, in spite of a tripling in 2009.

"When budgetary conditions permit, more should be invested in effective active labour market policies and in raising the profile of public employment services to help the unemployed find work more quickly," said Gurría.

Reforms to collective bargaining would also reinforce workers' bargaining power, including through less restrictive provisions on the right to strike and better enforcement of existing provisions on worker representation in the labour code.

Last but not least, Russia needs to deal with an ageing population, like many OECD countries. Significant increases in transfers to pensioners have helped to keep poverty in check during the crisis. But there is a large gap between pension contributions and expenditure, respectively 2.5% and 6.5% of GDP in 2009, which undermines the long-term financial sustainability of the pension system.

The Russian authorities are already working on a pension reform programme, which is very welcome. Our main recommendations in this area are to raise the standard pensionable ages, which are low; to gradually equalise the retirement ages, which are lower for women than men; and discourage early retirement. [IDN-InDepthNews – December 12, 2011]

Picture: OECD chief Angel Gurria (right) with Russian President Medvedev in Moscow in April 2011
Credit: eng.news.kremlin.ru

2011 IDN-InDepthNews | Analysis That Matters

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