Russia's Economy Is Decelerating Sharply, But It's Still Close To Full Employment

Posted: Dec 23 2013, 9:26am CST | by , in News

Russia's Economy Is Decelerating Sharply, But It's Still Close To Full Employment
Photo Credit: Forbes

Russia’s economy has had a lousy 2013. Estimates of GDP growth have been getting smaller and smaller with each passing week. The current consensus is for full-year growth of 1.4%, but given the frequency with which that number has shrunk it wouldn’t greatly shock me if the actual result ends up being 1.3% or even 1.2%. If you chart out the past decade of Russian GDP, it’s impossible to miss the weakness of the past several quarters, a period of time in which Russia’s economy has experienced virtually no net growth.

A lot of people interpret Russia’s current weakness as a reprise of the “period of stagnation” in the mid to late 1970′s, a time when the Soviet economy slumped into a crisis that eventually proved fatal. The implication is clear: unless Putin immediately undertakes radical and far-reaching reforms, Russia is doomed to perpetual slow growth and the international irrelevance that will eventually accompany it. The choice, as it is often presented in the media, is an incredibly simple one: reform or die.

Well if Russia’s economy stagnates forever that will obviously be an enormous problem for the authorities. Much of the regime’s de-facto popularity is a result of the huge improvement in living standards over the past decade. If those improvements suddenly come to a crashing halt that would eventually cause a systemic crisis. “Performance legitimacy” implies that the authorities are able to hold up their end of the bargain and deliver on the goods; if they can’t do that, things can get ugly  pretty quickly.

But while a slowdown in GDP growth is clearly not good, it’s worth keeping in mind some of the unique aspects of Russia’s current situation. One of the most important things is that the slowdown has not (yet!) had much of an impact on the labor market:

Matt Yglesias once wrote a very perceptive article about full employment, and it’s worth quoting him at length because everything he said about Argentina also applies to Russia:

This is just to say that Argentina’s got all kinds of problems. Problems with the investment climate, problems with the state of the physical infrastructure, problems with the regulatory framework, problems with the historic accumulation of capital, problems with the allocation of labor, problems with the tax code, problems, problems, problems. But one problem they don’t have is mass unemployment.

Russia has all kinds of problems, arguably problems that are even more severe than Argentina’s because of the whole “seventy years of state socialism” thing. But Russia isn’t suffering from an unemployment crisis, and its labor market has essentially never been in better health. For the most part, Russians who want jobs are able to find them and wages for those jobs (while still quite low by Western standards) are higher than they have been in the past.

Now full employment does not equal wealth or productivity. Full employment is essentially a policy choice and the Kremlin has, for quite obvious reasons, made active efforts to achieve it. People who have to get up and go to work every day are less likely to be out on the streets protesting, and so Russia has a large number of jobs that, to Western eyes, appear totally unnecessary and outdated.* But Russia’s slowing economy hasn’t yet had much of an impact on the average person, something which is born out by opinion polls which show only modest change in economic outlook over the past year.

Why is this important? Well it’s important because it suggests that the Kremlin has some time and room to maneuver. If unemployment was already spiking or wages were already plummeting then Putin would have a full-blown crisis on his hands and things could quickly start to look a lot like Ukraine. There’s nothing to say that that can’t happen in the future, and if the Russian economy stays weak for much longer then I fully expect the now-dormant opposition to come out on the streets with renewed vigor. Prolonged economic decline is the surest route to political crisis.

But at the moment the slowing economy hasn’t trickled down, and the Kremlin therefore has a chance to right the ship. Will it? Opinions differ. Some people think that Russia’s current economic institutions are so irredeemably broken and bankrupt that they cannot be reformed and must be destroyed. Others think that modest reform is possible given sufficient political will (and fear) on the part of the authorities. I’m in the second camp, but time will tell. But don’t expect an immediate political backlash from the slowing economy, because most Russians haven’t (yet!) personally experienced it.

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* Liberal Russian economists have a particular distaste for the bloated rosters of chinovniki, but it’s not hard to understand why the authorities have insisted on boosting the number of state employees

Source: Forbes

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