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Orientation to Asia

Evsey Gurvich: "Traditional strategies are not working in the Far East"

Orientation to Asia

Head of the Economic Expert Group, member of the Economic Council under the President of the Russian Federation Yevsey Gurvich - about why the Far East is still very far behind the rest of Russia in economic development.

- Evsei Tomovich, in his Address to the Federal Assembly, Vladimir Putin said that for the entire 21st century this region will become a priority in the development of the country. Immediately appeared a lot of departmental initiatives in this regard, rain forecasts, etc. In your opinion, what should the government do to ensure that these initiatives are not left on paper, and the trends in the development of the Far Eastern regions are finally becoming positive?

"I will not open the veil of secrecy over any plans of the government - which I do not think anyone knows, including the government itself, and even more so me. I'll try to just evaluate as an economist, what's going on.

In my opinion, now we simply admit that the traditional strategies applied to the Far East do not work. The inertial development of this region leads to the fact that people leave from there, depopulation occurs. And then begins not a spiral, or a vicious circle: the more people leave these regions, the less there are employees who are involved in production, creating added value. The economic demand is decreasing, the demand for products is decreasing - production is reducing its volumes further. The tendency to reduce, thus, is increasing.

Everything was predetermined by the objective state of the economy of the Far East back in Soviet times. Back in the mid-1990s, I was engaged in building a model of regional development. Russia at that time was just transitioning from the Soviet economic model to market mechanisms. And even then, according to all calculations, it turned out that the economy of the Far East is gradually becoming unviable. Primarily because it was largely based on subsidized (explicitly or implicitly) energy prices. With these subsidies gradually phased out, such an economy is unable to survive. The system of subsidies assumed that prices for gas or oil were uniform throughout the country, although in reality a significant part of them was supplied to the Far East, and these additional transport costs were no longer taken into account in the cost. As soon as we began to make corrections to this, it turned out that energy resources for the Far East are disproportionately expensive, which means that the products produced there, taking into account the transport costs for their delivery to the European part, are not competitive. All current problems could be foreseen and somehow smoothed out. But it is clear that the state had enough other urgent tasks, so the Far East partly developed by inertia. At some point, by this very inertia, he went straight to a dead end. Then the question arose about the need for state support for the development of the Far East, an investment program in this region, etc. But numbers are a stubborn thing and do not lend themselves to indoctrination. Economic analysis shows that, firstly, the scale of investment required is very large. Secondly, even large one-time infusions will not solve the problem, since the cost of transporting products or resources between the Far East and the Russian part is still very high. The model of the economy, when the sales market for the products of the Far East is located in the rest of Russia, is not viable under modern conditions. And now we just realized that we need a new model. The content of the current moment is precisely in finding it and, if not stopping, then at least slowing down the depopulation of the Far East, which is increasingly lagging behind the rest of Russia in development.

- And what can this model consist of? In a purely export orientation, as suggested by the President's Plenipotentiary in the Far Eastern Federal District Yuri Trutnev and the head of the Ministry for the Development of the Russian Far East, Alexander Galushka? According to them, industries in the Far East should produce goods that are in demand in the Asia-Pacific countries or, more specifically, in Southeast Asia ... There is also a proposal to place water-intensive industries with the participation of Asian investors in the Far Eastern Federal District and Siberia, where there is no shortage of water resources ...

- I think that the export-oriented model simply has no alternatives. If the rest of Russia is the market for the Far East, it will not be able to move forward. The only option is to focus on the neighboring densely populated countries of Southeast and East Asia, which, moreover, are developing very dynamically - China, South Korea, and Japan, which has also now overcome long stagnation. These are large and promising markets.

“But can we be competitive with them?”

- Economic theory teaches that there are no countries without at least some competitive advantage over others. Nor is it possible that a country cannot supply anything to its trading partners. Another thing is that success always requires some effort. The Far East is known to be rich in resources. The question is how its cooperation with neighboring regions and individual countries will be developed. The first - the worst - option we are seeing now, when the export of resources takes on an uncivilized and not always legal form.

This applies to fish stocks, partly to forestry, etc. The second, intermediate option is the civilized, legal export of primary resources. Everything is done the same, but on a legal and official basis, with the inclusion of regulatory mechanisms. And the third, optimal option is when the process of transition from the export of primary resources to the export of processed products begins step by step. There is nothing unusual here, there are many similar examples in the world. Many countries have successfully followed this path - for example, Finland started out as a timber exporter. Then they had a processing industry, factories that produced paper products. Then they moved on to modern, "advanced" paper production, and in this area they gradually became leaders. Then they began to develop woodworking and produce equipment for this market segment, which also became the best in Europe. And then they focused mainly on the export of high-level products in the woodworking, pulp and paper industries and related equipment.

“And then they also took Nokia’s phones in their hands ... But as for the transition from raw materials to exporting goods with high added value, how much time did the Finns take and how much time could we need for the same restructuring?”

- Hard to say. This is not a school puzzle for the movement, when from point A to point B you are moving at a predetermined speed. There are many intermediate stages. Finns have kept within several decades. But the process was lengthy, and in the category of developed countries they did not go immediately. A similar path, but with a different speed, was also done by Canada or Australia, whose economy, by the way, is considered to be more of a raw material to this day. But certainly, it differs sharply from the one that was in Australia some half a century ago. Ideally, the Russian Far East should follow the same path.

We have two prerequisites for such a strategy - significant reserves of natural resources and the proximity of large, dynamically developing sales markets. It is clear that this alone is not enough. Not only for the Far East of the Russian Federation, but for the entire country, the problem of diversifying the economy is very acute - increasing the share of processed products in the export structure, reducing dependence on oil and gas exports, etc. There are a lot of relevant programs, but, as we know, they do not work that dynamically and effectively. In the Far East, it seems to me, it is necessary to take some new steps, and they should be connected, first of all, with new forms of international cooperation. That is, the best for us is not the example of the former raw-material countries, which nevertheless became developed, but the experience of China, which created free economic zones in the east of the country. I think we should have done the same. This will be the third prerequisite and component of a successful development strategy, along with the two that I just mentioned. Free economic zones will make the region especially attractive for foreign investors. Especially from the states bordering on the Far Eastern Federal District, since they will be able to invest in products that are of interest to them in terms of export. To this must be added preferential tax conditions, provision of production with infrastructure, getting rid of excessive administrative regulation, which often simply chokes our business. I hope that Aleksandr Galushka, appointed head of the relevant ministry, will also play a role in this - he understands well the logic of business. It seems to me that its very purpose is largely symbolic: it is a kind of transition from purely bureaucratic methods of leadership to market and business management. The state realized that it is impossible to raise the region by investing money from the treasury into infrastructure or something else. The main thing the Far East needs is favorable conditions for the development of its own business.

- Can not the state completely avoid investment in infrastructure? And when, on competitive terms, the Ministry of Economic Development made the decision to create several SEZs in Russia, no Far Eastern project was adopted. Maybe just so long without major government inflows can not do?

“It takes time and a lot of patience to attract investors. Few will come right away, and one cannot hope that as soon as we announce the next one of our "new policies", everything will change at once with a wave of a magic wand. Programs need to be long-term, choose the right direction and do everything so that investors believe us. After all, as often happens with us: at first we declare with enthusiasm that we are moving towards some goal, and after three years, with no less enthusiasm, we turn in a completely different direction. Naturally, investors cannot work in such conditions.

Above all, the state is required to have a consistent policy. And it is necessary that it provide promising projects with the appropriate infrastructure. Except him, no one can do it. Therefore, all transport or energy facilities must be built in advance and under the very "new model" that we are talking about. That is, to focus not on the European part of Russia, but on foreign partners and foreign sales markets.

- Then it turns out that the megaproject on the expansion of Transsib is not needed? And instead it would be better to build some local transport routes to Southeast Asia or China?

- It seems to me that this project is subject to the old logic, when it was considered necessary to strengthen the connection between the Far East and the European "mainland". In my opinion, such a policy is unpromising. By the way, the recent actions of the government show that it has fully realized this. There is a likelihood that the project will still be implemented if lobbyists from RZhD or other natural monopolies are stronger in the struggle. Although I must immediately stipulate that specifically in the Far East, I'm not an expert and I do not need to know any nuances. I judge more from the standpoint of macroeconomics, the logic of growth, and not the specific management of a certain region.

- And how do the so-called "territories of advanced development", which are proposed in state strategies, fit into this logic? There are two variants of such zones, which were recently mentioned at the Krasnoyarsk economic forum: either to introduce tax privileges and preferences on a certain territory and to strive for the development of an industrial park and the "settling in" of investors. Or the second way: to build TORs around a particular project, under which laws will be created and where they will invest. So, how was it with the Olympics or how was the APEC summit held. What do you think is more effective?

- I do not understand why there is something to choose. The question is not in the form of "or-or", but in the form of "and + and + and". It does not interfere. If there are any ready-made investment projects - great, let the ministry and regional authorities support them and create special conditions for them. This does not exclude other types of economic zones. In general, it seems to me that it is necessary to focus not only on the support of existing investment projects, but also (not to the detriment of them) to create conditions for the emergence of new ones. I do not think that we will immediately encounter an oversupply of investors, and we will painfully decide which one to choose from. This stream is only to be created, and free economic regimes will need a lot, much more than two, depending on the specific situation or project.

- And what tax regime would be best for such growth points? On this account, there is no unity of opinion. There is an offer to reduce tax rates - VAT up to 10%, on the payroll - up to 7%. However, for example, regional budgets, which are already popping at the seams, simply do not provide anything to business ... How to be?

- I do not think that all problems are reduced to the tax regime. In the same way, I do not agree that at the level of the whole country the main thing for us is to reduce taxes. For a long time around it was a struggle, but now we have already left from this. The most important thing is to understand and clearly explain to investors what opportunities there are for development. Figuratively speaking, “make up a menu of opportunities” and offer in each region something to choose from. And at the same time, they are pushing up their finances, legislative support, government support, etc., to their own “kitchen”. In addition, we must understand the problems of investors. They do not always understand our legislation, the procedure for obtaining any permits is extremely difficult for them. So, in terms of the difficulty of obtaining building permits or connecting to power grids, we are one of the first places in the world. It means that we need to be in the first place in these zones for the ease of issuing such documents in order to connect to the energy infrastructure of the investor. Such things are more important than tax breaks.

In general, I think you need flexibility. Some taxes go to the regional, local budgets, respectively, it is their question - whether they can do without the income tax of the employee who lives there. Others are sent to the federal budget, others are distributed between the Federation and the regions. In this case, it would be quite possible to foresee some benefits. With regard to social taxes, then something new, apparently, should not be invented, just leave the best of the existing conditions and tax regimes. You can optimize the system, but I'm not sure that we will be able to sample the lowest tax rate that exists somewhere in the world for each tax. We often have this: we want to have a salary and pensions, as in Western Europe (where there are huge social taxes), and at the same time social taxes - like in China, where there are practically no pensions. Everyone has their own truth, but only these truths are incompatible.

"It's spacious in the Far East, but it's deserted." There is a territory the size of four Europe, there is a huge wealth of Yakutia, Sakhalin, Kamchatka and other regions - and only 6 million people, to somehow master this potential. How to solve demographic problems, where to take labor resources?

- This problem is common to the whole country. Demographics is a very conservative thing, and it is impossible to “break” something quickly and about the knee. We have just entered a new negative phase, which will last a very long time, at least until the middle of the century - after the growth of the economically active population, its number began to fall, and this will continue for several decades. This is also one of the reasons why we need to move from extensive to intensive development.

We have traveled extensively for a very long time, while we had a priority of social stability over economic rationality and rationality. That is, it often happened that an enterprise would like to modernize, install new equipment, but this meant the release of part of the labor force, mass layoffs. Governors feared the emergence of social problems, and the businessman, fearing to spoil relations with the governor, refused technical improvements. Thus, in recent years, technical progress has often been sacrificed to social stability, backwardness has grown, but "everything was calm." Now we need to understand that the situation is changing. In the long term, all will benefit from modernization. Judging by the polls of business representatives, for several years already they have called the main problem the shortage of skilled labor across the country. Therefore, we need to move to a new policy. For example, in assessing the effectiveness of the regional authorities should not include the level of unemployment in the region - it puts pressure on governors, forces us to look for ways to "provide employment" ... And how? You can help create jobs, or you can simply negotiate with entrepreneurs so that they "do not fire anyone," and judge for yourself that it's easier for the governor. It is necessary that such a temptation they did not arise. In most regions (with the possible exception of the most depressed ones) there is no danger of excessive unemployment. The threat in the other is in the preservation of our backwardness.

This problem is common, but it is especially acute for the Far East. The situation here is worse than in other regions, because there is a constant outflow of population, internal migration. To begin with, we need strong development support programs that would stop this outflow (which also does not happen immediately). Well, if the development goes so well that the labor force will become scarce, then, like in the rest of Russia, it will be necessary to use controlled foreign labor migration.

- Speaking at the CEF, one of the Asian diplomats suggested that it is possible to put cheap labor in large quantities in Russia in exchange for a favorable investment regime. Are we ready for such an expansion from the countries of Southeast Asia and China? And how do you assess the proposals on the Krasnoyarsk economic forum to introduce a simplified procedure for granting citizenship to people with knowledge of the Russian language?

- Each country struggles with the uncontrolled influx of migrants. With regard to attracting foreign workers together with foreign investment, this is a fairly common practice in the world, and each case can be treated specifically. Sometimes this is a perfectly normal mutually beneficial option. If we talk about the simplified granting of citizenship to compatriots - it is unclear why this has not been done for the last 20 years. It seems to me that such statements carry more politics than economics. The decision to support compatriots for the sake of economic progress had to be taken much earlier. Those who were ready for this have already moved - with minimal help from the state, and even without it at all. So from the economic point of view, such measures, I think, will not change much.

Chinese expansion, which is often frightened, is also objectively conditioned: "a holy place is never empty," if the depopulation of the Far East continues, someone inevitably will occupy the vacant space. It is possible that there will come Chinese business (partially controlled, partly not) and Chinese workers. I repeat, the main threat lies not in them, but in the degradation of the Far East itself, in its further economic stagnation. This is precisely what needs to be fought by building an effective economic model. And not only in the Far Eastern Federal District, but throughout the whole of Russia.

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