Reform is Feasible for Russia

PARIS: Who lost Russia? Who is responsible for Russia's economic meltdown since 1990? Are bumbling politicians guilty, or grasping oligarches, corrupt apparatchiks, the mafia, or the IMF? Accusations and finger pointing abounds, but the facts remain obscure. Ordinary Russians throw up their hands thinking everyone with power is tainted. A new study by the consultants McKinsey, however, sheds some light on this question and moves the debate forward.

The goal of the study (which is available at www.mckinsey.com) was simple: to study, in detail, how ten key economic sectors are faring. The conclusions are equally simple: in all sectors, average productivity is only at 19% of levels prevailing in the United States. The cause of this very weak productivity is the same for all sectors: Russia's complex system of disguised subsidies, heavy regulations and price distortions protects state owned firms, whose productivity is abysmal, and hinders the development of new firms, whose productivity is a lot higher.

The study of each of these sectors allows for a better understanding of the nature of the system of subsidies. At times, the rules of the game are transparent and still the established and incompetent triumph. In the construction sector, for example, when bids are solicited publically and therefore should be open to all, contracts simply go to the old, established firms. Others have to fight endlessly in order to obtain their construction permit from a myriad of government authorities, or clarify their property rights to the land they wish to build on.

Subsidies are often hidden. Many firms would have to close shop if they purchased the oil and electricity and gas they use at prevailing market prices. As a result, they rely on barter, using goods of little value (such as empty residential buildings) in order to pay their suppliers.