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Russia: Economic Adviser Recommends Cut In Public Spending

Andrei Illarionov, the economic adviser to Russian President Vladimir Putin, is urging a cut in government spending to help restore rapid economic growth. The adviser spoke to journalists yesterday on the state of Russia's economic health.

Moscow, 4 June 2002 (RFE/RL) -- Russian presidential economic adviser Andrei Illarionov says, ideally, government spending should account for no more than 18 percent of a country's gross domestic product (GDP). In Russia, he says, the figure is about double that, or 36 percent.

Illarionov yesterday presented a report entitled "What kind of economic growth do we need?" He told reporters Russia's relatively high level of public spending is detrimental to the economy.

As recently as 2000, the Russian economy was expanding at a rate of 9 percent a year. But in 2001, this slipped to 5 percent, and this year the economy is expected to grow by 4 percent.

Illarionov says Russia could see growth rebound to the levels of CIS neighbors like Kazakhstan -- which is expanding at 10 to 11 percent a year -- if it cuts back on government spending.

He says both Kazakhstan and China, whose economies are structured similarly to that of Russia, allocate less for public expenditures. Public spending in Kazakhstan amounts to 22 percent of GDP; in China, the figure hovers between 18 and 20 percent. Illarionov also praises the Kazakh model for not taxing exports, another step he says has contributed to that country's stable growth. He says the country's economic policy has pushed average salaries and pensions in Kazakhstan above Russian levels.

In scaling back Russia's government spending, Illarionov advises gradual cutbacks in all sectors of the economy by some 2 to 3 percent of GDP a year. In addition, he says, Russia needs to push ahead with substantive reforms to scale back the state sector and promote more efficient use of the country's natural resources.

"The government, by regulating the tariffs of the state sector -- which can be regulated -- makes the distribution of most national economic resources happen in a nonmarket way. And of course this, in turn, makes the national economy work ineffectively. Our 10-year [market] history is one of the most convincing arguments that increasing the nonmarket sector of the economy is harmful for economic growth."

Illarionov says the size of the state sector should be scaled back by 50 percent over the next decade. He says it should also be better regulated. The presidential adviser says Russia is not yet ready for the sector to be liberalized, adding that natural monopolies should be given a budget approved in the same way as the government budget.

He also says the government should stop controlling the ruble exchange rate, which ultimately weakens the competitiveness of the economy. Another negative pull on the economy, he adds, is the chronic dual problem of bureaucracy and corruption. "The next step [the government should take] is to regulate the bureaucracy -- which recently has been getting worse instead of better. This doesn't help economic growth either. Another important issue -- besides the state -- is crime that takes economic resources from those who produce it."

Illarionov says the government should do more to protect the rights of its citizens in the business sector -- defending, in particular, private-property and contract rights. "In this sphere," the adviser says, "the government is not fulfilling its duties."

A popular myth among government officials, Illarionov says, is that increased foreign investment will bolster economic growth. He cites as an example the Czech Republic, where between 1992 and 2001 foreign investment grew by 5.1 percent. Nonetheless, economic growth there was slow. By contrast, Taiwan saw its economy grow by 5.6 percent even as foreign investments dropped.

Asked to comment on Putin's budget forecast for 2003, Illarionov praised the president for demanding a reduction in budget and off-budget funds for state organizations. Illarionov says in doing so, the government finally admitted that such funds were hampering economic growth.