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09.06.2008

Russian official sets out economic challenges

 A top Russian official on Sunday gave international businessmen a sobering assessment of the challenges facing his country's economy, ranging from a declining skills base and poor public health to the government's inclination to meddle.

First Deputy Prime Minister Igor Shuvalov's comments to the St. Petersburg International Economic Forum were the latest sign that Russians are no longer content just to smugly bask in the country's recent oil-fueled economic resurgence and are ready face up to problems.

Since taking office a month ago, President Dmitry Medvedev has spoken repeatedly in general terms about solidifying economic progress, but Shuvalov's speech was notable for its candor.

"Russia should become a country that people want to live in," Shuvalov said, a remark contrasting with officials' strong tendency to chauvinistically reject any disparaging assessments. His openness could indicate that he will be an influential figure in the new government, whose lines of authority are still unclear.

Shuvalov said Russians' historic worries about trailing behind western Europe have led the country into a counterproductive sense of competition.

"The intention to keep up with the West and even to outdo it is a fixed idea of the Russian economy, which dooms us to unsuccessful copying and to inevitable lagging behind," he said.

"On some occasions we managed to achieve the desired development pace in individual sectors of our economy, forgetting at the same time about the social and political aspects. As a result of it, our accomplishments were not durable, and we moved back."

Shuvalov said that competitiveness had led officials to give comparatively little attention to environmental problems and to give short shrift to promoting first-rate education.

"New opportunities should be created for young people who wish to get additional education at the best research centers of the world," Shuvalov said. "We should not be afraid that they will remain there."

Shuvalov was a key Kremlin adviser during Vladimir Putin's presidency, which was marked by the creation of state-controlled "champion industries." Many observers have criticized those moves as creating enterprises whose political concerns could impede their business decisions.

Shuvalov defended those efforts, saying that "we believe we are right in creating state corporations," but also said the state has become too involved in economic matters.

A main initiative of the new government is "the limitation of the injurious meddling of the state in the economy. ... In recent years, many began to believe again that the state was capable of solving problems of the market, forgetting its peculiarity of creating its own problems," he said.

But members of a panel who shared the stage with Shuvalov criticized state companies.

"The effect of the state on the economy cannot be overrated. ... The champions of inefficiency are precisely those state-owned industries," said Anatoly Chubais, the chief of the state electricity network United Energy Systems. Chubais has led UES' drive to put itself out of business this summer by spinning off into privately owned generation facilities.

"A policy for diversification is one that supports competition," admonished Eric Berglof, chief economist of the European Bank for Reconstruction and Development, referring to concerns that Russia is overly dependent on its extraction industries and has correspondingly weak manufacturing and services sectors.

Jim O'Neill, chief economist for the Goldman Sachs (nyse: GS - news - people ) investment house, applauded Shuvalov for expressing concern about Russia's poor public health, which has contributed to a significant population decline that is likely to undermine Russia's economic development.

"If you want to be big, you have to have a lot of people working," he said. But "there will be fewer people working (in Russia) because the population is falling."


Source:  www.forbes.com

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