Rapid progress up the rankings shows an economy that is rapidly and purposefully modernising
This post first appeared on Russia Insider
A comment I repeatedly hear made about the Russian economy is that it supposedly needs “reform”.
Allegedly “the Kremlin” (ie. the Russian government) is failing to carry out this “reform”, which is why the economy is “stagnating”.
Those who say this are usually very vague about exactly what they mean by “reform”.
Mostly it is a cliche that simply gets written into articles about the Russian economy without the writers feeling the need to explain what they mean by it.
When pressed, it often turns out that they are confusing “reform” with budgetary policy.
For example it may be correct that Russia should raise the pension age or cut military spending so that it can spend more on education or health care or so that it can better balance its budget. However these are demands not for “reform” but for the reallocation of resources from the budget.
Very occasionally demands for the break-up and privatisation of companies like Gazprom, Rosneft, the Russian Railways etc slip out.
All I will say about that is (1) that when large-scale privatisation took place in Russia in the 1990s it was not a resounding success and those who call for more of it need to explain better why think it would be different this time; and (2) academic research anyway questions the supposed macroeconomic benefits of this sort of “reform” when carried out in a fully functioning market economy like Russia’s.
My major complaint is however that this ceaseless demand for more and more "reform" (1) disregards the extent to which Russia has already “reformed” - no country in the industrialised world has “reformed” more since the 1980s - and (2) ignores the extent to which “reform” is anyway already taking place.
The World Bank’s recent publication of its latest “ease of doing business” survey highlights the last point.
Unlikely many surveys, this survey uses a rigorous methodology developed for the World Bank apparently by Harvard University. It is also based on rigorous research on the ground. To the extent that any such survey can ever be considered reliable, this one is.
What the survey shows is a steep and continuing improvement in business conditions in Russia.
In the 2010 survey Russia’s ranking was 120th out of 183. By the time of the publication of the 2014 survey Russia’s ranking had risen to 62nd place out of 189. This year’s survey ranks Russia 51st out of 189 - a further rise of 11 places in just one year.
The improvement is dramatic and sustained and in the West is going completely unreported.
In terms of ease of doing business the World Bank rates Russia at 51st - far and away the best amongst the BRICS (Brazil is 116th, India 130th, China 84th and South Africa 73rd).
Moreover drilling into the numbers establishes certain further surprising - or at least interesting - facts.
The commercial justice system in Russia is highly efficient.
Russia comes fifth in enforcing contracts, ahead of every one of the G7 states: Britain is 33rd, the US is 21st, Germany is 12th, France is 14th, Japan is 51st, Italy is 111th and Canada is 49th.
This accords with my own impression and what people who use the Russian commercial justice system tell me.
Russia does less well in resolving insolvency issues, where its ranking is 51st.
This is not due to inefficiency on the part of the courts. It is the result of gaps in Russia’s bankruptcy laws. Passage of a new bankruptcy law - which has just entered into force this month - is designed to address precisely this problem, and will doubtless do so.
On the subject of protecting minority shareholders - a vexed issue where Russia was historically weak - the improvement is slower but still significant.
Russia comes 66th - equal to the Netherlands and Finland, and better than Germany (72nd) or Switzerland (105th) or France (87th) or Estonia (81st) - the last a country which routinely gets rhapsodic revues for its pro-business practises in the Western media.
In terms of paying taxes Russia comes 47th - above the US (53rd), Germany (72nd), France (87th), Spain (60th), Japan (121st) or Italy (137th).
This too incidentally accords with my own impression and what I have heard from people working in Russia.
In one other respect Russia does surprisingly well in the survey. It is now in the top ten in terms of the ease of registering property. In this key area its ranking is now 8th.
What this all means is that Russia cannot be the corrupt kleptocratic oligarchy of Western fantasy.
When I made this point recently in my discussion of Russia’s house construction boom it provoked an angry reaction from some quarters.
The facts in the World Bank “ease of doing business” survey however speak for themselves.
In corrupt kleptocratic oligarchies courts do not function efficiently, contracts are not performed and enforced, rights of minority shareholders are not protected, and people are not able to register their property easily and do not pay their taxes.
That is not of course to say that there is no corruption in Russia or that there are no other problems there
On the subject of corruption I intend to write about this complex issue separately, taking into account my impressions from my recent visits to Moscow and Perm.
As to the other problems that remain, the World Bank’s “ease of doing business” survey provides an important clue as to their source.
The two indicators where Russia scores badly are: Dealing with Construction Permits (119th) and Trading Across Borders (170th).
The problems associated with Trading Across Borders partly reflect Russia’s position as a self-sufficient continental sized economy. Russian companies simply do not need to trade beyond their borders, and they are unlikely to want to do so on any very great scale any time soon.
Whatever changes are made - and there is certainly much room for improvement - Russia is unlikely to achieve a score as high for this indicator as do the world’s major trading economies and city state entrepôts like Singapore and Hong Kong.
What the very poor level of this indicator does however point to - as does the indicator showing the difficulty in dealing with building permits - is Russia's longstanding problem of excessive bureaucracy.
It is difficult to avoid the feeling that the reason why these two indicators are so bad is because business people who have to deal with these issues are burdened with complex and expensive procedures administered inefficiently by an unresponsive bureaucracy.
This accords exactly with what I was told by business people I spoke to during my recent visit to Perm.
When I asked them what was the single biggest problem that as business people they faced, they told me it was dealing with a bureaucracy that is unqualified and unfit for purpose.
The problem is not that the bureaucracy is corrupt or excessively large - on the contrary it is if anything too small.
Rather it is that the people who staff the bureaucracy lack the training and the necessary understanding of commercial life to support - and regulate - the business community effectively.
However even this problem - though real and serious - can be overcome.
It would have been impossible to achieve the dramatic improvement in Russia’s overall ease of doing business ranking if the entire bureaucracy was completely incompetent and unresponsive.
The transformation in the indicator for connecting to the electric supply shows what can be done if the will is there.
In the 2012 survey Russia ranked an abysmal 183rd for this key indicator - pointing to massively complex procedures and a severe bureaucratic overload.
In just three years this ranking has improved to a very respectable 29th.
Clearly there has been a sustained and successful drive to improve this indicator by simplifying procedures and cutting red tape.
If Russia’s rapid rise in the World Bank’s ease of doing business rankings tells us that - for all its problems - Russia cannot be the corrupt kleptocratic oligarchy of Western fantasy, it also tells us two other things.
The first is - as I said at the beginning of this article - that the demand for more and more “reforms” simply ignores the fact that reforms are in fact being carried out.
Anyone who reads through the World Bank’s annual surveys will see that they are all about “reforms”. It is precisely because Russia is carrying out “reforms” that its ranking is rising so fast.
To be clear, modernising the court system, introducing a new bankruptcy law, simplifying procedures for connecting to the electricity supply, and passing laws on registering property and on administering bankruptcy, are reforms.
They may lack the drama of breaking up Gazprom, but academic research, historical experience and the World Bank all say the same thing: it is these sort of unexciting reforms that in the end are the ones that make a difference and which produce results.
In other words Russia is reforming, and it is doing so successfully, in a methodical and purposeful way.
Doing so requires hard work and unremitting attention to detail. The Russian authorities deserve credit for successfully doing it, not the criticism for doing nothing that they normally get.
The second point is that if one looks at what sort of countries now outrank Russia in the survey, it turns out that they are - broadly speaking - the three Asian industrial giants: Japan, Taiwan and South Korea, the two Asian city states of Hong Kong and Singapore, and the traditional and well established industrialised societies of the West: the US, the three rich countries of the British commonwealth (Canada, Australia and New Zealand) and most (though not all) the states of the EU - in sum what was once called "the first world".
If one removes the one indicator where Russia scores especially badly, Trading Across Borders - for which there are special reasons (see above) - Russia becomes even more clearly aligned with these "first world" countries rather than with those countries that make up what used to be called “the third world”.
The Russian government’s target is to achieve 20th place in the World Bank’s ease of doing business survey by 2018. That may be too optimistic, though it is worth pointing out that the target for this year was 50th, which Russia only missed by one place.
If Russia does achieve a ranking of 20th in the world by 2018 then it will be right in the middle of the "first world" group of countries rather than just outside it. At that point it will also have one of the best business climates in the world.
Even if Russia does not achieve 20th position by 2018, the pace of improvement in the rankings is so fast it suggests Russia will break in fully in terms of quality of its business climate into the list of "first world" countries before long.
Already Russia outscores many "first world" countries on individual indicators (see above) and is ahead of outliers such as Israel, Luxembourg and Greece.
Whatever view one has of Russia, “Upper Volta with missiles” or “Nigeria on the Volga” it obviously is not, and there is no excuse or justification for continuing to claim that it is.
This post first appeared on Russia Insider
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