[Radio Liberty: Programs: Economics]

Presenter Sergey Seninsky

- Competitiveness of Russia.
- Models of economic reforms: Latin America and East Asia.
- Shares of the “new” economy.
- Review of publications in the next issue of the British weekly The Economist.

Sergey Seninsky:

The International Institute of Management, or IMD, located in Lausanne, released last week its latest annual ranking of the world's 47 leading countries in terms of the competitiveness of their national economies. The first three places, as last year, were taken by the United States, Singapore and Finland, the last three places, as last year, were taken by Indonesia, Venezuela and Russia.

Why are these countries among the first or last? How is this rating, by the way, one of the most famous in international economics, determined? To answer these questions, we used materials from the International Institute of Management itself.

Firstly, the IMD rating, based on an expert analysis of almost 300 different indicators, determines, first of all, how much the existing social environment in a particular country contributes to increasing the competitiveness of companies and enterprises operating in that country. This is the purpose of the study.

Secondly, why out of almost 200 countries in the world are only 47 included in the ranking? This number includes 29 countries of the Organization for Economic Cooperation and Development, as well as 18 of the largest emerging economies. For example, of all the republics of the former USSR, only Russia is in the ranking, of all the African countries - only South Africa, of the countries of Western Asia - only Israel and Turkey, and of all the countries of Latin America, only the largest - Brazil, Argentina, Mexico, Chile, Colombia and Venezuela.

Third, where do the information and statistics come from? The Institute’s experts receive two-thirds of the total required volume from international or national organizations. And another third comes from an individual survey of managers of large and medium-sized companies operating in each of the countries studied. Thus, to compile the ranking based on the results of 1999, more than 3 thousand 200 people were surveyed in 47 countries.

There is no shortage of final recipes for how a country can achieve or maintain competitiveness. But, if we talk about the results of the IMD study, here they are formulated in the form of several points or, as they were called, “golden rules” of competitiveness. They are formulated approximately like this and in this order:

• - Stable and predictable legislation;
• - Flexible economic structure;
• - Investments in traditional and technological infrastructures;
• - Stimulating private savings and domestic investment;
• - Aggressiveness of exports along with attractiveness for investors of the domestic market;
• - Quality, flexibility and transparency of management and administration;
• - Interdependence of wages, labor productivity and taxes;
• - Reducing the gap between minimum and maximum earnings in the country and strengthening the middle class;
• - Large investments in education, especially secondary education, as well as in the continuous training of workers;
• - Balance the benefits of economic globalization and national characteristics and preferences.

It is not difficult to assume that it is to these provisions that, ultimately, all 290 parameters can be reduced by which the level of competitiveness of the country as a whole was determined.

Based on the totality of indicators, the first pair in the International Institute of Management ranking has not changed for five years: the United States and Singapore. Third in the 2000 ranking is Finland, which five years ago ranked only 15th. Following are the Netherlands, Switzerland and Luxembourg. All three countries have risen to 2-3 places in five years.

7th in the ranking is Ireland, which has risen from 22nd place over the past five years. 8 and 9 - Germany and Sweden. In 10th place is Iceland, which was only 25th in 1996.

It is curious that the top ten did not include countries such as Japan (only 17, between Norway and Austria), the UK (15, after Hong Kong), Canada (11) or Italy (30, between Portugal and China).

Of the former socialist countries of Central and Eastern Europe, Hungary is highest in the ranking today - 27, between Chile and South Korea. Then - Slovenia: 35, between Brazil and Mexico. Czech Republic - 37, Poland - 40. The last five countries in the ranking look like this: India, Colombia, Indonesia, Venezuela and the last, 47, Russia.

If we judge not by the totality of parameters, but by individual indicators, then the position of Russia, like all other countries, in the overall ranking, of course, is different. Let's give just a few examples.

The volume of gross domestic product of countries in 1999. Russia - almost $182 billion, in 22nd place, between Austria and Denmark. Russia produced 5 times less goods and services last year than China; 3 times less than Spain; 2 times less than the Netherlands or India; one and a half times less than Taiwan.

The volume of the government's domestic debt in relation to the volume of GDP. Russia - 22, between Switzerland and the USA. In terms of investment in research and development, Russia is 21st, between Austria and Israel.

An interesting indicator is the density of roads per square kilometer: Russia is in 31st place out of 47, between New Zealand and South Africa. The United States is 25th in this ranking.

Finally, one of the most important performance indicators is labor productivity. It was calculated as a share of GDP per worker. According to this indicator, the group of leaders looks like this: Luxembourg, Belgium, USA, Italy, Ireland, France, Norway, Germany. Russia is in 42nd place here, between Brazil and Venezuela. Among the 47 countries studied, productivity levels are lower than in Russia only in Venezuela, Thailand, the Philippines, Indonesia and India.

Let me remind you that the ranking of the competitiveness of the economies of 47 countries of the world, with some data from the study of which we have just introduced you, is compiled annually by the International Institute of Management located in Lausanne.

At the end of last week, the famous Russian economist Andrei Illarionov, who had just been appointed economic adviser to the President of Russia, held his first press conference in his new position. He stated, in particular, that in order to achieve maximum rates of economic growth, the optimal volume of government spending would be at the level of 17-20% of the gross domestic product. And Russia, according to Andrei Illarionov, today faces a choice of three models of economic reforms: Latin American, East Asian and North African.

And we decided to create a periodic column in which only experts would talk about how economic reforms were carried out over the past 15-20 years in individual countries of the three indicated regions of the world. And the first such experience is today. The column opens with Paul-Craig Roberts, an employee of the California-based Independent Institute, author of the book “Capitalist Revolution in Latin America”:

Paul-Craig Roberts:

In Chile, between 1973 and 1978, government spending relative to GDP fell by half. This greatly contributed to the reduction of the budget deficit. For example, in 1973 the budget deficit in Chile was 24% of GDP, and in 1978 it was only 0.8%.

But I want to especially emphasize that the volume of government spending itself is not the most important thing. It is much more important what exactly these funds are spent on. For example, in Mexico, during the process of economic reforms, the volume of government spending relative to GDP has changed little. But the way these funds are spent has radically changed! Before privatization, the government spent huge sums on supporting state-owned enterprises. Before reforms in Mexico, almost the entire economy was in the hands of the state. It owned banks, telephone companies, almost everything. When all these enterprises passed into private ownership, budget funds were used to develop the education system, build roads, and improve public infrastructure.

Later, almost the entire economy of both countries came under private ownership. Only the oil industry in Mexico and the copper industry in Chile remain under government control - a kind of “sacred cow” that has not yet been touched.

One of the most significant reforms in Chile was the reform of the social and pension system. Only the poorest were left in the care of the budget. Everyone else saves for their own future retirement - while they are working - in private pension funds and simply in banks. As a result, private savings in Chile have risen sharply and account for approximately 26% of the country's GDP. This has largely ensured Chile's current development and its leadership in the economic reforms of Latin American countries.

Sergey Seninsky:

The topic is continued by Steve Johnson, a research fellow at the Washington-based Heritage Foundation:

Steve Johnson:

In Argentina, in the 80s, that is, during the rule of the military, government spending amounted to up to 50% of GDP. Today this share has dropped to 12%. A similar process is underway in Brazil, Mexico or Uraguay, which, by the way, throughout the 20th century was a kind of Latin American leader in attempts to create a socialist economy. And that is why reforms are difficult for Uruguayans. This is a very slow process. Many Uruguayans still cherish the dream that the state will take care of them from birth to death, and believe that the government can somehow magically provide the money for all this.

More examples. Back in the 80s, all banks in Colombia were state owned. Now the state share in this sector is about 3%. In Mexico, at the turn of the 90s, banks were nationalized. In 1994, the financial crisis broke out, to overcome which most banks were again transferred to private ownership, and strict government control was lifted in relation to the rest.

Sergey Seninsky:

Of course, this is just the beginning of the conversation about reforms in Latin America. As well as about reforms in East Asian countries, which opens with Arthur Alexander, director of the Institute of Japanese Economics located in Washington.

Arthur Alexander:

Until relatively recently, budget expenditures in South Korea or Taiwan were very significant, since the state subsidized industrial enterprises. Both South Korea and Taiwan at one time tried to follow a path similar to the Soviet one, when the state actively determines the economic development of the country.

When it became clear that a failed experiment was too expensive, most industrial enterprises and banks were privatized. Although, for example, in South Korea, many private banks, in the way they operate, are still more reminiscent of state-owned ones.

In general, reforms in both countries were successful; they followed different paths. South Korea diligently copied the Japanese experience, sometimes taking it to the extreme. For example, in Japan there are “keiretsu” - huge industrial conglomerates that largely slow down the country’s recovery from the current recession. In South Korea, such conglomerates have become even more powerful, but at the same time even more clumsy, as the financial crisis clearly demonstrated.

On the other hand, in Taiwan there are a huge number of relatively small companies, which ensures a very high level of competition.

Sergey Seninsky:

Peter Beck, research fellow at the Korea Economic Institute of America continues:

Peter Beck:

Economic reforms in South Korea were mainly aimed not at changing the volume of budget expenditures or the share of public sector enterprises in GDP, but at changing the role of the state in the economy in general.

Over the past years, the South Korean government has gradually abandoned active intervention in the economy in favor of performing only certain functions of regulating it and monitoring the implementation of legislation.

In South Korea, banks were privatized in the early 80s. In the 90s, industrial enterprises were intensively privatized. The government now owns less than 30% of the two largest energy and steel companies, although they are all still considered state-owned. And, for example, South Korean car companies are all private.

The process of economic liberalization was difficult. Thus, after the economic crisis of 1998, the government again began to control two of the five largest South Korean banks, provided subsidies to some others and, to a certain extent, coordinated their activities. However, these are short-term measures and the government now intends to completely withdraw from the financial and banking sector.

Sergey Seninsky:

Thanks to all our interlocutors.

An overview of some publications in the next issue of the British weekly The Economist, which Dmitry Volchek will introduce you to:

Dmitry Volchek:

There were so many protesters in Washington that delegates to the next session of the International Monetary Fund and the World Bank were asked not to gather at all. “The meeting went well as usual,” said British Finance Minister Gordon Brown. He could have added that the result was as usual: that is, almost minimal, writes The Economist.

They talked, as before, about the need for private investors to bear part of the costs to overcome the consequences of financial crises, about the need to comply with international standards or greater transparency of national economies. There was talk about writing off bad debts of the world's poorest countries and about financing international programs to combat AIDS. The total number of infected people in the world today is estimated at 50 million people, 95% of them live in developing countries.

Of course, they talked about international trade at the session. The final document, for example, notes that the industrialized countries of the world have already done a lot to expand exports of products from less developed countries to their markets, especially agricultural and textile products. However, these markets are opening so slowly that the protest that the delegates to the IMF and World Bank session encountered in Washington is almost deserved, the Economist concludes.

To understand what is happening with many Internet companies today, it is not necessary to follow the American NASDAQ index; the example of Japan is enough, writes The Economist. Until recently, shares of two leading Japanese Internet companies - Softbank and Hikari Tsushin - fell in price - 4 and 10 times, respectively. Rumors spread about large losses at Hikari Tsushin and that its founder might be under investigation. And the founder of Softbank is no longer called “the Japanese answer to Bill Gates.”

However, the wave swept across many markets, from Bombay to Seoul. In Europe, shares of some Internet companies have lost two-thirds of their value in recent days.

But ultimately, the fate of technology stocks around the world now depends on further events on the American NASDAQ stock exchange, The Economist concludes.

The rate of economic growth in China, despite a constant decline in recent years, continues to remain at the level of 7-8% per year, writes The Economist. However, this is partly due to the continued release of goods that are not in demand. Research shows that in sectors of the economy where competition is strongest, such as consumer goods, overproduction is minimal. But in the steel industry or cement production it is the other way around. But it is precisely these industries, dominated by large state-owned enterprises, that receive the lion's share of government subsidies. It would be better to transfer this money directly to buyers, so that they, and not the authorities, determine which enterprises really deserve these funds, the Economist concludes.

Sergey Seninsky:

Dmitry Volchek introduced you to a review of some publications in the next issue of the British weekly The Economist.

Events of recent weeks on the American stock market. As an afterword to them, we offer you the opinions of commentators from several international economic publications:

Elena Kolomiychenko:

This is a convergence that will only benefit the market, writes the American weekly BusinessWeek.

Over the past year and a half, the stock market has become a market of extremes: on the one hand, incredibly inflated stock prices of “new economy” companies, and on the other, wildly undervalued shares of “traditional” companies. What has happened in the market in recent weeks can be defined as a correction of both extremes. Behind these external manifestations is a significant shift in the psychology of investors and a revaluation of the value of those companies that, in fact, have nothing else besides grandiose ideas and significant potential. Conversely, investors have again turned to the largest companies in the “traditional” economy.

But the most important factor in favor of a market correction is data on the real profits of leading American corporations. In the first three months of this year, it increased by almost a third - compared to the volumes of the first quarter of last year. In general, profit growth by the end of the year for the 500 leading US corporations included in the Standard & Poor's 500 stock index is projected to be almost 18%.

There are no guarantees that the market correction will lead to a new rise in the market in the near future. But at least any new increase in share prices will be much more justified than before, writes the American weekly BusinessWeek.

Tengiz Gudava:

Shares of many Internet companies have fallen by 70-80% from their maximum quotes and may fall in price even more, writes the American weekly Newsweek. Even the “whales” of the high-tech industry were not spared by the collapse. Shares of Cisco Systems, which recently became the most valuable company in the world, surpassing the leader of recent years - Microsoft, even lost almost a quarter of their value in a week. But, in essence, this is the same reputable company, which has simply become cheaper. Moreover, against the backdrop of a steep decline in shares of new Internet companies, which, in fact, have not yet left the zone of interests only of venture capital, shares of Cisco Systems seem to many investors to be almost as reliable as US Treasury bonds.

Today it is too early to say that the constantly growing stock market has lost its former magical influence on investors. However, what has happened in recent days more than clearly demonstrates how fragile this market can be. And how short-sighted it is to believe that it can grow indefinitely, writes the American weekly Newsweek.

Igor Taborsky:

Recent developments in the stock markets have been good news. The market did not collapse at all, but everything that happened on it is what both the American and global economies need, writes the British newspaper Financial Times.

First, the events reminded everyone that investing in stocks is always a risky business. Secondly, they demonstrated that even the “newest” economy can be “overheated”. Thirdly, a correction in the stock market will contribute to a slowdown in the growth rate of domestic demand in the United States, which is overdue, and this is obvious.

What has already happened in the stock market in recent weeks is just the beginning. So far, the fall in stock prices has only partially compensated for their growth only since the beginning of this year. The now even more obvious tightening of monetary policy in the United States will be reflected in the stock market.

Now is the ideal time for such a correction, as the world economy is increasingly demonstrating an acceleration in growth rates. Therefore, one can only welcome the latest events in the stock markets and hope that its correction will continue, writes the British newspaper Financial Times.