Food prices increased a monthly 2.2 percent in April, according to the statistics office. Bread prices rose 6.4 percent and sunflower oil prices increased 8.6 percent in the month.
Russia, which is the world's biggest energy exporter, is struggling in what now appears to be a vain attempt to reduce the inflation rate to 10 percent this year as food and energy prices and rising wages and living standards take what appear to be a relentless toll. Russia's inflation rate reached 11.9 percent in 2007, topping the government's 8.5 percent target rate by a good margin.
Update.
Well, I got a reasonably interesting comment on the post, so I though I would update adding my response, since I do think the issues raised are rather important ones.
"Is there a particular reason the decline in oil production is a bad thing for Russia?"
Well yes there is really, but to see why we need to think in the slightly longer term - let's say 5 to 10 years.
From the point of view of the Russian economy as a whole the oil sector constitutes relatively "easy money" (I'm sure you won't feel this though if you actually work in the industry out in Siberia, or are one of those who is likely to be involved in developing the Yamal peninsula resources). What I mean by this is that in the short term Russia can close some of the living standards gap with the OECD simply on the basis of oil money, and the secondary derivitive activities of construction (as people buy houses etc) and financial services (the loans and mortgages to float the new life style) - ie a consumer boom.
What gets missed out in all of this in the short term is the development of a competitive industrial base which can make the economy sustainable in the longer term, since all the inflation we are seeing is just choking this off. This is the core of my argument.
Now, if we look around the OECD countries right now we can see that the construction driven consumer credit boom leg for economic growth is completely unsatisfactory on its own account - viz the US, the UK, Spain, Ireland etc now, Japan 1992, Germany 1995.
So at some point this internal momentum will seize up, as we have seen and are seeing elsewhere. Now if when it does seize up you don't have the capacity Japan and Germany have had to "re-invent themselves" as strong export driven economies then you have real difficulties sustaining economic growth (as we have been seeing over the last 10 years in Italy. Italy's construction driven component also peaked out in the mid 1990s, and Italy now has a congenital competitivesness problem).
So this is where the oil starting to decline (or at least become more and more costly and difficult to extract) could become a problem. If Russia has not by the time oil starts to become more problematic as a source of revenue developed the necessary industrial capacity to survive in this new economic environment then things can become very complicated and difficult.
"A decline in oil production would cut down on that "Too much money chasing too few workers" thing, ya know."
This is not so simple as it seems, since strong bouts of inflation can be followed by severe bouts of deflation, which is of course "too little money chasing too many people, and too many dollar bills stashed away in mattresses".
I think the key point is that Russia's population is not simply declining, it is declining and AGEING.
So Russia is going to have a much higher elderly dependent ratio twenty years from now. This population will need to be supported, and to offer this support you need economic growth, and again this is where the presence or absence of an industrial base (and high tech agriculture I suspect in the Russian case) becomes important.
Last week Claus Vistesen posted something on the Demography Matters blog about Germany, and at the end of the piece he cites recent research by McKinsey (and other sources) which tend to suggest that between now and 2020 a further 10 percent of the German population can fall into poverty just due to the effect of ageing alone. Obviously Germany is a lot richer than Russia. Just imagine what happens once all this starts happening in Russia.
10 comments:
No worries, for Russia. As Russian oil production declines, there will be less money chasingthose few Russian workers, and this will also reduce the current account surplus that's driving Ruble appreciation. It's not that Russia needs the money after all. With half a terabuck in foreign currency reserves accumulated, the Russians have no need of it.
Too bad for countries reliant on buying the energy Russia exports though.
Hi,
"No worries, for Russia."
Well, I am glad to see you feel so confident about all of this. Since I guess it was you who put the comment on the "oil" post I will copy my reply over here, since you may not see it there.
"Is there a particular reason the decline in oil production is a bad thing for Russia?"
Well yes there is really, but to see why we need to think in the slightly longer term - let's say 5 to 10 years.
From the point of view of the Russian economy as a whole the oil sector constitutes relatively "easy money" (I'm sure you won't feel this though if you actually work in the industry out in Siberia, or are one of those who is likely to be involved in developing the Yamal peninsula resources). What I mean by this is that in the short term Russia can close some of the living standards gap with the OECD simply on the basis of oil money, and the secondary derivitive activities of construction (as people buy houses etc) and financial services (the loans and mortgages to float the new life style) - ie a consumer boom.
What gets missed out in all of this in the short term is the development of a competitive industrial base which can make the economy sustainable in the longer term, since all the inflation we are seeing is just choking this off. This is the core of my argument.
Now, if we look around the OECD countries right now we can see that the construction driven consumer credit boom leg for economic growth is completely unsatisfactory on its own account - viz the US, the UK, Spain, Ireland etc now, Japan 1992, Germany 1995.
So at some point this internal momentum will seize up, as we have seen and are seeing elsewhere. Now if when it does seize up you don't have the capacity Japan and Germany have had to "re-invent themselves" as strong export driven economies then you have real difficulties sustaining economic growth (as we have been seeing over the last 10 years in Italy. Italy's construction driven component also peaked out in the mid 1990s, and Italy now has a congenital competitivesness problem).
So this is where the oil starting to decline (or at least become more and more costly and difficult to extract) could become a problem. If Russia has not by the time oil starts to become more problematic as a source of revenue developed the necessary industrial capacity to survive in this new economic environment then things can become very complicated and difficult.
"A decline in oil production would cut down on that "Too much money chasing too few workers" thing, ya know."
This is not so simple as it seems, since strong bouts of inflation can be followed by severe bouts of deflation, which is of course "too little money chasing too many people, and too many dollar bills stashed away in mattresses".
I think the key point is that Russia's population is not simply declining, it is declining and AGEING.
So Russia is going to have a much higher elderly dependent ratio twenty years from now. This population will need to be supported, and to offer this support you need economic growth, and again this is where the presence or absence of an industrial base (and high tech agriculture I suspect in the Russian case) becomes important.
Last week Claus Vistesen posted something on the Demography Matters blog about Germany, and at the end of the piece he cites recent research by McKinsey (and other sources) which tend to suggest that between now and 2020 a further 10 percent of the German population can fall into poverty just due to the effect of ageing alone. Obviously Germany is a lot richer than Russia. Just imagine what happens once all this starts happening in Russia.
I find it rather perplexing that you portray rising wages as a negative thing. No doubt if wages weren't rising, the story would still be negative nonetheless, albeit with a different and more easily agreeable reason. I guess there's just no way to win, Russia is doomed to fail!
But in all seriousness, I think you give too much credit to the theory that Russia's economy is entirely reliant on oil exports to begin with. Exports as a whole only account for about 8.7% of the total GDP (2007). That's more than half what it was in 2000, which only proves that the economy is growing away from oil reliance, not towards. Oil is still raking in the dough for sure, but the economy is developing in other areas nonetheless.
You talk about "development of a competitive industrial base" - but what about it? Will the fact that oil exports contribute to 7% of GDP (a figure that is rapidly dwindling) really hinder this development? Sounds far fetched at best.
Hi again,
Well I guess we are just going to have to agree to differ about all this. But a few short points.
"I find it rather perplexing that you portray rising wages as a negative thing."
I don't portray rising wages and rising living standards as a negative thing, far from it. What I portray as a negative thing are wages increases which bear no relation to real productivity inreases and simply serve to fuel and inflationary spiral which can only end in tears.
If you want to get some idea of what this will mean just follow what is happening in the Baltic states, since they were in many ways a test case for what might happen for those who were watching.
You simply go on boom-bust, and I don't seriously think that is interesting for anyone. (Ukraine is, of course, another similar case).
Of course these latter countries are in a much worse problem than Russia since they don't have the oil and other natural resources which will of course provide some sort of natural cushion for Russia. In that sense oil certainly isn't a bad thing.
The Baltics, Ukraine, Romania etc have - like Vietnam - exported people instead of oil, and received remittances in return, but the end product is the same, especially in societies with very low long term fertility and already shrinking labour forces (not the case with Vietnam yet, but just give it a decade).
So we are looking at this from very different points of view, but don't please go away with the assumption that you are the one who cares about Russia while others don't. I may be wrong, but if I am right it is very much in the interest of all these above mentioned countries to do something serious about the underlying problem which is the fertility issue, and to do it soon. The unrealistically rising wages and the inflation are ultimately simply a by product of this.
"Exports as a whole only account for about 8.7% of the total GDP (2007)."
I think you must be a little confused here. The number you are referring to is probably the trade SURPLUS (just guessing, but it is the only one which comes near the figure of 7% of GDP.
According to the IMF Russia's dollar value GDP in 2007 was about 1225 billion $ (about the same size as Spain to get a comparison), while according to the Bank of Russia in 2007 commodity imports were running at 223 billion $ (just short of 20% of GDP) and exports were running at 355 billion $ (or aroun 30% of GDP). So trade is about 50% of GDP in total, and of course Russia becoming a more open economy this percentage should rise and rise.
Now the point is, on a per capita basis to have living standards equivalent to say Spain, dollar GDP will need to triple, but as we are saying, except for continuing increases in the price of oil (which are certainly not impossible), it is going to be difficult to increase oil revenue from additional output. Hence it has to come from somehwre else, and this, of course, is the importance of industry.
To get OECD type living standards Russia has to triplicate its GDP holding oil constant (more or less). This is not going to be easy, and especially not with a declining labour force.
Obviously Russia needs a serious inward migration (resettlement) programme, possibly from Sub-Saharan Africa, but this is another point.
"Will the fact that oil exports contribute to 7% of GDP (a figure that is rapidly dwindling)"
This is the whole point. This is just not the case. It has been the tripling of oil revenues which has made possible this whole inflationary boom. To take just one example, in 2006 Russian exports - which were largely commodities - were 303 billion, that is they increased, so in 2007 they were up by 50 billion - or roughly 17% - this is hardly dwindling - and in fact is an extra 3 or 4 percent of GDP in just one year.
"I guess there's just no way to win, Russia is doomed to fail!"
No. I don't agree. This is Russian fatalism. There are always things to do. But first you need to understand a problem. Then you need to address it. Denial doesn't solve the problem it simply wastes time while it gets worse.
"Sounds far fetched at best."
Which one, my view or yours?
Hi again, (by the way I'm not the same anonymous as the first one you replied to, I'm the second anonymous again. Sorry I'm too lazy to get an account at the moment!)
"it is very much in the interest of all these above mentioned countries to do something serious about the underlying problem which is the fertility issue, and to do it soon."
Absolutely. Actually, I've read a lot about Russia taking measures to help their demographic situation, and there have been some major visible improvements in the past year or so. Can't say for certain that the largest baby boom in 25 years will last, or whether the 4% decline in mortality and 2.4 year rise in life expectancy in just 2 years will continue to improve, but its positive development regardless. For now the rapidly declining population is down to just -0.17% as opposed to -0.6%+ in previous years.
I've already been reading reports that are changing their story and saying that this is just a small boom that might continue for 5-10 years before the real crash, but when demographic predictions change so rapidly to coincide with present day reality like that, I find it hard to trust their word. I'd rather look at it as motivation to continue working towards solving the problem for good and to prove them wrong, rather than an actual outlook on what will inevitably happen in 15-20 years. This blog went into a great deal of depth on the subject, you might be interested.
"I think you must be a little confused here. The number you are referring to is probably the trade SURPLUS (just guessing, but it is the only one which comes near the figure of 7% of GDP."
I got the figure from this article, which says: "The most notable change is in exports. In 2000, export accounted for 20 percent of the GDP; in 2007, it accounted for 8.7 percent of the GDP."
Perhaps it's wrong or maybe I'm just an idiot, but that's what I based my argument on so I can't really argue anything beyond that.
"No. I don't agree. This is Russian fatalism. There are always things to do. But first you need to understand a problem. Then you need to address it. Denial doesn't solve the problem it simply wastes time while it gets worse."
No, I agree completely. I can get carried away with sarcasm at times!
Hi again,
"I got the figure from this article, which says: "The most notable change is in exports. In 2000, export accounted for 20 percent of the GDP; in 2007, it accounted for 8.7 percent of the GDP.""
OK. I think I now understand what is going on now. This article is very confusing, since you need to be more or less an economics statistician to work your way through it (and then sort of do a mental leap and imagine what the guy might have been trying to think in Russian before he translated it into his head in Russian) but basically this is about the COMPONENTS to GDP growth. What the writer is saying - and I am sure that this is true - is that export growth now contributes less to GDP GROWTH than it did in 2000.
No one disputes the fact that economic growth is continuing in Russia, however. The only thing that is changing is its model. The most notable change is in exports. In 2000, export accounted for 20 percent of the GDP; in 2007, it accounted for 8.7 percent of the GDP. Meanwhile, consumptive use (exclusively in the state sector in 2007) and gross savings have increased. Investment in fixed assets and material reserves has also had an impact. Dependence on raw materials is decreasing.
It's the talk of growth models that's the giveaway. What he meant to say is that:
"In 2000, export accounted for 20 percent of GDP growth; in 2007, it accounted for 8.7 percent of GDP growth."
This is more or less the situation. To get this kind of number you need to do a growth decomposition, and take imports from exports and see the extra value this had in 2007 compared with 2006, and how much of the 8.1% total growth they were reporting was due to this: some 8.7% it seems, which really fits in with what I am saying, since with domestic industries becoming less and less competitive then exports can do less to help real growth.
In fact the line reported on is quite worrying. GDP growth share of exports dropped by around 11% points in 7 years. At this rates imports will start becoming a DRAG on growth (ie trade will have a negative impact) in about 5 years - or 2012. And if the situation is not linear and all the inflation accelerates this then I think we might see negative trade impact around 2010.
Indeed Finance Minister Alexei Kudrin seems to be suggesting this may well be the scenario.
"Can't say for certain that the largest baby boom in 25 years will last"
No I agree with you, this is very unlikely, since no one is looking at the real problem in a general and historical context, and as we saw in Italy with Berlusconi these one off payments (indeed there has been quite a history of this kind of thing in the Russian fertility issue) simply change timing decisions and not overall fertility decisions.
"but when demographic predictions change so rapidly "
look, I can't go into this at any length here, but the basic situation is that the real predictions don't actually change that rapidly, not the ones presented by serious demographers. There are "epochal changes" of course, but they may take place what, once every quater century or whatever. Basically the evidence for the fact that most of the Eastern European societies are stuck with very very low fertility is extensive and well documented.
Good times are encouraging people to be more optimistic, and this is advancing decisions (most Russian women now have one and only one child), and at comparatively young ages, as do Polish and Ukranian women, but of course if I am right and we are on a boom bust cycle here, then all the positive upside will be lost on the downside.
"This blog went into a great deal of depth on the subject, you might be interested."
Well the person who wrote it can sure put together a lot of words, but they don't have much idea what they are talking about.
For eg:
"Firstly, the post-Soviet fertility drop had much more to do with transitional shock rather than a values shift."
This is just wrong. This isn't a shock, it forms part of a much more general demographic transition and Russia's low fertility problem is of much longer duration, which is why the working age popultin has been falling for some years now, since the drop has been built up over many years and many birth cohorts.
"Nor will it have anything but a negligible effect on the economy."
IMHO this is just nonsense. Demography has very important economic implications as we are already seeing in Germany, Japan and Italy, and as we are now about to see all over Eastern Europe.
A couple of other things I noticed on the DA Russophile post,
Firstly he makes quite some use of the crude birth rate numbers (ie live births per thousand population). This kind of data is absolutely useless as it tells you next to nothing about fertility. For example if your population goes down then obviosuly your crude birth rate goes up, with NO CHANGE in numbers of children per woman.
On a much more complex level they are completely dependent on the shape of the pyramid and the cohort size. If you have large cohorts in the child bearing ages and much smaller cohorts behind them (which obviously is the case since women born around 1986 - just before the collapse in birth numbers - are far more numerous than those born in 1995) then you can get a lot more per thousand for a time, only then to have a sudden and dramtic drop if the underlying cohort fertility doesn't improve.
There may well be a legitimate debate about whether TFRs or cohort fertility rates are more useful, but almost no-one who knows anything about demography would use crude birth rate numbers to demonstrate anything beyond their own ignorance of the topic in hand. This notwithstanding I have seen this sort of data used by Russian officials who really should know a lot better.
Basically the person who wrote the post doesn't have the first idea about what the structural damage to the population pyramid questions are.
A booming economy, state sponsored pro-natality propaganda campaign and a 2007 law that 'expanded maternity leave benefits and payments, and granted mothers educational and other vouchers worth $10,650 for a second child and any thereafter', contributed to the fertility rate rising to 1.39 in 2007 and more than 1.50 this year. This is more than the average for the European Union and approaching the United Kingdom.
This is just absolute tripe isn't it. The UK has a tfr of around 1.8, so yes it is approaching but from a huge distance. I have no idea what the EU average is since it is a useless statistic. What is more important in the EU are the regional differences between Scandinavia, the UK and Ireland, and France on the one hand (all above 1.8), and the German Speaking countries, Southern Europe and Eastern Europe on the other (all around 1.3).
And how the hell this person can claim to know what the TFR for 2008 is going to be when we are only in May I really don't know. This sort of thing just isn't serious.
And this just has to be toatl bunk doesn't it?
"On the other hand, a 2005 Rosstat study, Family and Fertility, challenges Eberstadt's assumptions about desired fertility in Russia. The average desired amount of children, within favorable economic and social conditions, was 2.24, 2.40 and 1.99 for women, men and 15-17 year old teenagers respectively in Tver oblast, 2.26, 2.63 and 2.15 in Nizhnij Novgorod and 2.33, 2.56 and 2.11 in Marij El. On the other hand, the amount of children people are prepared to have in the present circumstances is substantially lower. Amongst women, men and teenagers, it is: 1.75, 1.87 and 1.72 in Tver Oblast; 1.60, 1.78 and 1.97 in Nizhnij Novgorod; 1.83, 2.05 and 1.92 in Marij El."
I mean in all the lowest low fertility EU countries I mentioned above except the Germany speaking ones women have expressed a desire to have two children for years, yet fertility has remained at rock bottom. So if the Rosstat data is valid what Eberstadt stated seem to be correct, namely "what we seem to be observing is that Russia is becoming part of the rest of Europe with respect to ideas about ideal family size". Or we could say like the rest of Eastern and Southern Europe.
If you are really interested in all this rather than simply wanting top feel "right" go check out my:
Familiarism in Italy - Dying From An Excess of Love?
post on Demography Matters blog.
In particular this quote:
"Italians have fewer children because they 'love them too much' and not the other way around" Rossella Palomba, Italy, The Invisible Change
It may be that Russians also love their children too much and this is why although wanting so many they have so few.
But note that Perelli Harris holds a different view and suggests that among Russophone populations there is "stopping behaviour": ie women have one and only one child, becuase they are happy with this.
Also you need to keep in mind that there is very large ethnic migration around Russia now, and different ethnic groups (like the Uzbeks, who have one of the largest migrant presences) have a tendency
towards higher fertility. Part of the drift upwards in births is partly and obviously due to the omnipresence and momentum effects of some high fertility groups across the whole of Russia now.
On the other hand, this bit is really quite reasonable, and evidently the case:
Thirdly, the current trajectory upwards is not going to last. This year's January-on-January 12.7% increase and last year's 8.7 % increase in the number of births is not sustainable and indeed a significant portion of them are due to a one-off increase in the case of previously fence-sitting parents who chose to have another child to get the new benefits package. There is a direct precedent for this - from the early 1980's, state pro-natality policies increased the fertility rate from 1.9 to 2.2, as shown on the graph, but the effect peaked off by 1987.
So I think that what we have in the post is a mixture of seeing what you want to see, and lack of real expertise.
The mention of the 1980s case is interesting, since as you will see from the TFR chart Russia went below replacement for the first time in the early 1970s, and then was dragged back out of this by a pro natal policy in the 1980s, early 1980s, but this collapsed in the late 1980s, as things started to fall apart.
My whole argument is basically I think that if the inflation issue isn't addressed (and this means a much more systematic opening to large scale labour supply with long term residence and citizenship righst (ie not guest workers) in the short term - possibly as I suggest from Sub-Saharan Africa - and real pro-family institutional policies on the French or Swedish lines in the longer term, then when the bust part of this boom comes we will simply see fertility fall off a cliff again.
Interesting reply. You may want to post that reply on his blog, as I'm sure he would be interested and willing to argue his points as well.
"Interesting reply"
Well thanks for your time and sharing your point of view with me. I think conversations don't necessarily need to be about unanimity.
What we face with this demographic-economic interface is truly what can be termed a complex problem, in the sense that you need to handle material from a variety of different disciplines - economics, demography, socoiology , anthropology, evolutionary biology (for the life expectancy and fertility issues), to name but a few. Needless to say few feel comfortable moving through such a wide area, certainly university academic staff are not trained to think in this way, and all of this is way, way beyond the "instant coffee" type discourses of the modern political classes and think tanks.
I feel one of the defining features of complex problems is that you need to apply multiple insights from a variety of different perspectives, which is why I value conversations, since they allow you to explore others points of view, and see what they can see from where they are standing that you can't from where you are.
I got interested in all of this when I found I couldn't understand why deflation became so deep seated and such a long standing phenomenon in Japan (I am a macro economist really). This has now taken me off on a wonderful voyage of exploration and discovery, and it still continues.
On the way I discovered that an economist of an earlier generation - Gunnar Myrdal - had given a lot of thought to the whole demographic issue: the propblem of below replacement fertility first arrived as an issue in the 1930s, and it was only really "forgotten" by the arrival of the post WWII baby booms and the impact of the huge population explosion in the third world (as I like to say one part of the world got to be very rich while another part got a lot of population, but few seem to have seen the connection). However the whole thing has come increasingly back on the agenda since the 1970s, and for one simple reason: with the ending of the "Malthusian Regime" where rising living stadards produced more children, there is no automatic "homeostatic mechanism" which can redress serious population imbalances, since with the possible exception of the United States the evidence is that as people get richer they have LESS children. This is epochal, and not simply a passing fad, which is why I didn't agree that demographic forecasts were so volatile.
The only real blips we have had in the OECD world since WWII has been the post war baby booms 8and possibly to some extent what is happening in the US now),and the subsequent shadow of this in "mini booms". I wouldn't read, for example, any very deep significance into the fact that Germans had slightly more children in 2007 than in previous years, since 2007 was the best year for them economically, and as I say, these good times may well shift around timing decisions, but there is little evidence they change long term patterns.
Anyway, back to Myrdal. What realloy surprised me was that he arrived at a series of conclusions about the economic implications of population ageing and decline (it is the age structural shifts that matter) which were very similar to conclusions I was coming to about Japan. Really it was pretty frustrating to struggle through to a set of conclusions only to find that someone had already gotten there some 70 years earlier, even if almost everyone has now forgotten about his work in this area (he got the Nobel for other contributions) although his work did leave a lasting impact in Sweden since his wife Alva had a lot to do with the "pro-natalist" policies introduced there from a very early point.
Anyway, I will leave you with one conclusion that Myrdal reached, that I will really endorse, and that is that population issues really stir up feelings much more than almost any other long term topic you can imagine. I know this from lengthy personal experience. Which again is why I like to chat, since I think half the issue with new ideas is developing them, and the other half is about ways of getting them across. That is it is a communication question.
Discussions of the population problem have always had the capacity to stir up public sentiment much more than most other problems....In fact, the discussion of the population problem seems at all times and in all places to be more strongly dominated by the volitional elements of political ideals and interests than any other part of the established body of social and economic thinking. Here, as in perhaps no other branch of social theorizing, the wish is very often father to the thought.
Gunnar Myrdal, The Godkin Lectures
Also writing things down helps me get my head straight about what I really feel about given topics :)
"You may want to post that reply on his blog,"
Well thanks for the invitation, but the big constraint is time here, although if you look at how much I have written here I guess you wouldn't notice it.
It's a pity, becuase as a young man the Andrei Tarkovsky film and character which our blogger friend takes his id from did influence me a lot. I have a very high opinion of Tarkovsky's filmography, and to some extent I identify with the "stalker" role, in the sense of trying to be a humble and unpretentious guide across a ruined landscape.
I am also a huge admirer of Russian letters generally, so I will close this comment with two quotes from giants of an earlier Russian avant guarde which I use to sign off my e-mails.
"As it is I'm waging a war already, but not for territory - for time. I am in a trench wrestling with the past for a shred of time"
Pavel Filonov
"Everything which we loved is lost. We are in a desert .... Before us is nothing but a black square on a white background!"
Kasimir Malevich
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