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bne April 2019 Eastern Europe I 45
For 1% of GDP spent on infrastructure on average, the OECD countries have added at least 1.6% of growth to GDP.
MOSCOW BLOG:
Will Russia's infrastructure spending cause a boom?
Netherlands, Portugal) were growing at less than 2% a year with infrastructure investment of less than 1% of GDP,” says Popov in his paper.
Russian President Vladimir Putin has no choice but to invest into infrastructure if the Russian economy is avoid stagna- tion; indeed, it is already stagnating.
Russia’s economic growth stalled between 2011 and 2013, when oil was still over $100 a barrel and well before the tensions with the west over Ukraine began. Russia’s petro-economic model was exhausted and growth has fallen to next to nothing. Even the controversial upgrade to 2.3% growth in 2018 reported by Rosstat at the start of this year is, by emerging market standards, actually stagnation.
Second time lucky
Russia’s nominal GDP is about RUB100 trillion and the government is propos- ing to double the amount it was invest- ing in the last decade to roughly RUB3 trillion, or as much as 3% of GDP. If the amount of infrastructure spending doubles then the growth it adds should more than double.
The Ministry of Economy is already adding the economic multiplier effects to its GDP predictions, estimating growth for this year to be a modest 1.3%, rising to 2% and then 3.1% in 2020 and 2021 respectively.
“That’s a very ambitious target,” says
Ben Aris in Berlin
The Kremlin is launching into a six- year long RUB27 trillion ($400bn) spending bonanza that is intended to transform the economy. The way it is going to do that is to spend a third of the money on infrastructure and if the money is well spent it could lead to a boom.
Infrastructure is an “economic multiplier”. Put simply: for 1% of GDP spent on infrastructure on average, the OECD countries have added at least 1.6% of growth to GDP, according to Dr Vladimir Popov of the Dialogue of Civilisations Research Institute (DOC) in a recent paper looking at OECD members' investment and growth in the last decade.
But in emerging markets the multiple can be much higher. In Russia’s case it was investing 1.3% of GDP in infrastructure between 1995-2016 and had an average growth rate of 2.4%, which implies a multiplier of 2.3, says Popov.
The way it works is simple. If you build a good road or fast rail link between two towns then by cutting the cost and
transit time small businesses that were concentrating on their local market suddenly find it's practical to serve customers in a second town. Their market doubles and revenues go up proportionally.
The worse the infrastructure was to begin with, the more dramatic the multiplier effect can be; and the
“Infrastructure is an “economic multiplier”. Put simply: for 1% of GDP spent on infrastructure on average, the OECD countries have added at least
1.6% of growth to GDP”
infrastructure in most of the former Soviet countries is very bad.
“China and Azerbaijan had growth rates of GDP of about 9% on average in 1995- 2016 with the share of infrastructure investment in GDP of 2.7-3.4%, whereas many developed countries (Austria, Belgium, France, Germany, Italy, the
Iikka Korhonen, the head of Bank of Finland Institute for Economies in Transition (BOFIT). Almost all the international financial institutions (IFIs) that study Russia have growth forecasts below the official one.
But it could work. This is actually the second time the Kremlin has launched
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