Page 46 - BNE_magazine_04_2019

46 I Eastern Europe bne April 2019
a massive infrastructure programme. At the start of 2007 inflation fell into single digits for the first time since the fall of the Soviet Union and the Kremlin immediately announced a $1 trillion (RUB35 trillion at prevailing exchange rates) infrastructure investment programme.
That is twice the amount the government is proposing to spend
this time round and it would have transformed the economy. Indeed, if the global financial crisis had not hit a bit
of 1pp of spending on infrastructure added between 1% and 4% to growth in developed markets and could add 7% or more in emerging markets.
Looking down the list of investment versus growth, the results are clearly mixed. Between 1995 and 2016 dirt- poor Armenia spent 1% of GDP on infrastructure but got 6% growth, while India spent the same and got
an even better 7% growth. Turkey
also did well, spending 0.8% of GDP
on infrastructure to get growth of 4.7%,
“the kings of state contracts” about two years ago. This group has won the lion’s share of mega-construction projects including the building of the Kerch bridge and the Power of Siberia gas pipeline to China.
Corruption is rife in Russia and the stoligarchs are all multi-billionaires thanks to their cosy relationship with Putin. But this hands-on model is also being changed.
Putin has lost interest in the day to day running of government. According
to bne IntelliNews’s Kremlin sources the inner circle around Putin has become smaller and he leaves much
of the business of running the country to the Duma and the Kremlin’s liberal fraction.
Putin largely deals only with his immediate circle and concerns himself with the huge set piece projects where large gobs of budget funds are being spent. In the new programme this direct control over massive infrastructure spending is going to be institutionalised under Vnesheconombank (VEB), which has been renamed VEB.RF and is now run by Igor Shuvalov, the former first deputy prime minister and Putin’s right hand man. VEB.RF will choose the projects and police the infrastructure spending to cut down on the waste
and stealing.
It is impossible to predict how well Russia will spend this infrastructure investment money. If the money is well spent it could lead to a boom as Russia still has a lot of “catch-up growth” ahead of it. Central Europe has pulled this trick off and has been booming for years now. But a second Russian boom seems unlikely. Given its multiplier so far was 2.3 – middle of the field amongst the emerging European countries –
a working assumption would be that it will at least keep the multiplier at the same level, which at least will produce a noticeable increase in growth.
“Infrastructure investments cause economic growth and economic growth, in turn, pushes up infrastructure investments, so that investments into infrastructure go hand in hand with general economic growth”
more than a year later with the collapse of Lehman Brothers in September 2008, Russia could have been a different place entirely today.
So just how big an effect will this spending have? If Russia added 2.4% to growth by spending 1.3% of GDP on infrastructure, surely by more than doubling the amount it will get spectacular returns, as the economic multiplier effect snowballs as it increases.
“This relationship is endogenous, as economists like to say: infrastructure investments cause economic growth
and economic growth, in turn, pushes up infrastructure investments, so that investments into infrastructure go hand in hand with general economic growth. The recent study of infrastructure invest- ment in the Chinese provinces found that debt-financed infrastructure invest- ment released structural bottlenecks and had substantial growth impact,” says Popov.
However, the spread is very wide. Investing in infrastructure works really well in some countries and not so well in others. Popov found that an increase
www.bne.eu
which is equivalent to a whopping multiplier of 6.2.
From the developed markets Ireland was one of the most efficient, spending 0.9% to get 5.7% growth – equivalent to a multiplier of 6. The US also made some of the most effective investments into infrastructure, spending only 0.6% for a 2.4% growth gain, but that is equivalent to a multiplier of 3.4. And Malta spent 0.2% on infrastructure for 3.7% growth, which is equivalent to a massive 15.9 multiplier: Malta clearly spent its money extremely wisely.
But there have been some failures too. Greece increased its infrastructure spending by 1.1% of GDP but only
saw growth improve by 0.7% and a multiplier of 0.7, which means much of the spending was wasted. The story in Italy and Japan, where the multiplier in both cases is less than one, is the same.
Where it will go wrong
And there is the rub. Nay-sayers have already pooh-poohed the Kremlin’s programme as yet another feeding trough, especially for the stoligarchs, the group of oligarchs inside Putin’s immediate circle that Vedomosti dubbed