Timing: Let's Leave business alone

Source: PhotoXpress

Source: PhotoXpress

How much involvement should the state have in the economy of an emerging market? While most agree that the private sector is the most efficient manager, academics say that during the transition period, state involvement is crucial.

“All emerging markets follow a similar pattern,” Professor Bernard Yeung of the National University of Singapore said during a presentation at the European Bank for Reconstruction and Development in Kazakhstan in May. “At the start of the process, the state has to engage in a big push to get the wheels of commerce turning, because it is the only entity with the resources to do anything. But once the economy is up and running, it must step back and adopt more of a nurturing strategy.”

Agreed Professor Sergei Guriev, director of the New Economic School in Moscow: "When the economy is healthy, the state should give the job of driving economic growth to entrepreneurs and small- and medium-sized enterprises."

Yeung added that a key element of nurturing was “creative destruction” – where inefficient companies go out of business to allow their resources to be put to better use elsewhere. But this is where it starts to get tricky, because government lobbies and vested interests swing into action to protect companies from being downgraded or sold off. It can be argued that Russia’s economy has already reached the point where its government can afford to become less involved.

A survey found that since 1991, levels of both income and consumption per household have soared. Those sectors that have benefited from the retail boom are the clear winners, and the state now needs to do little more than nurture them. However, not all manufacturing sectors are self-sufficient. While the state’s involvement in the power and automotive sectors of the economy has been very successful, the shipping, aviation and metallurgy sectors have a way to go.

Relaunching the privatisation process, the Kremlin is planning to raise upto one trillion roubles ($30 bn) in the next three years. The stakes are high: in the aftermath of the economic crisis, slower growth of about 4% may not be fast enough to stop the downslide in the ageing infrastructure. Even if the government stays on course, it still has to get the speed of transition – from the big push to nurturing – correct, which will not be easy.

Ben Aris is the editor and publisher of Business News Europe.

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