RANEPA docent: ‘Mechanical growth of GRP in Tatarstan isn’t a goal in itself’

Economist Sergey Khestanov on how to achieve a 5% increase of gross regional product

RANEPA docent:  ‘Mechanical growth of GRP in Tatarstan isn’t a goal in itself’
Photo: region.center

Tatarstan ended 2019 with a 1% growth in GRP, there was announced a plan for 2020 to achieve a 2% rise in the key macroeconomic indicator and 5% several years later. In a column written for Realnoe Vremya, economist, Docent of RANEPA’s Department of Financial Markets and Financial Engineering Sergey Khestanov talks about how to achieve this and what pitfalls would certainly lay on the way to it.

If something that isn’t profitable is created, the plus GRP turns into the minus one next year

I will note from the beginning that it is possible to achieve a 5% growth in GRP, but it isn’t simple to do this in practice. Of course, if Tatarstan is ready to suddenly increase expenses of the regional budget, this will instantaneously cause good growth. What is GRP? It is consumption plus investment, plus exports, minus imports. The republic can afford any massive investment state projects, but another question arises here: mechanical growth of GRP (and GDP) isn’t a goal in itself. Yes, once you spent public money, and your GDP increased, but if as a result of your actions something that isn’t profitable is created, the plus GRP turns into a minus one next year because you start spending big money to maintain the same facilities. So the main question is what Tatarstan authorities are going to invest in.

Generally speaking, of course, the economy of Tatarstan is very good in terms of diversification and balance — it has developed both mechanical engineering and agrarian sector, moreover, the republic has very good educational infrastructure, many Moscow companies outsource Tatarstan IT workers to develop software and so on, commerce is also historically developed in Tatarstan. And if the regional authorities elaborate and implement an investment project well, which will either provide commercial feedback or help a business, the 5% growth can be achieved. But I think that projects should better be created not for the 5% growth but to ensure they won’t make a loss later. Tatarstan already has an example of Alabuga, which is the only Russian special economic zone to make a profit, while other SEZs became domestic offshore areas. While the oil industry will unlikely provide the republic with a new profit: the fields are old, it is impossible to raise production suddenly.

Projects should better be created not for the 5% growth but to ensure they won’t make losses later. Tatarstan already has an example of Alabuga, which is the only Russian special economic zone to make a profit, while other SEZs became domestic offshore areas

Innovation as the most difficult thing

Today businesses’ standard problem isn’t to create something new but to make up something that will make money. And, by the way, production capacities in Russia now are so big that suffice it to name an invention and fix a good price and capacities will immediately be built for this — if you want a plant, a plant will be built. But it isn’t enough to build a plant, it is necessary to think about how to load the plant and if the products will be in demand.

And it is no secret that not everything nowadays stumbles over money in Russia — there is no problem here, in any case, for a successful Russian business. Innovation is the most difficult thing. Now there are very few spheres and products without competition, while the Russian market is very competitive. Yes, you will create a plant in one of the republican Priority Social and Economic Development Areas, but the key question is if somebody will buy these products and why they are better than the one a consumer got used to.

For this reason, private businesses should deal with innovation in any regions. Yes, it is risky investments, one can lose a lot, but if you nailed what a consumer needs, a lot can be earned. The mission of regional authorities in this case is known — to create conditions for a business, to improve the performance of transport, communications, maybe even to reduce taxes in some priority areas. There aren’t a lot of precedents around the world when a state raised GRP thanks to its own business.

Photo: Maksim Platonov
Production capacities in Russia now are so big that suffice it to name an invention and fix a good price and capacities will immediately be built for this — if you want a plant, a plant will be built. But it isn’t enough to build a plant, it is necessary to think about how to load the plant and if the products will be in demand

Can foreign investors with their novelties help the economy of Tatarstan? The case is that the whole world economy is on the rise now. In general money in international markets is cheap, and one can borrow good money with safeguards. But it becomes harder to imagine that foreigners will go to the Republic of Tatarstan from afar year after year — now many countries of the world are fighting to attract investments. This is why some foreign projects can be implemented in Tatarstan, but this is unlikely to be widely spread.

Socialism helped the weak, while capitalism did the strong — who won in the end?

It is in general necessary to help, first of all, those sectors that have better development dynamics. If you want to develop something in the region, you should help not the weak but the strong. For instance, socialism helped the weak, while capitalism did the strong — who won in the end? If all enterprises hope for help from the authorities, there won’t be any development.

And Tatarstan, of course, as well as the whole country, should pay attention to the IT sphere. Yes, the development of IT takes decades, but it still takes place; with time it will become more important to make up a useful product for some entrepreneurs, consequently, industrial designers, those who not only programme but also engineer — develop different devices, modernise them and so on — will be needed. This is why I would advise the officials of the Republic of Tatarstan to lure good teachers of engineering, electronics and information technologies to the republic.

Contemporary China’s has engineering firms — it is pure IT with its software and experienced engineers. You go there and say what device you want to make. The engineers take some time to study a product and then announce how much it will cost to translate the description of the product into a drawing of a special format. If all is fine for you, you will receive an email with a fail you give to the enterprise that knows how to make electronics and get the end product. Yes, most big manufacturers won’t take on producing less than 100,000 samples of the product, but some experimental plants will make you a test lot of some LED lanterns for a high price.

Tatarstan, of course, as well as the whole country should pay attention to the IT sphere. This is why I would advise the officials of the Republic of Tatarstan to lure good teachers of engineering, electronics and information technologies to the republic.

When nobody knows what will happen next, any sensible functionary will keep his or her region’s reserves

Of course, unlike a large business, authorities can do little for small and medium-sized ones. First of all, it is infrastructural projects, tax concessions and a subsidised interest rate. Nevertheless, authorities need to work in these areas, moreover, to place a government procurement order from local manufacturers. It is the world practice, but it is important to consider that the producer must be sensible enough.

Is there hope to provide GRP’s growth with the help of federal programmes? If oil price is low in the next years, the federal Ministry of Finance will realise that cheap oil is for long, all federal programmes will be cut. Any large-scale public expenditures lower the ruble, so any big ideas of the regions will be severely cut. This is why one shouldn’t hope for the federal centre here.

And I don’t think that the Tatarstan authorities will hurry up to perform the plan to increase GRP with low oil prices. Functionaries’ logic is clear here and quite fine — an event with important and very serious consequences took place, but the consequences are not completely clear (if oil will stop falling or keep going down, it is unknown if the Saudis will manage to drive Russia out in the oil market). The country does have reserves, but when nobody knows what will happen next, any sensible functionary will keep his or her region’s reserves until there is some certainty. So we can easily forecast a pause from a month to a quarter for both Russian and regional functionaries.

By Sergey Khestanov
Tatarstan