Good afternoon, Ladies and Gentlemen,
I would like to continue with the historical thread begun by our Swedish colleague. Clearly, the world has been living in an era of globalisation for a long time now. We could count the start of this era from October 12, 1492, the day that Christopher Columbus landed in the New World. There followed the industrial revolution and the world wars, and also the financial and technological expansion of the developed countries.
Globalisation, as we know, is a process of far-reaching change in every area of human activity. It has become a commonplace truth to say that this process has both benefits and drawbacks. Larry Summers compared global capital markets to jet aircraft that take people where they want to go much faster and in greater comfort, but that have more dramatic consequences when they fall. Globalisation means that we can buy goods produced in any corner of the planet. It also means that local producers can no longer impose their goods on consumers at any price. Protectionist measures give them no more than a temporary breathing space.
Many researchers and politicians think that this means inevitable poverty for countries with a lower level of development at the outset. There are, however, at least three arguments to counter this assertion. First, all countries have so-called relative advantages. A country might have higher production potential but not have the time to make the needed product or deliver the required service to the market. In the same way, a company director, for example, does not have the time to do the accounting, even if he knows it better than the chief accountant. Second, every country has the possibility of attracting foreign investment and technology to develop production and create jobs. Finally, demand for imported goods rises following the rise in living standards. If a country follows a sensible economic policy, local producers will have enough time to adapt and improve the quality of their products.
One of the distinguishing features of globalisation is that it usually leads to a voluntary harmonisation of various standards and regulations. But though there is certainly a demand for this process and benefits to be gained, it cannot be based on one single economic or social development model. Every country, every nation, after all, has its own unique cultural values and its own independently chosen development paths and models. I think it would be a mistake to see globalisation as simply adjusting all the different development models to make them fit with one single model, even if it happens to be the most progressive and dominant model of the day. This is only one globalisation scenario, and far from the best one. This kind of globalisation would ultimately lead to the construction of an ineffective society.
Another scenario — and one much closer to the spirit of globalisation — is that of giving all countries the chance to choose the most effective development path for themselves. Globalisation’s role should be to ensure that countries can choose the best solutions on the basis of quality and not on the basis of who is proposing the solutions in question. As global processes erase economic borders between countries, people are starting to call for a corresponding improvement in the quality of life on this planet. In short, people are starting to demand fairness. This is obviously a long-term goal, but people all around the world are making their demands heard more and more clearly and will continue to do so with increasing strength.
As an active member of the global community, our country is also encountering new problems. The open economy of modern Russia offers far more development possibilities than our previously closed economy. Unlike our formerly closed economy, it does not allow us to move forward in a broad front in all sectors, but forces us to make rational choices based on analysis of our comparative advantages. The key factors on which a country’s potential in the globalising world rests are its human, production and natural resources potential.
The world’s population quadrupled over the course of the twentieth century, from around 1.5 billion to more than 6 billion people. Forecasts predict that global population will rise by a little more than 1.5 times over the coming century, and that significant structural changes will take place within national populations. Countries’ readiness to enter the global world will vary. The share of population in the developed and developing countries, along with economic and political potential, will shift in favour of the developing economies. This, incidentally, is why we would like the St Petersburg forum to specialise in analysing the potential of the developing markets.
Forecasts predict that Europe’s share in the world’s economic weight could almost halve by 2050. Already today more than half the world’s population lives in four countries – Brazil, Russia, India and China. The developed world, with 1.2 billion people, accounts for 86 percent of world GDP, the developing countries, with 2.5 billion people, account for 13 percent, and the least advanced countries, which are home to 2.3 billion people, account for just one percent. To quote another interesting figure, according to Forbes, the total capital of the world’s 600 richest people comes to more than $1 trillion – entirely comparable to the gross domestic product of the world’s biggest countries.
Is it possible to stay on the sidelines of globalisation?
The most interesting example in this respect is the Soviet Union. The Soviet Union is usually cited as an example of a self-sufficient country with closed economic borders. Some analysts say that the Soviet Union became drawn into globalisation only after 1985, and that this ultimately caused its collapse. In the view of some economists, the Soviet Union refused to take part in the global division of labour and in doing so hindered the global economy’s development. This is the view taken, for example, by well known American analyst Bril Litz in his recent book. But was this actually the case?
The Soviet Union was without any doubt one of the most important actors in globalisation. Indeed, it was a country that aspired to globalisation, which was planned right from the outset as an, albeit artificial but nonetheless basic component of the international communist system. The Soviet economy was quite broadly integrated into the world economy. We should not forget about cooperation within the framework of the Comecon. If the Soviet Union had been a genuinely self-sufficient country its economy would not have been dependent on world oil price fluctuations, for example. But the Soviet Union was hit by economic crisis after the slump in world oil prices in the mid-80s. Of course, external factors were not the only cause of the country’s collapse, rather they acted as a substantial catalyst for the internal problems that had accumulated. In this context, we need to make a more detailed analysis of the development challenges arising from globalisation facing both individual countries and the world economic system in general. Globalisation is not the one-way street it still was a few years ago. The rise of China, India, Brazil, Russia and other countries has changed the world development landscape.
First, in this new landscape, the imbalance in world trade and investment flows between the major economic centres represent an increasing danger, as do the long-running budget deficit policies in leading countries. This concern arises because, as world markets become more integrated, the risks and threats of destabilisation to the world economy in general become greater. Sharp fluctuations in currency and interest rates on the markets are a threat not so much to individual economies as to the entire world financial order. Particularly worrying is the fact that the world’s largest economy, the United States of America, the issuer of the only reserve currency at the moment, is running huge trade and budget deficits, mostly financed by an inflow of foreign capital. What’s more, much of this capital is coming from the developing economies, from China and from other countries, with which quite heated debates are going on exchange rates. Another important economic centre, Western Europe, is facing the challenge of exceptionally low economic growth rates partly caused by the over-strengthening of its own currency.
Russia, we hope, is today following a balanced and responsible finance policy. This gives us a certain moral right to initiate a discussion on the need for more balanced rules of the game in this area and the need to change the current situation without detriment to world economic growth and without causing sharp currency fluctuations.
In his Nobel Prize address, Robert Mundell said that two unresolved issues remain today: the most important is the unproductive changeability of exchange rates that can aggravate international relations during crisis periods, and the other problem is the lack of an international currency.
The situation in the world is changing today and we are now seeing the emergence of new world development leaders with their own stable currencies. The modern world is in very serious need of a more secure financial system, a system in which there is not just one reserve currency that dominates.
All the conditions are in place for developing the situation along these lines, but there are also obstacles blocking the movement of capital and holding back this process. As we dismantle these obstacles, a system will be able to take shape that will most likely be based on several collective and reserve currencies. Whether or not this system will ultimately produce an international currency is a question for future generations. But already today the international financial organisations should be paying attention above all to the financial policies pursued by the most developed countries, for it these countries’ actions that can cause problems for the entire world financial system. This is all the more important given that today’s priorities, including the International Monetary Fund’s priorities in Asia and Latin America are somewhat different in focus. The practice followed by this esteemed organisation based on the principle of ‘money for reform’ does not appear to have much of a future. It would be of greater benefit to all if the IMF focused its efforts on stabilising world currency markets based on responsible financial policies in the world’s leading countries.
Our country has decided to remove all formal restrictions on capital and financial operations, to create an oil exchange with settlements in roubles, and to pay taxes and customs duties in our national currency. As demand for the rouble increases in the world, our currency could also become a reserve currency, like the currencies of other centres of economic development. We are also abolishing taxation of dividends received through direct investment within holdings, and we hope that this measure will encourage Russia’s transformation into a regional capital centre.
The second problem is the threat of financial and economic crises aggravated by resource deficits as the world economy continues to expand. The rapid growth of the Chinese and Indian economies coupled with the lack of a long-term response from producing countries have already led to a sustained rise in prices for the main energy resources. The so-called Golden Billion is coping with this situation for now, although high petrol prices in the developed countries have already led to serious changes in consumer spending. In the poorest regions, meanwhile, people did not have access to basic energy resources anyway, and this is still the case. But the leading oil producers and consumers continue to discuss issues within their separate clubs. Russia, which is both a producer and consumer country on the market, supports a common dialogue of all interested parties and proposes concrete solutions to the problems we face.
In order to respond properly to the common energy security threats we face, producers and consumers must take responsibility together. We need to work together in a number of key areas such as establishing a stable investment regime in the producer countries, expanding the use of alternative energy sources, including renewable energy sources and ensuring stable energy demand based on long-term relations, including through exchanges of energy assets.
Third, world trade and investment rules remain unfair with regard to the less developed countries, and this is a global challenge. The developed countries have already passed the point where change becomes irreversible. Beyond this point we have the new economy, a new society and new forms of social relations, but on the other side of this point is the old economy, a rigid social structure and archaic social relations. According to the United Nations, the gap between the leaders and the outsiders has doubled over the last 20 years. This represents a gap in the quality of life, the quality of education and various other measures of development potential. We must understand that from an international relations point of view we cannot allow such a growing gap between two groups of countries. This gap means that not only are relations between countries unfair, they also carry the potential for political, military and socio-economic conflict. This is why the new global rules of the game should be based on reciprocity and not on unilateral opening up of markets to goods, services and investment in the developing and developed countries.
Another global challenge that is particularly acute today in the less developed countries is protection of intellectual property rights. This problem is becoming more acute not just in the less developed countries but also in the leading economies, in part because of the development of trade in goods covered by intellectual property rights on the Internet. So far, the world community has responded mostly by putting pressure on countries where mass-scale and systematic violations of intellectual property rights have come to the world’s attention. But this is to fight the consequence rather than the cause. The problem goes deeper that this and solving it requires striking a balance between acceptable prices for users and tough, concerted action by all countries to enforce intellectual property laws and to create modern information products and legal constructions that meet today’s needs.
We need to have a clear idea of what place Russia can have in the international division of labour. It is clear that in today’s situation the Russian Federation can hope to be a leader in a number of sectors of the world economy. We have all the necessary resources and conditions to achieve this. Clearly, we must make effective use of our traditional advantages. But we must not forget that a country’s place in the world community is determined above all by the quality of its human capital and the existence of technology that confers global competitive advantages. It would be a mistake to try to artificially create conditions for growth in sectors in which Russia, for objective reasons, is hardly likely to be able to compete in over the coming years. It would make no sense, for example, to try to compete with China in the production of cheap manufactured goods, when China has an absolute advantage in terms of a low-cost labour force, especially given the demographic situation in Russia and our labour shortage problem in general.
So what then is our place in the world economy?
Let me set out some points.
First, we need to make full use of the inherent creativity of our people. This is one of our historical riches. Russia’s intellectual potential enables us to count on being one of the world’s intellectual centres providing intellectual services to the world’s big corporations.
Second, natural resources are one of our clear and unquestionable advantages. Experts estimate that at the start of the century Russia had around 65 percent of the world’s known resources, including 35 percent of natural gas reserves, around 30 percent of reserves of iron, nickel, tin and lignite, 14 percent of uranium reserves and 13 percent of oil reserves, not to mention abundant reserves of wood and precious metals. We do not intend reducing Russia’s share of supplies to the world market, but we see our main task as being to do more of the processing of these resources and supply the world market with competitive, high-value added goods using the latest technology.
Third, Russia’s unique geopolitical situation is another advantage. It gives us the conditions we need to develop major transport corridors that would speed up the movement of goods, invigorate world trade and turn Russia into a major communications and logistics centre.
The main condition for successfully achieving the objectives Russia has set is economic freedom and this implies, above all, political stability and macroeconomic sustainability, the basis of which is a responsible budget policy and the formation of sufficient reserves for future generations. It also implies the existence of effective legal mechanisms to protect property rights and competition.
What else do we need to do?
We need to create the conditions for bringing in private capital to priority sectors of the economy. This goes, above all, for creating the necessary production infrastructure. Many infrastructure projects can be carried out through joint financing by the state and by private investors, including under concession agreements. We now have the necessary mechanism for undertaking such projects and we also have the mechanism for financing them – the Investment Fund.
Next, we need to focus on creating large Russian corporations and supporting their activities on markets abroad. These companies will not hold a monopoly position on our domestic market because they will be competing with other companies, including foreign companies.
The fifth point is that we need to create a mobile and innovative infrastructure. It is of vital importance that we have a developed system of initiating, financing and introducing innovations based on a strong foundation of fundamental scientific research.
Finally, we need to create conditions for encouraging an increase in labour productivity and energy efficiency. We will not be able to take a worthy place in the world economy unless we raise labour productivity and reduce our energy consumption levels. Furthermore, we also need to remove unjustified barriers in the way of movement of goods, services and investment across our borders and we need to support high-value added exports from Russia.
Russia is currently in the process of accession to the World Trade Organisation. This means that we accept the rules of the game that exist today on the world market, but we would like to see fair international trade rules, as for other countries, for our partners. It is true that in the fierce competition on world markets our goods often lose out not so much because of poor quality but because we do not have an effective state support system encompassing export credit guarantees and organisational mechanisms.
Finally, and most importantly, we must make long term investments in people, in giving people the chance to realise their potential, and this means providing a better quality of life. We cannot demand that our people work efficiently and productively unless we provide them with a developed social sector and ensure the basic comforts of life. We need to achieve a higher standard of living for our people because economic success makes no sense if it brings no benefits to the people who, through their labour, make it possible in the first place.
With this in mind, we are focusing particularly today on social development. We have launched national projects in the areas of housing, healthcare, education and agriculture. Additional state spending totalling 0.6 percent of GDP will be spent on these projects annually, and this will be coupled with structural modernisation in the sectors concerned. Overall, our spending on these sectors comes to around 9 percent of GDP, or 30 percent of total budget expenditure.
At the same time, Russia has begun tackling one of the biggest challenges facing our country at the moment – the demographic problem.
Ultimately, all the conditions I have named will determine our country’s competitiveness, which we can see as the sum of the competitiveness of its people, its business and the authorities. Losing any of these factors would pull our country backwards. And in the modern world no one can afford to lose a decade getting back on their feet again. Russia’s history has shown that it is able not just to compete with other countries but to win. Our goal today is to not let the opportunity go and to make use of our advantages to achieve a real development breakthrough.
Thank you.