M. Gelvanovsky
State policies should influence prices: what's the strategy?

dollar_bill,_roubleF02Few can deny today that the sudden deregulation of prices in the Russian Federation in the early 1990s had a very negative impact on the Russian economy . It had a disintegrating effect on the economic infrastructure, contributed to the breach of long term contracts and caused a catastrophic decrease in agricultural and industrial production. Why?

First, many industrial facilities suddenly found themselves in one of two categories: the strong – those who could sell their products, and the weak – those who couldn't. That subdivision demonstrated the negative effect of deregulation as the inability of the "weak" industries to compete was determined by the fact that the structure of prices and resources at that moment was disproportionate and rather more specific to the USSR than to a market economy. It took time for the new market mechanisms to stabilize the economy, meanwhile during the transition period a lot of facilities that became quite competitive later suffered on several accounts, e.g., their long-term economic relationships were broken, partners and subcontractors went bankrupt etc. Generally speaking, the industries most dependent on the infrastructure and a stable economic environment – obviously hi-tech industries –appeared to be the weakest during the transition period.

  • Second , the "strong" industries accumulated a disproportionate amount of resources, while the "weak" could hardly find any resources at all. That damaged the "weak" industrial facilities even more and sometimes even caused their total collapse. As a result, the national economy of Russia lost its ability to reproduce itself and became dangerously dependent on imported goods.
  • The third is that the structure of international trade became almost exclusively focused on exporting natural resources, a focus that has become even stronger with the passage of time. 

In general, since the dissolution of the Soviet Union, the Russian Federation has become part of the global economy based only upon its supply of natural resource. This has resulted in a dangerous dependency of the Russian national economy on its foreign partners, while these "partners" are doing their best not to depend on Russia at all. This is a clear and present danger to Russian national security and sovereignty. The only way out is to establish coordination between state financial, fiscal, monetary and credit policies and influence prices in such a way so that the competitive ability of the national economy will increase, while market mechanisms will still be in effect. Some features of this policy are obvious even now and include the following six measures:

  •   1. Market price formation is not a holy cow but merely a financial tool, and its adequacy is judged by its ability to reproduce the main resources of the national economy: labor, natural resources and capital. It follows that the disparity between the price of labor and the prices of all major goods should be eliminated.  The price of natural resources should include the price of its reproduction including geological research. The price of industrial products should include the price of capital funds and of research and development . Prices formed by the short term philosophy of "futureless" spending of industrial and intellectual resources accumulated during the "Soviet era" in no way can be considered just or adequate.
  •   2. The involvement of resellers and intermediate dealers should be regulated in order to prevent monopolistic or even criminal activities on the part of these resellers and dealeres.
  •   3. The prices of vital life support systems such as food, drinking water, electricity, heat and transportation should take into account the climate and geography of the Russian Federation. In case of emergency where, for example, stochastic or speculative price movement causes substantial disruption to long term contracts or other economic relationships, such prices should be regulated by the government to prevent destabilization.
  •   4. The government should use all the financial and fiscal instruments at its disposal to protect national producers, stimulate their competitive ability and guard against dumping and unfair competition by importers, with a view toward creating ant protecting the jobs of Russian citizens so that salaries and profit coming from these jobs can be reinvested into the national economy.
  •   5. The state pricing policy should be in harmony with monetary and credit policy to stimulate the effectiveness of such natural advantages of Russian economy as its research and scientific potential in order to increase profits from intellectual rent and export of high-tech products.
  •   6. Anti-inflation policies should support national economic growth, the stimulation of which should be a priority of state pricing policies. What is even more important is that this growth should be achieved by an increase in resource effectiveness rather than by expansion. This requires prioritizing interests of the real sector of economy, as only the structural improvement of this sector can decrease the amount of resources needed to produce the same products and correspondingly increase the ability of these products to compete for resources with foreign producers, thus increasing overall competitive ability of the Russian national economy.