'The Russian Economy: Growth is Possible," the McKinsey Global Insti-tute announced last week. A day earlier, Moscow newspapers published information on the 225-page report, a year in preparation and incorporating six years of Russia research by Mckinsey, a major global consulting firm.
The attention drawn by the report becomes clear upon closer look at even its most general conclusion. Russian GDP could experience 8 percent annual growth - this achievement would raise dramatically the standard of living without requiring extensive investment.
The report indeed presents powerful news. With GDP shrinking over the last ten years, simply halting the collapse, much less attaining actual growth, would signify a true accomplishment.
Strictly speaking, the McKinsey report unveils nothing new. What's distinctive is a study - with consistent adherence to liberal market principles - of 10 sectors contributing a total 15 percent of Russia's GDP. Through this study, the report's authors establish a hierarchy of impediments to Russian growth.
Well-known ills, including corruption and a frail legal system, are named as important but secondary contributors to Russia's current crisis. The main culprit is absence of a level economic playing field.
Companies take advantage of sometimes open but more often hidden subsidies: tax breaks; favorable treatment in winning government tenders and obtaining land; lower gas and electricity rates; government inaction over energy debt; wage arrears; and debt to the pension fund; and more.
Despite formal privatization and trade liberalization, market mechanisms aren't being allowed work; the socialist command economy is everywhere in evidence.
Simultaneously, authorities prop up the most backward companies, ostensibly to prevent layoffs, but, actually, to maintain channels for siphoning state money.
What results is cement factories with productivity levels at 1 percent of U.S. levels. Simply transferring all orders to the most efficient companies - which are not operating at full capacity as it is - and upgrading technology would raise overall productivity in the cement sector from its current 7 percent of U.S. levels to 50 percent. In the ferrous metals sector, similar measures could raise productivity from 28 percent to 80 percent of U.S. levels.
The path to economic recovery - as well as reduced corruption - is diametrically opposed to increased-regulation remedies advocated by strong-state proponents. But, there would be a bitter pill to swallow along the way - unemployment at least matching the preceding drop in output - a two-fold drop in industrial output over the last decade, 40 percent in agriculture and a four-fold drop in the construction sector.
The unavoidable cost of the restructuring that accompanies transition to a market economy; a cost known to Russia before reforms even began.
What does the Mckinsey report add to this knowledge? First, Russia has no choice because its economy will simply collapse without reform; second, the social cost of refusing to restructure is higher than the cost of restructuring; third, Russian industry need not experience such radical surgery as initially expected.
There is no choice, if only because - barring market incentives - there will be no investment, and, without investment, economic mainstays like the oil industry will falter. Oil production drops in recent years have been offset by reducing supplies to former Soviet republics and decreased industrial consumption. If this trend isn't reversed, by 2009, Russia will shift from net oil exportation to being a net oil importer - something the country's balance of payments won't withstand.
Clearly, maintaining inefficient companies will cost more than unemployment benefits as well as the retraining and resettlement of workers made redundant.
The report proves that in sectors ranging from light industry and foodstuffs to construction and hotels, restructuring doesn't create unemployment as it leads to increased activity through greater competitiveness. Mckinsey estimates three quarters of Russian industrial capacity as economically viable - more than any previous estimate.
Russian reform opponents heap blame on Yegor Gaidar's shock therapy, seeing it as the source of all present woes. The McKinsey report clearly demonstrates the contrary - that Russia's problems exist because there was never real shock therapy. There was a great shock, but no therapy.
An absence of outside pressure cannot save a nonviable economy - it will simply implode. And, as in the case of the Soviet Union, the political system could crash with it. Finally, there's an increasing awareness that Russia indeed needs market therapy.