How Not to Become Hostages of the Nationalization Fad
Editorial
Picture: Pyotr Kanevsky
Last week, both the banking system and the economy as a whole began to adapt to the new reality: the reality of a crisis. Even the data on the beginning of the fall of the industrial index, which was determined to have started in September and to have an annual decline of over 5%, were not viewed with panic. Salary limitations, rather significant layoffs, and episodes of “deposit attacks” on some small banks were interspersed with information about successful credit deals and takeovers. The Central Bank deserves special thanks, since it succeeded in thwarting highly liquid banks’ attacks on the ruble and finally released a rather large circle of banks at its auctions. However, this calm is like the calm before a middleweight boxing match. No one can say today how long or hard a crisis awaits us.
Eighteen months seems to be the most widely suggested time span for this crisis. In principle, that length of downturn seems to be characteristic of market economies. Not only that, but we ourselves experienced a period of stagnation from the end of 2001 through the beginning of 2003, though it was mostly forgotten in the long, too-strong upturn that followed due to the excesses on world financial markets. However, this new eighteen-month recession will probably cut deeper than the last one did.
The fresh statistical data on the decline in industrials in September indicate that only three industries showed gains: oil extraction, gas extraction, and precious metals mining. All the rest – both investment (machine-building, construction materials, and so on) and consumer (foodstuffs, light industry, and others) – fell into a deep slump, from which they will only emerge slowly. Consumer industries will recover as a new level of demand is determined, which could be stabilized more quickly for domestic companies if a portion of imports is removed from the market. Investment-based industries will improve when new investment plans and takeovers are formed, which, based on previous experience, take about nine months. It is the understanding of how the market is going to develop further that will now become the main limitation on new investments.
There is one more thing we would like to draw the reader’s attention to: the question of whether private business or the government will be the engine that propels the economy out of the crisis. It is visible with the naked eye today that state projects and companies have preference over private companies. A huge amount of money is being transferred into these projects even today. However, it must be understood that in the history of market economies, an escape from this kind of “strategic” crisis has never been provided by the government sector, which by its very nature is unable to address the major issue of the crisis: increasing business efficiency. It does not have the creative ambitions and motivations of managers to do so. Although we are not fans of inflationary horror stories, we will say that the domination of government business in crisis conditions will lead to a baseless increase in liquidity and then to inflation. The Federal Anti-Monopoly Service will not be able to stop that process; only another crisis will.
The only salvation for the economy in a crisis situation is businesspeople. Only they are both motivated and able to provide a short-term increase in business effectiveness and the radical decrease in the base inflation level that would occur as a result. They simply need to be given the chance: money should stop being distributed in favor of the government sector (among other things, to prevent private companies from being taken over by state-owned and regional “governors’” companies). And the private banking sector needs to be given the chance to accumulate enough long-term liquidity to be able to start issuing credit again.
Today, when Western countries are being tossed on a wave of nationalism, common sense should not let us down: only the private initiatives of thousands of businesspeople will be able to create a true renaissance. The government, which has tried to play the role of a market player over the last few years, should cede the market to business.
