Russia and Hong Kong: Recessionary Analysis - Essay Example

?Russia and Hong Kong: Recessionary Analysis [ID # The recession has struck most of the globe fairly evenly, but there are contradictory pieces of data. Hong Kong saw growth in 2010, while other countries did not (Trading Economics, 2011). Agaral (2009) found that countries like Canada, Sweden, China, Japan, India, Qatar, New Zealand and Australia are not being affected by the recession terribly much. But other countries are being slammed. Russia is seeing car sales drop by 50%, except for the Hummer which is having a “banner year” (2009). Comparing Russia, one of the global losers, to Hong Kong, one of the global winners, is an illustrative exercise. Russia's policy decisions tended to deepen the recession, harm the poor, broaden inequality (in the long term) and reinforce the oligarchy; meanwhile, Hong Kong, while admittedly receiving more of an infusion of capital and thus having more room to move, made the right policy choices. Russia's economy is in a disastrous situation after the recession. Putin had managed to get the country on the right track throughout the early 2000s, after a calamitous period after the end of the Soviet Union with unimaginable poverty and desperation. But the progress seemed to have, like Sisyphus rolling his boulder in Tartarus, all disappeared. Russian charities have been devastated: “Nearly two thirds (61 percent) of Russian charitable organisations say their funding has dropped as a result of the recession and over half (52 percent) say they have already lost a quarter or more of their funding” (Charities Aid Foundation, 2009). Beginning in 2008, Klepach anticipated major recession, after record years such as 2007 where the Russian economy grew 8.1% thanks to metal and oil export (BBC News, 2008). Migrant workers into Russia face stiff competition for jobs and racist backlash (Schafer, 2009). In 2009, Russian GDP dropped 7.9%, an amazing fall that countries like Hong Kong did not see: “A triple shock––to oil prices, capital flows, and external financing––led Russia’s real GDP to fall 7.9 percent in 2009, driven by the drop in domestic liquidity and collapses in industrial production (IP) and aggregate demand. Unemployment and poverty rose, and the ruble fell. The fiscal surplus turned to deficit for the first time in a decade. The banking sector, which had relied heavily on non-deposit financing, faced severe liquidity constraints. A deposit run at the end of 2008 exacerbated the liquidity crunch, and threatened financial stability” (Bogetic, 2010). Russia had weathered the crisis better than expected, and official data and pronouncements put it at climbing out of the recession in 2009, but nonetheless, fundamental weaknesses in the economy have been exposed (Bogetic, 2010; Tang, 2010; Vasilyeva, 2009). “Russia technically emerged from recession in the third quarter [of 2009] it was revealed yesterday after official data showed economic activity grew 0.6 per cent compared with the previous three months – the first quarterly rise since the crisis struck a year ago” (Vasilyeva, 2009). But even in this ostensible “recovery”, domestic product was still 9.4% below what it was in the third quarter of 2008, and much of the benefit was due to “less capital outflow” and “companies replenishing their stocks”, hardly long-term growth. Looking even more closely, many other signs of recession were still strongly apparent: GDP growth is not Moses and the Prophets. “2009 was a bleak economic year in Russia and one of the toughest years on record in the post-Soviet period. While attracting high levels of capital inflows related to the oil boom in 2009, Russia, at the same time, experienced a sharp devaluation in the ruble. The value of the ruble is considered to be one of Russia’s most pressing threats to economic stability and growth. The global financial crisis also impacted domestic liquidity and access to credit, although local banks and companies were able to borrow in foreign currency resulting in significant growth in net borrowings” (Nova Capital Partners, 2010). The recession revealed numerous problems in Russia's economy. Corruption is rampant, and it is costing the economy in terms of foreign investors. “Corruption in our nation has not simply become wide-scale. It has become a common, everyday phenomenon which characterizes the very life of our society. We are not simply talking about commonplace bribery. We are talking about a severe illness which is corroding the economy and corrupting all society” (Volkov, 2009). Corruption costs for both native businesses and foreign ones are estimated at over $300 billion a year, and the average bribe is $135,000 (Stott, 2010; Bigg, 2005). Corruption is so bad that Transparency International is ranking Russia in the bottom fifty nations and many people are preferring to do business with Nigeria! Long-term investment by foreigners in such a corrupt climate is insanity. Only resource exploitation remains, which leads to financial instability. The instability of an oil-and-metal based economy was also revealed. “Oil-fuelled crony capitalism does not bring lasting prosperity. The real route to lasting progress is in solid, honest public institutions: courts, efficient bureaucrats, a good education system, strong anti-monopoly laws. Russia not only lacks these, it has the opposite” (Parker). The recession in Russia, after all, was prompted in no small part by declining gas and metal commodity prices (Vasilyeva, 2009). There was a silver lining to the recession: It might temporarily reduce Russia's massive inequality (Oxford Analytica, 2009). Even the oligarchs were hurt by the recession (Telegraph, 2008). But this is not to last. A generational tide of people leaving the country, the “best and brightest”, is leaving behind only hyper-exploited workers (Newsweek). With Putin still functionally in power, it is only a matter of time before the oligarchs use the recession to consolidate their gains (Avnery, 2004). Other problems Russia faces is a weak financial sector, an antiquated public sector, a hostile investment climate and an extremely non-diversified economy. Transparency issues, discrimination against small and medium enterprises, and bad banking regulations have made it impossible for Russia to grow sustainably. Thus, Russia's policy response, essentially Putin declaring the recession to be over, is a mere coverup for long-term problems that are not going away and that the administration is not seeking to solve. Meanwhile, Hong Kong has a fundamentally strong economy, poised for growth. True, things remain sluggish: Interest rates are low, yields on exchange fund papers are near zero, credit has fallen as has the money multiplier, etc. (N'Diaye, 2009). But a look under the surface reveals fundamental health. There are many factors that have helped Hong Kong have a more sensible response (N'Diaye, 2009). 1. Hong Kong has linked monetary response to the Federal Reserve, which allows them to behave much like the major economy of the West. 2. Large capital inflows into solid equity and property markets have provided a solid bae for growth. 3. The monetary base has more than doubled, as the government's smart investment in purchasing U.S. dollars paid off. 4. Low interest rates encouraged investment elsewhere. 5. Higher asset prices are leading to higher private consumption. It is true that there is a risk for a credit-asset price cycle (N'Diaye, 2009). But the simple fact remains that Hong Kong's fundamentals are sound while Russia's are not. Hong Kong did the right thing: It responded to the recession with smart investments, good fiscal policy, and coordination with countries like the US and mainland China. Putin's Russia, on the other hand, is unable to face the music and reform chronic corruption, a broken fiscal and public sector and policies, and numerous other failures. 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