24 Aug 2020

NES rector Ruben Yenikolopov: Negative impact of pandemic might be far greater than just drop in GDP

The Russian economy is weathering the trials of the pandemic relatively well so far, with key macro indicators, at any rate, looking better than in many other countries. But statistics can be deceiving. Firstly, they cannot record changes fast enough and, secondly, not all the repercussions for the economy have been felt yet and they are not all measured with the standard metrics, New Economic School (NES) Rector Ruben Yenikolopov said. He shared his views on the social and economic policies of the Russian authorities in the fight against the pandemic and how he sees the future of Russian and global education in an interview with Interfax.

Question: Rosstat figures for the ‘locked down’ second quarter came out recently and they turned out to be considerably better than the most pessimistic expectations, not only better than the forecasts of independent analysts, but also the Central Bank and Economic Development Ministry. Are official statistics representative amid the pandemic? And a broader question – can Covid push the fairly old debate about GDP no longer being a good indicator of the state of the economy toward something practical?

Answer: There are two components. One is the problem with GDP, with standard measures of GDP. Foremost, this is an issue of data currency - how quickly do we see the picture, particularly now, during the crisis? Surveys of companies give results with a time lag, after the fact.

Yes, the results of the second quarter were indeed better than expected, honestly. I, as an expert, also believed the drop would be steeper. It’s another matter that it’s premature to celebrate. Perhaps the decline will just be longer – some problems were swept under the rug, so the drop is not as steep, but longer. This is a very realistic possibility.

But, firstly, one can certainly expect that Rosstat will review the data. I don’t know in which direction, I’m not prepared to say, but quarterly data are sometimes revised quite dramatically, particularly in crisis periods. And this is genuinely a problem that is not just being discussed in Russia. Standard measures, based on surveys, even representative ones, are very slow and they find out everything very late. But now, with the amount of new digital data, we can collect far more information virtually online.

The Central Bank has been the leader here, because their latest statistics on money transfers by sectors were the most current statistics that have been collected on the economy, and this is just a huge leap forward. They have their limitations, of course, this is not the full picture; one needs to understand that this is just the flow that goes through the Central Bank. By they probably reflect the dynamics, and this is certainly a step forward. And there will be more and more of this. Measuring people’s mobility through the data of Internet providers, new means of collecting big data and their aggregation, making it possible to develop leading, faster indicators of economic activity – the move will certainly be in this direction. Traditional methods of measurement are indeed becoming obsolete.

The second issue is already quality rather than currency. What we measure as GDP, what relation does it have to reality? And there are two factors here. One is related to technological changes. There are concerns that formal measures of GDP, against the backdrop of what’s happening, the transition into the digital, online and so on, are ever further and further from reality. Because, nominally, in terms of formal GDP, what Yandex does, for example – search, maps, other free services on the Internet – are absolutely useless for humanity, since their price is zero.

Q: They don’t create added value.

A: Yes, no added value. Obviously, this is absolutely not so. Business models are changing - big data, platforms, ecosystems. You, as their user, pay with your data and time, and by no means necessarily with money. How to appraise this? This is genuinely a new thing, a conceptually new thing.

Before, there were other problems. For example, a huge portion of the Earth’s population was not counted in GDP – women who looked after the household. Formally, after all, it was also considered that this is “useless” activity. This is a slightly different matter, but essentially similar. Not everything that is measured by market transactions encompasses economic value.

And a third factor, and it is being increasingly discussed recently, is that, in principle, economic activity is very often confused with people’s wellbeing. GDP growth is equated with how well people are living and this, of course, is certainly not so. Because measuring a person’s wellbeing is a far more complicated thing. For instance, a person who earns more money does not always live better than a person who earns less. So how do we grasp all this multidimensionality of human wellbeing that does not come down to GDP growth?

This is an absolutely different question, a third question. The first two – yes, we believe that economic activity is poorly measured and slowly measured. But now we’re also saying: “But you know, this is not actually economics, not pure economics, a person does not live by monetary things.” And everyone actually understands this, so now a huge number of various additional indexes of human development are being constructed, they’re trying to measure happiness, and so on.

It might turn out that the impact of the coronavirus is far stronger and more negative than just an economic decline. People have been locked at home in quarantine – this is a huge psychological shock, uncertainty. What will happen? It’s not clear. And this is crushing. And all the psychological aspects are not factored in at all in the economic decline, but they play a huge role. That is, the mental wellbeing of people has suffered far more than the economy. This is a fairly obvious thing, but we really don’t know how to measure this for the large part.

With GDP, at least, everything’s clear. One can agree or disagree, but there is a definition. Here is a market transaction. Here is what was paid and we count the whole amount. And then this is a clear, defined concept, within which we can discuss pluses and minuses. But when we say how do we measure happiness? As many people as you ask about this, that’s how many opinions you’ll get about what happiness is.

In general, in terms of “fast” measures, I’m confident that there will be some progress and there will be new measures. In terms of how to factor in new technologies, free services, I also think that some sort of assessments will be developed. But people will have a far more critical view of pure GDP growth as a definitive measure of wellbeing.

Q: Returning to classic metrics and to the Russian economy. Do we already understand the scale of the pandemic’s repercussions for the country’s economy, or are there some factors that have not come into play yet?

A: Honestly, I don’t think that we already understand them fully. Firstly, Russia depends a great deal on the global situation. The slowdown of the global economy is a serious matter. The first wave of the crisis has not ended in the global economy. It is escalating. We don’t know when it will end, and what the scale of the first wave will ultimately be.

Furthermore, second waves of the virus have already started in several developed countries, and we have a poor understanding of why they are happening in some places and not in others. Epidemiologists have a poor understanding and economists, who are listening to epidemiologists, have a doubly poor understanding of what’s happening and why.

The models for the spread of the epidemic are actually very complex. Completely trivial models – there are sick people, there are people who are not sick, they run into one another with a certain probability and get infected – don’t work. People live in various social groups, various social groups communicate and interact differently among themselves. We already have several examples of a second wave before us. We can, of course, reassure ourselves that we, as usual, are different and this won’t happen here…

Q: A safe haven?

A: Yes, safe haven. We already said this at the beginning of March: “Look, they’re having a corona crisis.” And now we’re saying: “Look, they’re having a second wave.” There’s a good chance that it might end the same way as last time.

The uncertainty is huge. We don’t know how the situation will develop and, I think, we haven’t fully gone through the consequences of what has already happened. Firstly, the particulars of the production cycle – businesses worked on old orders for a long time, we don’t yet know how things will be with new ones. And secondly, we have our Russian specifics – a huge amount of resources flows through the oil and gas sector, and then filters deep into all of the rest of the economy. And this takes some time. This stream was pinched, far less money is flowing through gas, oil. This is gradually spreading to their contractors and so on. I think the drop in oil prices that occurred in the spring has not reached the economy yet, it’s lagging by several months. So a depressive phase is still awaiting the Russian economy in the fall, probably, when all these effects emerge.

June and July are not indicative at all, honestly – there was a great deal of deferred demand. People were locked up in March, in April-May they finished doing what they wanted and then, hooray, freedom! So in June-July it was partly just the realization of deferred demand, and partly, I suspect, psychological – people, overjoyed by the lifting of the lockdown, could buy something.

Now the euphoria has subsidized, people are returning to reality. The Central Bank’s latest statistics reflect this and Sberbank is also saying this – there was a sharp recovery and then everything faded again. And such a depressive phase will probably last a fairly long time, even if there is no second wave. It might not be that acute, thank God, but it will be more protracted, I’m afraid.

Q: So you don’t expect a V-shaped recovery, which the Central Bank hinted at after its recent board of directors meeting?

A: I have the impression that this is a behavioral, psychological effect. We all expected Armageddon, everyone will die, but it turns out that there was painful suffering, but not everyone died. Everything is far better than we thought, so, hooray, everything’s great. No, not great, everything’s bad, just not as bad as we thought.

Q: What is your forecast for the contraction of Russia’s GDP in 2020?

A: At the moment, I don’t see any reason to significantly revise the forecasts already made by international organizations such as the IMF, World Bank and OECD. They all forecast a drop in Russian GDP of more than 6%. And this is in the scenario where there is no second wave of the coronavirus in the fall of this year. In that case, the Russian economy could contract by up to 10%. Global GDP will probably fall by about 5%.

Q: Compared to the European Union and the United States in particular, the drop in the Russian economy this year will be far less severe. What are the main reasons for this?

A: The fact that the drop in the Russian economy is smaller than in most developed countries of the world is related to two factors. Foremost, this is differences in the structure of the economy and a smaller share of industries that were hardest hit by this crisis. In addition, measures taken in time helped to avoid such a high level of infection as in Italy, Spain, France, the United States and the UK.

Q: What do you expect the inflation rate to be in Russia in 2020? Do you think the Central Bank can lower its key interest rate further and, if yes, to what level?

A: I think that the Central Bank’s forecast will be close to the fact and inflation will be about 3.5%. In the absence of bad news regarding the spread of the coronavirus, I think the Central Bank will not change the rate by more than 0.25% one way or the other. But if a second wave starts here, the rate might be lowered more.

Q: The authorities are now discussing the idea of national hedging against low oil prices along the lines of Mexico. There are various points of view. Do you think that such hedging makes sense for Russia or is the current fiscal rule sufficient?

A: The existing fiscal rule is a mechanism for hedging such risks, and probably a cheaper one than using specialized financial instruments like the ones to which Mexico has turned.

Q: Due to the pandemic, the Russian authorities had to quickly solve the problem of providing financial support on a massive scale to part of the country’s population. On one hand, from the technological point of view, the result can probably be considered successful and even very successful – there were no insurmountable glitches. On the other hand, we are still far from the targeted provision of support that officials have been talking about for years. Is there even a solution to this problem?

A: Of course there is, we just need to work on it. They have, indeed, talked about this a lot, for at least 20 years if not more, but they haven’t actually done anything. In terms of information infrastructure, collection of data and so on, the picture in the country in general is pretty sad – girls move figures from one Excel to another. So it is only possible to talk about some kind of big data in narrow areas. In them, it has started to work. Where there was aid to families with children, since we had maternity capital as a very big, important objective, they invested in it, meaning there was some kind of foundation. It’s also not an easy task to hand out so much money on such a large scale, so I pay my respect to the government. But there was a foundation there after all – targeting, specifically targeting was already built into the system.

As for other aspects of targeting, this is all still in a very poor state in terms of infrastructure and data collection. Various necessary pieces of information are controlled by various ministries, which do not share with one another, where these big data are not in a state in which they could be tied together. The government doesn’t have this now, and this is something that will now be developed.

This is the task that the new prime minister has been set to, since he actually has a history of success at the Federal Tax Service (FTS). But how long with this take? It took him quite a long time to build this at his agency. And here he will be overseeing many ministries of “various degree of degeneracy” at once, and the FTS will be the best of them, so this will, of course, take some time. This is a technologically complex matter, no one did anything for 20 years.

Q: Targeting is also supposed to accompany the introduction of a progressive personal income tax scale, in the sense that the money is intended to help severely ill children. Does the mechanism of earmarked budget money have a chance of catching on in Russia? We’ve never had earmarked money in the budget, no one has ever solved this problem in practice.

A: It now seems to me that this is exclusively a political move and, honestly, not an impressive one. In the budget systems of other countries there might be earmarked money, but there is some kind of logical link between the tax base and what the money goes toward. Schools in America, for example, are funded by property tax, which is why there, where homes are affluent, schools are also better. This has its negative aspects, but at least everything’s clear – here is the tax, here is what it goes toward, there’s some kind of logic. If you want a good school, buy an expensive home near a school.

But here when they say that people who earn more than a certain threshold will pay more and this will go to children, why? Why specifically to children? Firstly, we’ve discovered that our healthcare system in principle has problems, and not just child healthcare, and we’ve discovered this in a fairly hard and painful way. So if they had said just for healthcare, there would be some kind of logic, but here the calculation is purely on an emotional reaction. This is like charity – it’s known, after all, that the most money is collected for sick children. We’ve just escalated this principle to the level of the government. I, honestly, didn’t like this.

The progressive scale is such a symbolic gesture, a symbolic increase and symbolic earmarking that, in my view, will not catch on because it doesn’t make much sense. And a progressive scale, I’m afraid, will open Pandora’s box, upsetting the stability of the tax system. Before we said that we have a flat scale, one of few. Now we can’t say that any longer. And this opens up room for the scale to become a little more progressive next year, a little more progressive and a little more progressive still…And this raises concerns.

Q: The increase in the tax on Cyprus dividends alone should generate at least twice as much money for the budget as the progressive personal income tax.

A: Yes. And about Cyprus dividends – this is quite a serious, big matter, a matter of genuinely big money, with a clear economic rationale.

In general, I personally see far more problems with government expenditures than with revenues – they don’t help fight inequality. But this is complicated. And it’s far easier to say: “Let’s instead introduce a progressive scale, and in this way we will fight inequality.” Not help the poor, but torment the rich. If the goal is to reduce inequality, then of course it’s easier to burn the house of the lord than to do something so that the peasant lives well. Therefore, until there is trust, until something is corrected with spending in the conservatory, it will be difficult to collect more revenues.

Q: The pandemic has become the ideal stress test for the healthcare system and we see what problems Russia has faced and that even far from all developed countries passed it successfully. The lack of reserve capacity results in exponential growth of mortality. Will there be a review of the structure of government spending in the world based on an analysis of what happened with the coronavirus? Will the share of healthcare spending increase and from what sectors might it take away a piece of the global budget pie?

A: I really have a feeling that the pandemic will not be for nothing in this sense. More and more money is being spent on healthcare; in principle, as prosperity grows the share of spending on healthcare grows. This is a general trend of the current crisis – both in terms of technological development and in terms of healthcare it is pushing us several years ahead along the trajectory that we were already going. There was already digitization, but they put us in quarantine and it had to be done a lot faster.

It’s the same with healthcare. The role of healthcare was already growing, and now there will probably be an even bigger push. In a number of countries, indeed, the problem was in large part because there is insufficient capacity. Russia is an example – in the past number of years everything here was built on optimization, improving efficiency, cutting costs. And well, this model, as is now obvious, is very dangerous. In such situations, models that are perhaps more expensive but have additional capacity, like the German one, have of course proven to be far better.

An interesting question is at the expensive of what? I’m afraid that this will happen not at the expense of reducing spending on something else, but at the expense of raising the tax burden on the economy. That is, the role of the state will increase.

The question is not just in healthcare. The coronavirus is also having a very strong impact on inequality, increasing it, since it is hitting vulnerable groups harder. Less educated people, for example, are employed in industries that cannot work online, so the lockdown is hitting them harder, and they have lower savings. Inequality is growing both within countries and between various countries as well. This will probably lead to a leftward shift in economic policy, meaning to even greater growth of the state’s role. In some sense, this will be similar to what happened in the United States and European countries in the 1930s and after the Second World War. In the era of the Great Depression, the state’s share in the economy grew very dramatically in all developed countries. Right now we have the same type of crisis, of the same scale.

After the crisis of 2008-2009, the subject of workers’ insecurity, vulnerability became very topical. Something needs to be done with this. I think that in the next few years some completely new platforms will emerge. It’s not for nothing that there has been active debate recently about a universal basic income as such a measure of security, so that no matter what happens to you, you don’t fall below some decent level. A universal basic income that absolutely all citizens get is, of course, an extreme idea, not a single economy would manage such amounts of funding. Any calculation shows that the level of taxes has to be completely inordinate. But there should be something like this in some more humane, targeted form.

Therefore, one can expect growth in spending on both healthcare and social security in countries that can afford this. Some shift leftward, an increase in the role of the state will probably be seen.

Q: What do you think is the most important conclusion that higher education in Russia and the world will draw after the pandemic? Is it possible to get a full-fledged higher education remotely in the modern world? Are you betting on distance education at NES?

A: I don’t believe in the prospect that everything will completely go online in higher education. Firstly, we need to slowly somehow get rid of the juxtaposition of higher education and not higher education. Before, everything was very simple: you finish school, then some immediately go work and the rest go get a higher education, get their specialization, work, retire and that’s it. Now, everything is changing so fast that education has become far more continuous. You’re always learning a little, getting an education throughout life. This part will certainly remain, this trend toward a more spread out education, and not just the model of school – post secondary institution and that’s it. You can get an education in small doses, but throughout your whole life.

When we talk about lower grades in school, I can’t imagine how it’s possible to go online. Firstly, I’ve felt this myself with my own children – it’s impossible. Secondly, there are very important processes of socialization, character building, working in a team that simply cannot be online in principle. Later, as they grow up, online can take a bigger and bigger share. True, we can look at professional education, where senior executives in principle pay in order to hang out with one another and discuss something. This is more of a club than education, frankly, even if a number of business schools get upset with me now. But in general, a professional training course, where you’re already an adult person and you need to acquire some skill, it can be done fully online.

But in the middle, for example a bachelor’s degree, the first year of a bachelor’s, frankly, these are still children, virtually schoolkids, so fully online, of course not. They still really need socialization. But as they grow up, less and less. And the issue of price and costs is, of course, superimposed on this. When we talk about bachelor’s degrees, I believe that it’s ideal in the first years when people live together, because this is a very important aspect, but it is far more expensive. And now, when the whole world is online, one can get a decent education, pretty good education, a higher education far more cheaply, and from the best universities. And I already don’t have to pay an average university in order to listen to its professor, because they don’t have another professor in my city. If they’re all online, why would I listen to an average professor? I will listen to the strongest one, if it’s online.

There will be very strong popularization of post secondary institutions. Very many average post secondary institutions will die, because there will be post secondary institutions that specialize in cheap, mass education online. Since the effect of scale is huge there, they can attract the best teachers and you get quite a profitable organization. Therefore, in the medium-term future there will probably be such mega-universities with the best professors, who will teach a huge number of people, [and be] relatively cheap for students; and more elite universities, to which those who can pay for offline, for social experience send their children, because it’s very valuable. This format will become far more expensive.

But most education will be mixed, with elements of online and offline. Some courses online, for example, and seminars offline, or three days you stay home and learn online, two days you hang out with your classmates and socialize, and discuss what you’ve heard. Such a mixed format will occur most frequently, but the share of online and offline will change within it.

But in general, an ideal, universal format of education probably doesn’t exist, and various universities and programs will ultimately use various formats in terms of combining online and offline. We at NES wrote exactly that into a recently adopted strategy, that we will experiment with formats, look for optimal approaches for each existing and possible new programs.

Q: With the development of online platforms and a remote format, where you take something here, something there, there will be the issue of recognition of diplomas, degrees. Who will award and verify them?

A: Yes. What, frankly, do universities give? Why do people go to elite post secondary institutions? Well, professors console themselves with the hope that it’s to acquire knowledge. This is partly true in some cases, but in some cases not. Partly in order to meet people, acquire social connections, socialize – this is also very important. Partly it’s just a ‘stamp on the forehead,’ a seal of quality, that you graduated from Harvard, Moscow State University or somewhere else. With this stamp, an employer hires you.

And so the stage of certification, how it will be organized, is also a huge, very interesting problem. It’s actually very difficult to predict what will happen, because everything will change. There will be far more mixed formats, for instance, a course from one university, but a different university ultimately gave the certificate and verified the quality of knowledge. This is very interesting, everyone is actually discussing this and everyone has a different opinion. But there will no longer be the uniformity that there was before.

Q: You were re-elected rector of NES for another three years in June. How will the school develop, taking into account all the current realities?

A: The pandemic, of course, has had a fairly palpable impact on our work this year. But just this summer NES adopted a comprehensive development strategy for five years. Within this document we identified three key areas for ourselves.

Foremost, this is a continuation of the work that was done in preceding years, specifically strengthening positions in the global academic environment, making our graduates more attractive to employers. We already have a very good head start thanks to the fact that we always oriented ourselves toward the highest world standards and we remain the leading Russian post secondary institution in terms of academic research in the field of economics.

But it’s important to us that NES not withdraw into itself, but be a center of the professional economics community in Russia, it’s important to raise the general level of expert debate and the level of knowledge about economics in the country. Partly with this goal in mind, we conduct public educational projects. We are already starting the next NES lecture series, in which leading world economists will give lectures, in September.

In this context, one can also note various partnerships in Russia and the world. For example, last spring we became a participant in the Interfax University Program. Our students and professors have already received access to the group’s information resources and in the next few months we expect the first research publications on data from them. Our joint bachelor’s degree with the Higher School of Economics is developing extremely successfully. Our joint program with the Yandex School of Data Analysis is gaining momentum. We are actively discussing new joint initiatives with other Russian and foreign universities.

Secondly, we want to see NES become a full-fledged university with its own campus and full cycle of educational programs. As for the campus, we hope that we will be able to acquire it soon on the territory of the Skolkovo Institute of Science and Technology. In terms of educational programs, we plan to open and develop our own graduate school, and actively develop existing and open new master’s and bachelor’s programs.

In addition, as I’ve already mentioned, we plan to actively experiment with new formats and products for high school graduates and NES students, using online and mixed education.

Finally, there is the important objective of ensuring the financial independence and stability of the school. Since we’re an independent, nongovernmental post secondary institution, this is an extremely pressing problem for us, and we hope to solve it by significantly increasing the size of our endowment and through development of applied research and corporate education. I really hope that external factors will not make significant alterations to our plans, and our existing foundation will enable us to realize everything we have planned.