metadata: authors: 0: author: Okawa,Yoki
1: author: Sanghi,Apurva
count: Russian Federation
docna: 0: docna: Potential Growth : Outlook and Options for
            the Russian Federation
docty: Policy Research Working Paper
subtopic: Pensions & Retirement Systems,Inflation,International Trade and Trade Rules,Employment and Unemployment,Labor & Employment Law
teratopic: Macroeconomics and Economic Growth,International Economics and Trade,Social Protections and Labor,Law and Development
abstracts: cdata!: This paper examines the past and future
            trajectory of the Russian Federation's potential
            growth: the speed at which an economy could grow if all
            resources were utilized efficiently. The findings show that
            it peaked before the 2008 global financial crisis and
            continued to decline up to 2017. The estimated potential
            growth rate was 3.8 percent in 2000-09 and 1.7 percent in
            2010-17, a 2.1 percentage point decline. The most recent
            deceleration was due to a slowdown of productivity growth
            and a shrinking potential labor force, rather than a
            shortfall in capital accumulation. For its future
            trajectory, under the baseline scenario, Russia's
            potential growth is expected to continue its gradual
            downward trend, from 1.5 percent in 2017 to 1.3 percent in
            2022. It is expected to recover gradually thereafter,
            primarily driven by stabilization of the labor force. The
            simulations of proposed reform measures currently being
            considered by policy makers, including a combination of
            pension reform, more migration, higher investment, and
            gradual acceleration of total factor productivity growth,
            can double Russia's potential growth rate to 3.0
            percent by 2028. Under the assumptions discussed in the
            paper, pension reform, increases in migration, investment,
            and productivity contribute 0.4, 0.2, 0.6, and 0.3
            percentage points, respectively, to the increase in
            Russia's potential growth rate. Potential growth is
            found to be most sensitive to changes in total factor
            productivity growth, suggesting that reforms that increase
            productivity may have the most impact on boosting
            Russia's potential growth.
geo_reg_key: 517191,517208,517198,82689
repnme: repnme: Potential Growth : Outlook and Options for
            the Russian Federation
display_title: Potential Growth : Outlook and
            Options for the Russian Federation
listing_relative_url: /research/2018/12/30659650/potential-growth-outlook-options-russian-federation
topicv3: Inflation m1326709 0870F4727ACED1CF8525815C00471347,Trade m1326924 698,Retirement m1504007 2896,Unemployment m1504051 2747,Working Age Population m1504053 2749
publishtoextweb_dt: 2018-12-03T00:00:00Z
historic_topic: Macroeconomics and Economic Growth,International Economics and Trade,Social Protections and Labor,Law and Development
no_of_pages: 28
author_keys: 0: author_key: 500022
model_extractions: WPS8663 Policy Research Working Paper 8663

# Potential Growth

Outlook and Options for the Russian Federation _Yoki Okawa Apurva Sanghi_ Development Prospects Group & Macroeconomics, Trade and Investment Global Practice December 2018
Policy Research Working Paper 8663

# **Abstract**

This paper examines the past and future trajectory of the Russian Federation’s potential growth: the speed at which an economy could grow if all resources were utilized efficiently. The findings show that it peaked before the 2008 global financial crisis and continued to decline up to 2017. The estimated potential growth rate was 3.8 percent in 2000–09 and 1.7 percent in 2010–17, a 2.1 percentage point decline. The most recent deceleration was due to a slowdown of productivity growth and a shrinking potential labor force, rather than a shortfall in capital accumulation. - For its future trajectory, under the baseline scenario, Rus sia’s potential growth is expected to continue its gradual downward trend, from 1.5 percent in 2017 to 1.3 percent in 2022. It is expected to recover gradually thereafter, primarily driven by stabilization of the labor force. The simulations of proposed reform measures currently being considered by policy makers, including a combination of pension reform, more migration, higher investment, and gradual acceleration of total factor productivity growth, can double Russia’s potential growth rate to 3.0 percent by 2028. Under the assumptions discussed in the paper, pension reform, increases in migration, investment, and productivity contribute 0.4, 0.2, 0.6, and 0.3 percentage points, respectively, to the increase in Russia’s potential growth rate. Potential growth is found to be most sensitive to changes in total factor productivity growth, suggesting that reforms that increase productivity may have the most impact on boosting Russia’s potential growth.

This paper is a product of the Development Prospects Group, Development Economics and the Macroeconomics, Trade and Investment Global Practice. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/research. The authors may be contacted at asanghi@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Potential Growth: Outlook and Options for the Russian Federation**<sup></sup>

Yoki Okawa† and Apurva Sanghi‡ World Bank

## **_JEL Classification:_ E6, O20**

**_Keywords:_** Potential growth, potential output, emerging markets, developing economies, Russia, pension, structural reform, investment.

>  This paper is a product of the Development Prospect Group and Macro, Trade and Investment Global Practice. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/research. The author may be contacted at asanghi@worldbank.org. This paper was produced with valuable contributions from Sinem Kilic Celik and Y. Modeste Some in World Bank (2018), and benefited from the comments and suggestions of Zoran Anusic, Olga Emelyanova, Evsey Gurvich, Andras Horvai, Sandeep Mahajan, Alexander Morozov, Franziska Ohnsorge, Irina Rostovtseva, Marc Stocker, Maria Ustinova, and seminar participants at the Central Bank of Russian Federation.

> The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and should not be attributed to the World Bank, its Executive Directors, or the countries they represent. † Economist, Development Prospect Group, World Bank, Washington DC.

> ‡ Lead Economist, World Bank, Moscow and corresponding author.
# **Table of Contents**

|I.<br>Introduction ............................................................................................................................... 3|
|---|
|II. Methods ...................................................................................................................................... 3|
|III.<br>Evolution and drivers of potential growth in the short and long terms: Productivity,<br>capital, and labor ............................................................................................................................... 5|
|A.<br>Productivity ............................................................................................................................ 6|
|B.<br>Capital ..................................................................................................................................... 7|
|C.<br>Labor ....................................................................................................................................... 8|
|IV.<br>Russia’s potential growth: Outlook ........................................................................................ 9|
|V.<br>Boosting potential growth: Role of pensions, migration, investment and productivity ........ 11|
|A.<br>Pensions ................................................................................................................................. 11|
|B.<br>Migration .............................................................................................................................. 13|
|C.<br>Investment ............................................................................................................................ 13|
|D. Productivity .......................................................................................................................... 14|
|VI.<br>Can Russian potential growth match global growth? ......................................................... 15|
|References ........................................................................................................................................ 19|
|Appendix .......................................................................................................................................... 22|

# **List of Figures**

|Figure 1: Russian potential growth has been declining .................................................................... 5|
|---|
|Figure 2: Slower potential growth was driven by TFP growth slowdown and decline in labor|
|force .................................................................................................................................................... 7|
|Figure 3: Russia’s Investment-to-GDP ratio stopped increasing, and its capital-to-GDP ratio<br>remains low ........................................................................................................................................ 8|
|Figure 4: Russia’s potential growth is expected to decline slowly due to declining productivity<br>growth .............................................................................................................................................. 10|
|Figure 5: The simulated effects of pension reform in Russia ......................................................... 12|
|Figure 6: Comprehensive reforms can raise potential growth to the global growth ..................... 16|

# **List of Tables**

|Table 1: The simultaneous impact of proposed reforms could be major ....................................... 18|
|---|

# **List of Boxes**

|Box 1: How to measure potential growth? ........................................................................................ 4|
|---|

2
# **I. Introduction**

Although economic activity in the Russian Federation has continued to recover from the 2015-16 recession, potential growth — the rate at which the economy can grow when labor and capital are fully employed — has continued to decline. A weakness in potential growth is not specific to Russia. Potential growth has been adversely affected in both advanced economies (AEs), where it was evident even before the financial crisis, and emerging markets and developing economies (EMDEs), especially since 2010-12. However, a faster-than-average decline in Russia’s potential growth raises concerns about its medium-term prospects and the risks of stalled convergence in GDP per capita with advanced economy levels.

Since per capita income growth is the overriding long-run force for the sustained improvement of living standards, this trend is also cause for concern about Russia’s ability to meet its broader development goals.

Against this backdrop, this paper addresses the following questions:

- How has potential growth evolved since the turn of the century?

- What are the prospects for Russia’s potential growth?

- What policy options are available to lift potential growth in Russia?

To help answer these questions, this paper estimates potential growth and simulates the impact of various policy outcomes on output, employment, capital stock, and productivity. Estimates of potential growth for other EMDEs provide useful benchmarks to analyze cross-country differences (World Bank 2018) .

# **II. Methods**

Potential growth is the rate of increase of potential output, which is the level of output an economy would sustain at full capacity utilization and full employment. Since it is not directly observable, the measurement of potential growth relies on a range of assumptions about its relationship to observable variables. Different estimates of potential growth capture different time-horizons: “short-term” versus “long-term” (Basu and Fernald 2009) _Short-term_ potential growth is the growth of potential output that can be achieved without putting pressure on production capacity and inflation when factors of production cannot immediately 3
relocate in response to shocks (Okun 1962.). The short-term measure is particularly useful for monetary policy since supply constraints or adverse demand shocks, even if they are not permanent, reduce the effective slack in the economy and therefore influence the policy interest rate at a given decision point.

_Long-term_ potential growth is a function of the available capital stock, labor input, and current technology (Solow 1962). As such, long-term potential growth captures movements in the slowmoving fundamental drivers of output, assuming allocation of all factors of production to their most productive uses regardless of temporary supply shocks. Long-term potential output sets the underlying trend of short-term potential output as well as actual output (see Box 1 above for various estimation methods).

Other studies have also documented a potential growth slowdown in Russia (Entov and Lugovoy 2013; IMF 2012; Kaitila 2016; Kuboniwa 2011; OECD 2018). This paper fills a gap in the literature by providing a cross-country perspective using a large data set of comparable estimates (World Bank 2018). The analysis is also innovative in its examination of the impact of multiple reforms in a single platform. While the appendix provides the technical details, Box 1 provides an overview of how potential growth is measured.

# **Box 1: How to measure potential growth?**

Estimates of short-term output may be computed using filtering techniques, including univariate and multivariate filters, while estimates of long-term potential output rest on structural models or long-term growth expectations.

**Filtering techniques.** Univariate filters involve estimates of trend output using only GDP series. Multivariate filters take into account the relationship between GDP and other variables (such as inflation or unemployment rates) to help distinguish short-run deviations of output from trends.

**Production function approach.** This approach represents potential output as a (CobbDouglas) production function of the amount of full-employment capital and labor, as well as technology and efficiency of factor allocation that drive total factor productivity (TFP).

**Expectations.** The approaches above are supplemented with long-term growth expectations, such as five-year-ahead growth forecasts from Consensus Economics or the IMF’s World Economic Outlook. These growth expectations reflect both model estimates and forecasters’ judgment. Judgment can be especially useful during periods of major structural changes, which model-based estimates may not be well-equipped to capture.

The key results pertaining to potential growth presented in this paper are broadly robust to the choice of potential growth measures: the faster-than-average post-crisis slowdown in Russian potential growth (see Appendix for more technical detail).

4
<!-- Start of picture text --> =—Actual Growth<br>6<br>£0<br>G<br>D<br>O16<br>-12<br>fo) w oO wo ~<br>S =} = ay<br>Oo fo) Oo lo) oO<br>N N N N N<br><!-- End of picture text --> <!-- Start of picture text --> 5 Russia Advanced Economy<br>4<br>5°<br>°<br>a2<br>1<br>i —<br>(o) w oO w Ld<br>lo) So co = =<br>oO oO lo) oO oO<br>N N N N N<br><!-- End of picture text -->
# **A. Productivity**

Total factor productivity (TFP) growth has historically been a critical driver of sustained growth in per capita output and prosperity, allowing output to expand beyond what was previously considered possible with a given amount of factor inputs (Romer 1986; Lucas 1988; Grossman and Helpman 1991). Differences in TFP account for about two-thirds of the variation in per capita income across the world (Jones 2016). TFP growth can rise with the adoption of new technologies, an adaptation of existing technologies, the introduction of more efficient processes, or changes in management practices (EBRD 2014). Higher productivity lifts firms’ marginal product and reduces their marginal cost, which allows them to increase their demand for factors of production. Technological advances reduce the price of capital equipment, encouraging further capital accumulation, which in turn embodies further improvements in productivity (Greenwood, Hercowitz and Krusell 1997; Sakeflaris 2004).

Russian productivity growth outpaced the advanced economy average and global average during the previous decade. On average, TFP growth was 2.9 percent in Russia compared to 0.7 percent in AEs in 2000-2009. This high TFP growth reflects a one-off transition process characterized by the reallocation of excess capacity to more productive sectors of the economy (World Bank 2014).

As Figure 2 shows, Russian TFP growth began to slow down during the global financial crisis period in 2008-09, and ultimately declined to 1.3 percent in 2017. The declining trend in TFP is a global phenomenon that started well before the global financial crisis in AEs and spread to EMDEs after the crisis. Weaker productivity growth has been attributed to slower investment growth, partly because of deleveraging pressures and other crisis legacies, combined with population aging and maturing global value chains (World Bank 2018). In Russia, TFP growth slowed as productivity gains from first generation reforms wore off (World Bank 2014). The changing composition of investment from machinery to construction could have also contributed to lower TFP growth (Voskoboynikov 2017).

6
<!-- Start of picture text --> @ Capital m Labor<br>5 a TEP #Potential Growth<br>4<br>eg<br>a<br>g2g,<br>5<br>oe 1<br>0<br>{ 2000-09 2010-17<br><!-- End of picture text --> <!-- Start of picture text --> ws:<br>10 —Labor Force—Fertility Rate(LHS) 5<br>0.5 1.5<br>a ¢<br>80.0 1 8<br>a.° a2<br>-0.5 0.5<br>-1.0 0<br>- oO = oO - ~<br>ao oO oO oO - -<br>[o>] fo>) Oo oO fo) oO<br><!-- End of picture text -->
<!-- Start of picture text --> 30 —Russia —Advanced Economy<br>Oo<br><315<br>2<br>10<br>S is © ob<br>aq & a Q &<br><!-- End of picture text --> <!-- Start of picture text --> 400 “Russia “Advanced Feenemy<br>5a 300<br>®8 200<br>aim<br>100<br>Ss S © 2 &<br>& & a a &<br><!-- End of picture text -->
share of the working-age population has been accompanied by higher capital accumulation and faster productivity growth (Bloom and Canning 2004; World Bank 2018).

The recent demographic shifts towards older population structures affect potential output in several ways. Population aging may reduce the working-age population, which directly reduces potential labor supply. Aging populations have also been associated with slower labor productivity growth for various industries and occupations (Maestas, Mullen and Powell 2016). Russian demographic trends are worse than those found in other EMDEs, as the country’s low total fertility rate in the early 1990s accelerated population aging. Russia’s total fertility rate remained low until the mid-2000s (Figure 2B). The decline in the total fertility rate began to take a toll on the working-age population after 15 years, with potential labor force growth peaking in 2007 at 0.7 percent before declining to -0.7 percent in 2017.

Over the past five decades, global growth was supported by rapidly growing working-age populations—until the mid-1980s in advanced economies and around 2010 in EMDEs. With the retirement of the baby boom generation and lower fertility rates, demographic trends have turned less favorable to growth and will continue to do so over the next decade. In advanced economies, the working-age share of the population is set to decline from 65.4 percent in 2015 to 62.3 percent by 2025. In EMDEs, the working-age share of the population peaked at 65.8 percent in 2015 and is expected to stabilize around this level for the next 10 years.

Another important driver of increased labor supply is labor force participation among less represented groups, including women, young, and old workers. Rising female labor force participation rates have been attributed to better educational attainment (opening access to higher-earning jobs), lower fertility rates, a technology-driven shift towards non-manual skills, and cheaper home production (lowering the opportunity cost of working). While the Russian labor market participation rate is on an upward trend, it is not enough to offset the rapid decline in the population.

# **IV. Russia’s potential growth: Outlook**

Factors weighing on potential growth for Russia are likely to persist over the next decade. Demographic trends are expected to become less favorable. This will weigh on potential growth even if trend improvements in human capital and labor force participation continue. Short of unexpected surges in productivity growth, these trends imply an outlook of mediocre potential growth.

9
<!-- Start of picture text --> 4 Percent —Russia<br>—Advanced<br>Economy<br>3<br>2<br>1<br>0<br>A oresRRRRRRRRRRRARARARAROOr SoS TK NIA Reng<br>-2<br><!-- End of picture text --> <!-- Start of picture text --> Percent 7 . Capital<br>= Labor<br>2 = TEP<br>1<br>0<br>9-1 201720202028<br><!-- End of picture text -->
Under the baseline scenario, Russia’s potential growth is expected to continue on a gradual downward trend from 1.5 percent in 2017 to 1.3 percent in 2023. It is expected to bottom out in 2023 and to recover gradually thereafter. This recovery is primarily driven by labor inputs. According to the UN’s forecasts, the rate of contraction in the working-age population is expected to bottom out in 2022 (0.9 percent decline) but subsequently bounce back. While our forecasts contain significant variations, the upper bound of forecasts without reforms is expected to remain below 2.5 percent in our forecasting horizon.

In 2019, Russian potential growth is expected to be below the advanced economy average for the first time in 20 years, reflecting a faster contraction of the potential labor force. The difference is at most 0.2 percentage point and well within the confidence interval. While expected demographic improvements will raise the Russian potential growth above the advanced economy average again in 2026, a minor difference in potential growth suggests that Russia’s catching-up to the advanced economy average is expected to stall for the next decade.

# **V. Boosting potential growth: Role of pensions, migration, investment and productivity**

While a detailed analysis for boosting Russia’s potential growth is beyond the scope of this paper, the production function framework can be applied to examine some stylized policy scenarios. The impact of better policy outcomes is estimated as the difference between potential growth under a counterfactual scenario of higher growth of physical or human capital or labor supply compared with the baseline scenario. The estimates provided in these stylized scenarios may well be lower bounds because they disregard nonlinearities in reform impacts as well as synergies between different reform measures.

## **A. Pensions**

In Russia, both the mandatory retirement age and labor force participation rate for aged workers, especially for females, are low compared to advanced economies (Figure 5). Increases in the retirement age can lift potential growth as the labor force participation rate for aged workers increases.

In 2018, the Russian government proposed a gradual increase in the retirement age—by five years to 65 for men to 60 for women—starting in 2019 and ending in 2028.<sup>3</sup> We simulated the impact

> 3 The proposed pension reforms go beyond retirement age reform. For purposes of this paper, we consider the effect of only the increase in retirement age.

11
<!-- Start of picture text --> 80 mMedian | Russia ee _<br>70 708<br>g<br>260 605<br>50 2<br>502<br>oa<br>40 40g<br>ra<br>30 308<br>Male Female} Male Female 4<br>Retirement age participationmactulohas<br><!-- End of picture text -->

<!-- Start of picture text -->
1.0 —Baseline —Reform<br>0.5<br>+<br>$0.0<br>&<br> -0.5<br>4<br>‘ CROAT OHRONYO®<br>saangtgagngngiaqaa&asg,<br><!-- End of picture text -->
# **B. Migration**

Traditionally, linguistic, family, cultural, and economic ties between Russia and neighboring countries created strong migration flows to Russia, especially from Central Asia (World Bank 2017). An increase in migration flows will partially offset the adverse demographic implications on potential growth.

We simulated the impact of increased migration on potential growth.<sup>5</sup> We used the medium variant population projection from the Russian Federation Federal State Statistics Service, which assumes successful implementation of ongoing reforms to improve Russia’s demographic outlook (Federal State Statistics Service 2017). The most notable difference from our baseline assumption taken from the United Nations is the expected number of migrants.

In this scenario, the number of net migrants per year increases to 289,000 until 2028 (while the United Nations forecast is 100,000 in the same year). This results in a 0.2 percentage point higher potential growth. The effects are expected to continue after 2028. The cumulative impact of increased migration is around 2 percent of potential output during 2018-2028.

# **C. Investment**

Many countries have sizable investment needs. UNCTAD (2014) estimated that unfilled global investment needs amount to up to 3 percent of global GDP. A low capital to GDP ratio suggests that Russia has substantial room for expanding investment.

Russian investment needs are vast and estimated at 75 percent of its 2015 GDP (World Bank 2016). Underinvestment in physical infrastructure limits connectivity, which damages the profits of firms due to higher transport costs, and it reduces income opportunities and well-being by limiting labor mobility or access of the population to services. By mobilizing private capital through public-private partnerships (PPPs) and opening up infrastructure subsectors to direct private investment, infrastructure can be expanded without creating excessive pressure to the fiscal deficit.

> 5 Even though the government projects higher net migration, it is worth noting that recently, Russia saw less, not more net in-migration due to a weaker exchange rate and mediocre income growth, which has made Russia less attractive for migrants. Also, due to data limitations, we do not consider the quality of migrant labor. As of now, most migrant labor into Russia is cheap, unqualified labor, in low-productivity sectors of economy.

13
We calculated the impact of higher investment growth. The investment growth path is taken from the Ministry of Economy and Development’s projections up to year 2025 and extrapolated afterwards. These forecasts imply that the ratio of investment to potential GDP is expected to increase from 23 percent<sup>6</sup> in 2017 to 34 percent by 2028. Since 1990, more than 70 countries have experienced such an increase. Other than the well-known example of China, other relevant examples include Indonesia, India, the Republic of Korea, Saudi Arabia and Turkey. All these countries experienced over a 11 percentage points increase in their investment rates in 11 years.

The increase in the investment/GDP ratio raises potential growth by 0.2 percentage point in 2020 and 0.6 percentage point in 2028. The cumulative impact of the higher investment rate is around 4 percent of potential output during 2018-2028.

# **D. Productivity**

Russian TFP growth began slowing down around the global financial crisis period in 2008-09, and declined to 1.3 percent in 2017. The decline of TFP growth in Russia is supported by firmlevel data (World Bank 2016): firm-level TFP has been declining since 2007 in all sectors. At the same time, productivity dispersion, especially in the service sector, has risen since 2005, which may imply increasing economic distortions. These economic distortions ultimately create an uneven playing field, limiting the entry and expansion of more efficient firms and the exit of less efficient ones. It is expected to decline further to 1.1 percent in 2028, as the declining share of young working age population will weigh on TFP.

We assumed substantial strengthening of institutions for regulation of private enterprises and successful implementation of policies focused on (1) leveling the playing field for firms by stimulating competitive markets and eliminating barriers to the entry of productive firms and the exit of unproductive incumbents; and (2) upgrading firm capabilities, such as innovation, and technology adoption and better managerial skills, in order to help firms, especially start-ups and SMEs, become more competitive.

> 6 23 percent refers to the investment to GDP ratio using 2010 PPP numbers. Russia’s nominal investment to GDP ratio was 21.6 percent in 2017.

14
In addition, greater exposure to international competition could substantially improve firms’ efficiency. Russia advanced to 31st place in the World Bank’s 2019 global ease of doing business ranking, representing an improvement from the 35th place last year and 40th place two years ago. However, there is room for further improvement in several areas, including Trade Across Borders, Resolving Insolvency and Protecting Minority Investors. Progress in easing barriers to trade would also support productivity growth.

We assumed a gradual acceleration of TFP growth in the reform scenario. In this scenario, TFP will increase by 0.1 percentage point in 2028 from the 2017 level instead of the 0.2 percentage point decline expected in the baseline scenario. This increase would push potential growth up by 0.3 percentage point. The cumulative impact of increasing the TFP growth rate is around 2 percent of potential output. It is worth noting that unlike for capital and labor, a one percentage point increase of TFP growth would increase potential growth by the same one percentage point.

# **VI. Can Russian potential growth match global growth?**

Global growth is expected to remain around 3 percent. As we have seen, in the baseline case, Russian potential growth is expected to remain around 1.3-1.5 percent for the same period. This suggests a relative decline of the Russian economy for the coming decade.

However, simulations of specific reform measures currently being considered by the government, such as pension reform, more migration, higher investment, and gradual acceleration of TFP growth, _can_ increase Russia’s potential growth rate to 3 percent in 2028 (Figure 6). Pension reform, and increases in migration, investment, and productivity contribute 0.4, 0.2, 0.6, and 0.3 percentage point, respectively, to the increase in the potential growth rate. Improvement in the demographic conditions by 2028 contributes to the potential growth rate as well. Even without reforms, the potential employment growth rate in 2028 is 0.2 percentage point higher than that in 2023.

15
<!-- Start of picture text --> a<br>= Productivity increase<br>25 ;<br>= More investment<br>z 2.0 m ensionPensi reformf<br>° = Higher migration<br>51.5<br>o<br>1.0<br>0s<br>.<br>0.0<br>Baseline Reform<br><!-- End of picture text --> <!-- Start of picture text --> 3.0<br>—Reform —Baseline<br>2.5<br>oa]e 20<br>5<br>a<br>1.5<br>1.0<br>©OADAONTOOooSOOOTT TT DONTAA ANTY O tkHO<br>NNNNNNNNNNOOO OO oO AYNoO oO<br><!-- End of picture text -->
- _Synergies_ . Implementing multiple reforms simultaneously rather than piecemeal can generate mutually-reinforcing synergies. For example, in OECD countries, labor and product market reforms, FDI, and trade regulation potentially yield important synergies (OECD 2017). In another example, land, fiscal, and social benefit reforms yield larger growth benefits in China when implemented jointly (Ran et al. 2011). In addition, cross-country synergies from coordinated reforms may arise. The potential for growth spillovers puts a premium on reform efforts in advanced economies that have large repercussions for their EMDE trading partners.

- _Timing_ . Reform payoffs may take more time to materialize than in the stylized scenarios discussed here. There is some evidence that reforms had the largest growth dividends when they were well timed—at least in the context of advanced economies. For example, labor market reforms may lift growth more during economic upswings, when job entrants can more easily find jobs appropriate to their skills, than during downturns (IMF 2016). Pension reforms can have a larger impact on the labor market participation rate and potential employment when the potential labor force is declining.

- _Political economy_ . While a meaningful discussion of the political economy goes beyond the scope of this paper, it is important to emphasize that any structural reform creates winners and losers. Moreover, minority vested interests may upend reforms that benefit the public at large.

The current cyclical upswing is an auspicious time for Russia to implement reforms that may yield long-term gains. There can be no quick fix for reversing the expected slowdown in potential growth at the global level, since it reflects underlying economic factors that are not susceptible to rapid change. More importantly, if history repeats itself, a possible crisis over the next decade may have a substantial adverse impact on potential growth prospects. Mitigating pressures from shortterm risks and long-term headwinds requires the adoption of appropriate policies over time. A package that delivers substantial material benefits at an early date thus stands more chance of success in the long run.

17
# **Table 1: The simultaneous impact of proposed reforms could be major**

|**Reform Measure**|**Contribution to potential**<br>**growth (percentage**<br>**point)**|**Cumulative increase in**<br>**potential output during**<br>**2019-2028(percentage)**|
|---|---|---|
|1. Increase in retirement age<br>(60 to 65 for men; 55 to 60<br>for women)|0.4 %|3.2%|
|2. Increase in migration flows<br>(number<br>of<br>migrants<br>increases<br>annually<br>from<br>100,000 to 289,000)|0.2%|1.8%|
|3. Increase in investment rate<br>(Investment / GDP ratio<br>increases by 13 percentage<br>points)|0.6%|4.1%|
|4. Increase in TFP growth<br>(increases to 1.4 percent by<br>2028)|0.3 % *|1.6 %|

_Note:_ Because this table summarizes the simultaneous impact of proposed reforms, and thus capture the interaction between various reforms, results shown in this table differ slightly from those in section V (which are piece-meal reforms).

* Contribution in 2028. The contribution is assumed to be increase gradually.

18