The Economics of Politics


September 23, 2015

Last week I attended a conference titled “Russia’s food market in 2015”; it was the first of a series of panels that took place in occasion of the 24th World Food Exhibition, a well-known event which brought to Moscow more than 1500 firms from over 70 countries.


At the discussion participated the Presidents of many Russian Commercial Unions in the food sector from one side and spokesmen of the Russian and Belarusian Ministries of Agriculture on the other. Issues such  as the politics put in place by the government in the context of the “import substitution strategy” and the needs and difficulties of entrepreneurs were extensively discussed.


What I want to point out in this brief article is the clear discrepancy that emerged between the authorities’ view of the situation and the entrepreneurs’ one; according to the latters, the government is “living in its own world” and doesn’t consider –and listen- to the problems faced by businessmen.




According to Sergey Levin, the Deputy Minister of Agriculture of the Russian Federation, food imports from sanctioned countries slumped but have been considerably replaced by third parties; in addition, the national industries, if considering the difficult macroeconomic environment, has reacted positively and develops in the directions indicated by the authorities.


The process of “import substitution” has been strongly supported by the government; subsidies to firms aiming to fullfill long-term goals have been extensively provided. Willingness to maintain such economic support in the future and favor the inflow of  new investments in the sector has also been remarked.


Yet, the Presidents of the Russian Commercial Unions had a very different opinion on the actual situation. They think that the politics of subsidies is detrimental and don’t help the entrepreneurs at all; rather, it just contributes to create unbalances in the production and increases inefficiencies.


As an example, they pointed out that subsidies to the poultry industry have contributed to push the production over the equilibrium created by the demand, which generated a consequent reduction of prices. It is therefore clear how the money invested by the government end up in short-term increase production’s goals rather than in long-term acquisition of machineries, expertise and competencies which would allow a real “import substitution” process.


We cannot let our products be underpriced due to government’s subsidies; consumers must pay a fair market price. The politics of subsidies can be undertaken only within a more comprehensive, long-term strategy aiming at increasing investments in production techniques rather than mere productions; only in this way the import substitution process can be accomplished”.


Some participants also stated that the government lives in “its own illusions; functionaries don’t put too much efforts to understand the real problems faced by entrepreneurs, there isn’t any sort of dialogue, simply the latter acts autonomously”.


In this context also Aleksey Bogdanov - Head of the General Directorate of Foreign Economic Activities of the Ministry of Agriculture and Food of the Republic of Belarus, was criticized. He explained that his government and the Russian’s one are working together to develop common goals in the agricultural sector. Businessmen, on the other hand, remarked how they are completely excluded from this dialogue. How governments could coordinate and improve the current reality without taking in consideration the  needs of the entrepreneurs remains unclear.




Besides taking into account the needs of businessmen and entrepreneurs, the Presidents of the Commercial Unions asked the government to stop the politics of subsidies; as an alternative, they suggested the government to undertake policies aiming to support consumer spending.


High inflation has caused the demand for food to fall sharply indeed. Consumers are reorienting their expenditure to cheaper, lower quality goods. The fall in the demand has also discouraged investments, no matters how much the ruble has depreciated; if the demand is weak, investors are bearish.


Therefore, the alternative suggested by entrepreneurs seems reasonable. Finances spent in subsidies can be reverted to low-income consumers, who would contribute to sustain the demand and, consequently, stimulate the development of the industry itself. The problem is how to do it; fortunately, I will interview the chief economist of the World Bank for Russia and CIS in the next days to ask for clarification. Yet, whether the government will take any action at this regard remains dubious. 

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