Institutions Come First: How to Diversify the Economy and Solve the Housing Problem

I am often asked how our economy can be changed and what must be done to make it diverse, so that it does not depend solely on the price of oil. This is, of course, a very difficult question, and it belongs more to the realm of philosophy, because only the market can determine which sector of the economy is better and which is worse. Any attempt to pick the efficient sectors by hand can create very large risks for the economy as a whole. But there is one rule of economic development that always and everywhere holds true: for progress and quality growth, institutions come first. In other words, to develop the economy, we must start by developing institutions, and only then everything else. Suppose, for example, we want to develop SMEs. No matter how much money is allocated for that purpose, quality development will happen if and only if there is a sound judicial system, a sound law enforcement system, a sound education system, a fair tax system, and a fair system of inspections and oversight of SMEs. If all of these institutions are weak, a small business owner will spend time and money dealing with inspectors, protecting his business, going through courts and akimats (local administrations), training employees, and so on. As a result, the efficiency of his business will decline, and he will become uncompetitive compared with similar entrepreneurs in other countries.

So when I am asked where budget funds should be directed to make the economy grow, the answer is obvious: first, create properly functioning institutions, and only then think about subsidies, direct financing, infrastructure, and government procurement.

I am also often asked about the housing program, and whether the state should build housing and dictate a target number of square meters per person. Here, too, the answer is clear: this is the wrong way to set the goal. It is a result we should strive for, but not a task in itself. The state should not be building housing (except for socially vulnerable groups and public sector employees). Private developers should build and sell it, and the population should be able to afford to buy it. To increase the number of square meters per person, two things are needed:

1. Growth in household incomes (which requires economic growth).
2. Lower construction costs, which requires building infrastructure.

Developing infrastructure is precisely the state's direct task.