Financial Constraints on the Modernization of the Russian Economy

Abstract

A British economist examines the main obstacles to economic modernization in the Russian economy. After arguing that increased investment is required if the Russian economy is to undergo significant modernization, he presents a framework for identifying binding constraints on such investment. A number of popular explanations of Russia's persistent underinvestment are considered, with particular emphasis on financial constraints. Recent Russian government proposals to restructure the financial system are then assessed in light of their implications for the wider economic modernization. On the basis of the growth diagnostics framework employed in the paper, the author makes the case that the binding constraint on investment in Russia is the poor quality of domestic financial intermediation.