Russia’s Economic Modernization: A Long-Term Perspective

1 march 2018

Yaroslav Lissovolik - Programme Director of the Foundation for Development and Support of the Valdai Discussion Club, Chief Economist of the Eurasian Development Bank.

Resume: If there is one thing that we can be certain about with regard to Russia in the next several decades, it is that it will attempt to stage a catch?up effort vis-a-vis the front-runners of the world economy.

If there is one thing that we can be certain about with regard to Russia in the next several decades, it is that it will attempt to stage a catch?up effort vis-a-vis the front-runners of the world economy.  That effort will necessitate a new strategy of modernization that is more coherent and comprehensive than in the past. The strategy that dominated before was clearly not very successful in that it hinged on the hope that the West would altruistically “deliver the goods” in terms of technological development and investment. The disillusionment with regard to that vision was striking in some ways in the past several years. 

Accordingly, there will be a strategy that to some degree will represent a contrast effect of sorts with regard to the experience of Russia in previous decades.  One part of the strategy that we are already starting to see to some degree is more emphasis on self?sufficiency, the realisation that Alexander Gerschenkron’s thesis that “countries that are lagging will adopt technology and catch up quickly” does not seem to have worked for a lot of reasons, and there needs to be a more concerted effort to forge ahead with modernisation in other ways that rely more on Russia’s own economic and historic heritage.

What is very interesting is the reference in the domestic policy debates with respect to “non?linear catch?up”.  This means that if previously, the vision was that we adopt this or that technology step by step, we go through all of the necessary stages and all of the requirements to reach a certain level of development.  Now, Russia is looking for shortcuts, and some of these shortcuts may be precisely represented by the new infatuation of the authorities with the digital economy.  

In terms of the components of catch?up, one can take the growth model of any country that is predicated on capital, labour and productivity as the three drivers of economic expansion. In terms of capital there is the key unresolved issue that is still unresolved from the previous decades, namely is infrastructure.  The issue of industrialisation has not been delivered upon so far in Russia despite the greater scope for import-substitution in the past several years.  Infrastructure development in turn is something that would allow Russia to deal with the key growth barrier, which is distance.  A look at the balance sheets of Russian companies reveals that transportation costs tend to be higher from the hinterland regions and from the inner regions of Russia to external markets.

Then we go to the second component, which is labour.  With regard to labour, demography is likely to remain a challenge.  The lower growth rates that are exhibited by the Russian economy are partly because Russia is losing hundreds of thousands of people from the labour force each year.  This is the effect of the aftershock of the 1990s.  In these circumstances, migration will have to remain part of the economic policy package and the key issue for Russia will be quality rather than quantity of migration. 

Finally, with regard to productivity - this is probably one of the biggest frustrations from the past and one of the biggest question marks for the future.  If you take the past 10 years, almost every year, productivity was consistently below wage growth.  Secondly, if you take the past 10 years, there was no catch up at all vis?à?vis the West.  We started from a level around one?third of the US level of productivity 10 years ago, and it is roughly the same as where we are now. This is despite the low base effects with respect to economic efficiency that have been largely untapped in the past several decades.

Arguably, there are also good things to be said about low base effects that could be exploited by Russia and that could provide some upsides, in particular with respect to the integration into the world economy and the number of economic alliances.  In the preceding several decades, Russia pursued an overwhelmingly Eurocentric strategy in terms of economic alliances. Now China is certainly seen as a success in terms of its transition path and it is only inevitable that this model will attract the attention of Russian policy makers, as will some of the other successful models in East Asia. Nonetheless the fruits of the so-called turn to the East are still modest – while China has become Russia’s leading trading partner investment cooperation leaves substantial scope for improvement.

If one looks at the number of FTAs secured by Russia one of the very few such agreements in the “far abroad” is the one with Vietnam, while for advanced economies the number of such agreements can run as high as 14?15. At the same time Russia is pursuing its alliances together with the European Economic Union, and there are dozens of countries that are waiting in line to forge a free trade area with Russia and its Eurasian partners.  These potential partners include such success stories as Singapore and South Korea, and other players, like Israel for example. Some of these cases are actually near?term goals for the government and represent what is called “new openness” by Russian policy makers, openness that is now based on forging economic alliances across the world.  Finally, after joining the WTO, Russia can pursue a proper trade policy.   

Another aspect of Russia’s integration into the world economy in the long-term is the possibility of using it economic resources abroad, such as capital and labour. Judging by the size of the capital outflow in the preceding decades, hundreds of billions of dollars from abroad could come back if the investment climate were to significantly improve. We saw precisely that pattern in 2006?07, when Russia experienced sizeable net capital inflows.  Another possible upside potential is the Russian diaspora.  Russia has one of the largest and most high-tech diasporas in the world. If Russia is capable of exploiting some of this potential, its capacity in attaining higher growth rates would be significantly enhanced.   

Finally, in all of the discussions on the long-term economic strategies of Russia, human capital is of crucial importance. Apart from the standard prescriptions of the need to finance R&D as well as education and healthcare there is an important generational angle in Russia’s long-term outlook.  In this respect recent developments associated with the promotion of young professionals into the upper echelons of power (including gubernatorial positions and top positions in some of the ministries) suggest that we may be entering into a phase of a generational shift. While perhaps somewhat overdue, such a turn in the direction of Russia’s policy may turn out to be key in determining Russia’s economic trajectory in the next several decades.  

Valdai International Discussion Club

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