Nineteen Eighty-Five

25 december 2010

Looking Back on the Present

Vladislav Inozemtsev holds a PhD in Economics; he is Head of the Department of World Economy at the Faculty of Public Administration, Lomonosov Moscow State University, and Director of the Center for Post-Industrial Studies.

Resume: The Soviet Union, contrary to many expectations, survived the year 1984 – one of the last years of the industrial age. But it proved helpless in the new conditions, when the development of post-industrial countries demanded greater flexibility and innovation from the rest of the world. As for Russia, over the years since the end of the Soviet era, it has grown, it looks, richer somewhat, but its basic features have remained Soviet all along.

On Monday, December 31, more than a quarter of century ago, the 1984th year since the birth of a legendary prophet, who, as believed, finished his earthly ordeal on the cross in the Roman province of Judaea, came to an end. That year was very much like many others, when the superpowers were fighting the Cold War and building up nuclear arsenals, the developed countries continued to struggle with recurring economic crises, and the developing nations with never-ending ones. It was just another year when people were born and died, when they dated each other, celebrated weddings, made professional and public careers, became national leaders and made scientific discoveries. The boldest forecasts for that year did not come true: the totalitarian regime George Orwell had described in his novel Nineteen Eighty-Four 35 years earlier had not conquered the globe, and the answer to Andrei Amalrik’s question “Will the Soviet Union Survive Until 1984?” was in the affirmative.

The following year, however, appeared to be a turning point for many countries and peoples; the value of some of its events was recognized almost instantly and universally, while the role of many others began to be realized many years afterwards. Yet, however different those events might look, in a whole they shaped the quality of the world we all live in today. This world is very different from the one that looked so cozy a place just a quarter of a century ago. But today, as they look back on their recent past, many Russians have, unfortunately, to admire the achievements of others and acknowledge their own failures at the same time. Nostalgia is not the best feeling of all, but 1985, alas, provokes it in an extremely hard way.

THE CHANGE OF THE GLOBAL LANDSCAPE

Of course, we cannot describe everything that happened in the world in 1985, or follow all the trends that emanated from its events. However, some of them certainly deserve special attention.

On January 15, Brazil saw the first free democratic elections after twenty years of military dictatorship, which awarded victory to Tancredo Neves and turned a new chapter in the history of that country, and of the whole of Latin America as well.

On March 11, the Central Committee of the Soviet Communist Party met to elect Mikhail Gorbachev, a future architect of perestroika and glasnost,  its General Secretary and, de facto, leader of the Soviet Union.

On June 14, the leaders of five of the twelve EEC countries met near the small town of Schengen in Luxembourg to sign an agreement that effectively canceled the borders between their countries.

In September, the Chinese Communist Party’s Central Committee held a plenary session followed by a party conference which dramatically rejuvenated the party’s leadership. Functionaries with college and university degrees in science and engineering took up a hefty 76 per cent of the seats on the Central Committee.

On October 18, the Emir of Dubai issued a decree establishing the Arabian Peninsula’s first free economic zone in Jebel-Ali harbor, semi-abandoned after the withdrawal of a British naval base.

Finally, throughout that year specialists’ attention was riveted to events that had a direct bearing only on select few: in January, Apple Inc. presented the Macintosh, a clumsy and not very trendy computer with a 512-kilobyte RAM; in May, the National Science Foundation pooled five major U.S. computer centers into the NSFNET network, which allowed for free exchange of information; and in November, Microsoft revealed its Windows OS.

All these events – each in its own way – lent history unprecedented dynamism. One can argue about whether humanity has since gone freer and better, or economic progress has triggered a new wave of pure materialism, but it is hard to ignore the fact that development has become less uniform, and the world, more fragmented. And it is noteworthy that its fragments have started moving in almost opposite directions.

In 1985, Brazil was a backward country – 53rd in the world in terms of per capita GDP, importing more than three-quarters of its industrial equipment and exporting mostly coffee, soybeans and iron ore (54.2 percent of the total exports). The industrial sector contributed only 27 percent to its GDP. Although in the mid-1980s the country had 62 universities, the share of people with college education was a tiny 9 percent, and less than 60 percent of its inhabitants had high school education. Over the years, Brazilian society has changed dramatically. Despite the string of presidential impeachments and scandals in parliament there have been six parliamentary elections and five presidential ones (all held on time), in which fierce political opponents came to power in a civilized way – sometimes amid severe financial crises, when the GDP fell by 4-7 percent a year, and annual inflation soared to 2,500 percent.

Guarantees of private property were established and the country has become one of the most important investment targets for entrepreneurs from Western Europe and North America. Particular emphasis was placed on rapid industrialization, and the results were quick to manifest themselves. A quarter of a century later, 81 percent of all newly installed industrial equipment is manufactured domestically; the country now produces 4.7 times more passenger cars than it did in 1985 (3.18 million in 2009 – the 6th amount in the world), 12.6 times more aircraft (now it has become the third largest manufacturer of aircraft in the world after the EU and the U.S.), and pumps 3.6 times more crude oil. The local engineers have created and mastered the technology of offshore drilling to a depth of 7,000 meters, which makes the country a global leader in this area. The ratio of exports to GDP reached 18.7 percent, and the share of raw materials in export fell last year to 40.5 percent. The number of university students increased over the twenty-five years by 3.1 times, and in some areas – particularly, in developing “electronic government” (in 2002 the country held the world’s first general election with 100 percent of the votes counted electronically and the returns announced just two hours after the ballot cast came to an end) and the use of alternative fuels (94 percent of Brazil-made cars are equipped with engines capable of working both on gasoline and biodiesel) – Brazil appears to be the undisputed global leader. A former Portuguese colony, Brazil today is the world’s eighth largest economy and ninth in terms of industrial production, the dominant regional power of South America, a country of democratic traditions and European culture. What made it so? First of all, the competence of its leaders; openness to economic and political innovations; a broad national dialogue among the people, the authorities and the expert community; readiness for international cooperation, and the authorities’ faith in the people, their ability and right to choose their leaders and development benchmarks.

The situation in China in the mid-1980s was immeasurably worse. The country of “the great leap forward” and “the cultural revolution,” which claimed millions of lives, remained one of the poorest and most backward in the world. The average GDP per capita was 310 dollars. In terms of size, China’s economy was only 9th, ranking between Canada’s and Australia’s. China’s exports amounted to 25.8 billion dollars, being the 18th in the world – less than those of the German Democratic Republic. Industrial output stood at 90 billion dollars at the market exchange rate, the average wage of an industrial worker was a mere 40 dollars per month, and the average per capita income amounted to 1.65 percent of the U.S. level. In a situation like that the Chinese leaders put their stake on catching-up development, based on impressive borrowing of Western technology and attraction of FDI. There emerged free economic zones, and mass migration from the central areas to the coastal regions began. The focus was made on the development of new enterprises, while the state retained control over outdated heavy industries, which in the first period of reforms made heavy losses. This produced a unique combination of extremely cheap labor, relatively low-cost local materials and a very favorable investment climate. The state was persistent (though not entirely successful) in fighting corruption, it painstakingly ensured the meritocratic principles of personnel recruitment, and sought to promote economic openness.

The first achievements in the foreign markets were promptly converted into improvements inside the country: the available financial resources were channeled into support for domestic producers – above all, into the manufacturing of electronics and communications systems, cars and industrial equipment, as well as into the creation of modern infrastructure. The results are well known: in the early 2000s, China was already the world’s largest manufacturer of office and computer equipment; in 2008, of industrial products in general; in 2009, the world’s largest manufacturer and exporter of cars; and finally it became the world’s second economy in 2010. In 2009, China produced 3.6 times more coal than it did in 1985, generated 8.4 times more electricity, made 8.6 times more steel, 8.7 times more cement, and 31.2 times more cars. As for personal computers (109.2 million) and mobile phones (574 million), China’s production is bigger than that of the rest of the world. Over 2005-2008, China built 6.9 million square meters of residential and office buildings, 1.86 billion kilometers of hard surface roads (including 27,000 kilometers of highways with four lanes and more) and 5,400 kilometers of railways.

Once a marginal participant in the global economy, China has become one of its centers closely linked with other major players: by the beginning of 2010 it had four of the world’s 25 largest airports in terms of passenger traffic and 11 of the world’s 25 largest seaports in terms of the volume of cargo handled. The GDP per capita has risen by 11.9 times over a quarter of a century to 3,700 dollars, and the rising living standards of the Chinese citizens have proven a major factor for the overall reduction of poverty in the world during the period under review. One can go on listing the achievements of Russia’s great neighbor in the East, but it is undeniable that the rapid rise of China was the most dynamic economic and social process in the last quarter of the 20th century, and that the country owed it to talented and competent management, on the one hand, and to hard and diligent work by its people, on the other.

Another critically important region – the Middle East – in the mid-1980s was, it might seem, at the zenith of its glory. Although oil production fell between 1979 and 1985 by half, or even more, the region increased its export earnings almost three times due to the “second oil shock” of 1980-1981.

However, the most far-sighted rulers in that part of the world were aware that the era of oil prosperity may not last long, and began to diversify the economy. The United Arab Emirates is the best example. That country chose a strategy of turning itself into a major regional transport hub and international financial center, as well as an attractive destination for tourists from the industrialized world and neighboring states. It was a typical “niche strategy” that suits small countries well – and it fully justified itself.

In the first phase the emphasis was on the development of transport, on building seaports and airports, as well as on expanding specially created free economic zones. Then, as capital started pouring in, there followed a boom of tourism, housing and office construction. The UAE skillfully used the benefits of globalization to bring in cheap labor from India, Pakistan and neighboring Middle East countries. And finally, at the last stage Dubai was converted into a leading financial, cultural and educational center in the region.

The results are impressive: the share of oil revenues in the budget shrank from 1985 till 2009 from 88.4 percent to 28.3 percent; maritime trade turnover grew 19.3 times, and passenger traffic through the major airports of the country increased nearly 150 times. Emirates Airlines in 2009 became the world’s No 1 airline by the passenger-kilometers carried on international routes, and the Dubai International Airport in 2009 took 15th place in the world in terms of passenger traffic (the state-of-the-art Al-Maktoum airport, inaugurated in July 2010, is designed to service 160 million passengers a year – 78 percent more than Hartfield airport in Atlanta, and 3.4 times more than all airports of the Russian Federation serviced in 2009).

In 2007-2008, the UAE was annually building 40.2 times more apartments than in 1985, and commissioning 49.2 times more office space. The hotel stock increased from 11,600 suites in 1985 to 260,000 at the beginning of 2010. The country has five of the 20 most expensive hotels in the world. Off the shores of Dubai one can see man-made islands with luxury villas, and early this year the world’s tallest building Burj Khalifa, soaring 828 meters into the air, and the world’s most spacious facility – the third terminal of Dubai airport, were opened. Over the past five years, real estate projects in the country attracted 260 billion dollars of new investments, and many of the architectural solutions realized here are unparalleled in the world. One of the most neglected spots on the globe in the past, the UAE has grown into a cosmopolitan state, hosting ever more newly-opened branches of not only the world’s largest banks and companies, but also of universities and museums. It is now an attraction for the wealthiest people from dozens of countries. A precise strategy, efficient and competent management, low taxes and artificially under-priced labor – all these factors have transformed a strip of the Arabian Desert into the region’s most prosperous country over just a quarter of a century.

In another part of the world, Europe, the past twenty-five years have been a period of somewhat different trends. That richest region of the world failed to score any impressive economic achievements, but at the same time it has not lost – contrary to the opinion of many Russian policymakers – its influence in the world. Europe’s share in the global gross product declined only slightly – from 24.3 percent in 1985 to 21.9 in 2009; the continent retained its position as the world’s largest international net investor (providing 54.6 percent of FDI made in the world last year); it still enjoys the position of the world’s second “pole of wealth” (after North America) and one of the leaders of the knowledge economy (today, 38 percent of European companies are considered “innovative,” and high-tech products account for 62 percent of export).

At the same time, the continent has undergone a landmark political and social transformation, which started back in the 1950s, and, as tensions between the U.S. and the Soviet Union eased, began to acquire its own identity. The cancellation of borders between individual EEC countries was a prelude to the expansion of the Community in 1986-2007, which increased its membership to 27 from 12. The deepening integration led to the establishment of the European Union in 1992, introduction of a common currency in 1999 and, finally, to the signing and adoption of the Treaty of Lisbon in 2009, which paved the way for transforming the European Union into a very special quasi-state entity based on a limited sovereignty of its members.

The changes in Europe since the mid-1980s have been the largest social innovation in recent centuries, and for the first time ever made the Old World a zone of stability, peace and sustainable international cooperation. Moreover, they embodied abdication of the concept of sovereignty that had dominated world politics since the mid-18th century, and also of principles of the nation-state, which from the beginning of the 19th century had been the main form of national self-determination. From 1985 to 2009, the share of trade among the EEC/EU member countries increased to 62.9 percent from 47.8, the number of Europeans fluent in languages of other EU countries increased almost fourfold, and the proportion of interethnic marriages between EU nationals rose to 4.9 percent from 0.6 percent of all weddings in the EU. What we all witness now is the birth of a single European nation, which will change the traditional ideas concerning the principles of political organization. The Western world, which for the past half a century kept losing its overseas possessions, suffering defeats in peripheral wars and conceding leading positions in the economy to representatives of the “developing” world, today is getting a chance to become a center of attraction, a place where lucrative images of the future are being created and notions are being nurtured of what is due and proper, adequate to the goals of the 21st century.

Changes in science and engineering that once looked significant only to specialists have now changed the face of the world to a greater extent than anything else.

In the mid-1980s, many associated the future of humanity with nuclear and thermonuclear energy, or space exploration, but it was innovations authored in American garages by the first computer hardware engineers and software specialists that were destined to determine development guidelines. Computer technologies were personalized and turned into a means of accumulating and storing information and of communication among people. Whereas in 1985 only 7.5 million computers were produced in the world, in 2000 there were 132 million, and in 2009 – more than 300 million. The leading makers of software, chips, computers and communication gadgets entered the top ten on the list of the most expensive corporations of the world (Microsoft held first position in 1998-2000, Intel, third in 1999, Cisco, fourth in 2000, and Apple, tenth in 2009). Apple’s capitalization in 1998-2010 increased 83 times, and that of Microsoft in 1990-2000, 297 times.

The computer and communications industry remained virtually the only one where products became instantly cheaper, while their technical properties soared: the average memory of a PC’s hard disk grew 1.2 million times from 1985 to 2010, and speed, 90,000 times, while the price dropped by a factor of 4-6, even without adjustment for inflation. The information revolution has spilled over to mobile communications and the Internet, making them the fastest growing sectors of the global economy. Whereas in 1985 the world fleet of mobile phones did not exceed 5 million pieces (it was on January 1, 1985 that Britain’s Vodafone launched the UK’s first mobile network), today they number 4.6 billion, and the Internet is used by 1.9 billion subscribers, or 27.3 percent of the globe’s population. The spread of PCs and the Internet eliminated barriers to the transfer of information, it virtually deprived the closed totalitarian countries of any chance to develop, and – more importantly – it changed the essence of the economic system in the post-industrial world. As new computer technologies expand, it has become possible – especially for people of creative professions – to sell not their labor, but finished creative products; in other words, inside the traditional capitalist economy a non-capitalist sector has begun to emerge, and we are still unable to gauge the effects of this development.

The expenses on information products and expertise – as human and intellectual capital turned into a major factor of production – turned from personal consumption to productive investment, and this factor began to change the concept of investment and consumption, allowing Western societies to reduce traditional investments without retarding economic growth. And, finally, the production of high-tech goods – such as software products – is not simple reproduction: by selling copies of software their producers do not lose their rights on the original product: in this way the post-industrial world has opened up an opportunity for deriving virtually unlimited wealth. No wonder that the last quarter of a century has become – despite the existing countertrends – a period of the fastest growth of economic inequality on a global scale.

Thus, over the past twenty-five years the world has changed deeply. On the one hand, its post-industrial part opened an enormous potential of technological and social innovativeness and put it to use to the full to maintain its leadership in the world; on the other hand, some peripheral countries countered this trend with the niche development strategy and tried to extract maximum advantages from the de-industrialization of the Western nations, as well as from the rapid growth of the living standards of the global elite. The examples that we have briefly reviewed show that this strategy is applicable in many forms, it is not necessarily based on cheap labor, and it can easily be implemented in the backward states or countries once dependent on the West. The ideas of the dependency theory were put to shame.

RUSSIA’S PATH: PROGRESS OR FAILURE?

Against this background one can easily see how different the Russian way has been from all those success stories that have been observed around the world over the past quarter of a century.

Although in the second half of the 1980s the Soviet Union had a great scientific potential (and a particularly strong one in mathematics and natural sciences), nothing was done to bring high-tech industries and services into the country. Instead of becoming a leading offshore software development center, more successful than India’s Bangalore, where this kind of business now provides a 36-billion-dollar surplus to the regional product, the Soviet Union and later Russia easily let thousands of talented programmers to leave; all of these easily settled in the United States and Europe to become successful and highly paid employees or businessmen (the most lucky of them, Sergey Brin, co-founded Google, Inc. which propelled him to 24th place on the list of the world’s richest people). The Soviet Union, with its unique technologies, failed to create mobile communication devices, computers or wireless data transmission systems. As a result, Russia still does not make mobile phones (their market is estimated at 142 billion dollars per year), and by the number of computers assembled (at this point we shall put the theme of quality aside) it lags behind Vietnam – by a factor of eight.

Although Russia had at its disposal one of the most diverse and complex quasi-empires, it has ruined it and it is still unable to resist the authoritarianism and nationalism of the ruling elites in the former Soviet republics with any attractive integration project. Instead of increasing the flexibility of public management, the Russian elite, brought up deep inside the KGB – the least successful of the 20th century’s secret services – has opted for etatization of the economy, for the creation of clumsy state corporations, and for nearly complete rejection of mutually beneficial technological cooperation with foreign countries and international corporations.

With its huge transit potential, Russia de facto has refused to use it: suffice it to say that in comparison with 1985 the number of airports in the country has decreased by two-thirds, the intensity of passenger air traffic by 55 percent, and that of cargo air traffic, by 60 percent. While the land route for taking cargos from Asia to Europe is twice shorter than that by ship, 98 percent of trade turnover between the EU and the Asia-Pacific Region is held by sea routes, while the share of the Trans-Siberian corridor is less than one percent.

However, the most terrible picture opens up if one takes a look at the degradation of Russia’s industry – a branch of the economy that in recent decades was the main driving force behind the accelerated growth in any of the countries outside Europe and North America.

In 1985, the then Russian Soviet Federative Socialist Republic (RSFSR) [what is now the Russian Federation – Ed.] produced 395 million tons of coal, 88.7 million tons of steel, 1.16 million cars, 79.1 million tons of cement, 17.7 million tons of fertilizers and 5.0 million tons of paper. By the end of 2009, these numbers were down respectively by a factor of 1.32, 1.49, 1.95, 1.78, 1.21 and 1.28. Statistics illustrating the production of investment goods and relatively high-tech consumer goods looks still sadder. In 1985-2009, the production of trucks, combine harvesters and tractors decreased by a factor of 5.87, 14.1 and 34.0 respectively, and that of watches and photo cameras, by a factor of 91 and 600 (!) (in the meantime, the retail consumption of these goods during this period increased by 3-5 times, and the demand was almost entirely satisfied by imports). And even the industries that according to official propaganda constitute the backbone of the domestic economy are far from thriving: in 2009, Russia produced 8.8 percent less crude oil than the RSFSR in 1985, and 10.6 percent less gas than the RSFSR in 1990. At the same time, Russia’s share in global production of these natural resources declined from 19.4 percent to 12.9 percent for oil (from 542 million tons of the 2,792 million tons in 1985 to 494 million tons of the 3,821 million tons in 2009), and from 35.8 percent to 17.6 percent for gas (from 590 billion cubic meters of the 1.649 trillion cubic meters in 1990 to 527 billion cubic meters of the 2.987 trillion cubic meters in 2009).

Russia experienced a powerful recession in the output of all industrial products, which was by no means confined to “the terrible 1990s,” but spread well into the “prosperous” 2000s.

The same trends are observed in agriculture: the area sown to crops shrank over the same quarter of a century from 119.2 million hectares to 58.6 million hectares, or by 50.8 percent; meat and milk production decreased by a factor of 2.2 and 3.5 respectively; number of cows and bulls by a factor of 3.7; and sheep and goat stock, by a factor of 7.1. Modern Russia has practically ceased to sell industrial products – it exports mostly oil, gas and metals. In 1985, the Soviet Union exported 20.0 percent of the motor vehicles it produced, 28.2 percent of watches and 39.4 percent of photo cameras – but only 5.0 percent of coal, 5.5 percent of timber, 10.7 percent of natural gas and 19.7 percent of oil. In 2009, finished manufactures accounted for only 4.7 percent of exports from the Russian Federation to countries outside the post-Soviet space – but the breakdown of other exports bound there looks as follows – 23.8 percent of timber, 28.8 percent of natural gas, 35.2 percent of coal and 66.4 percent of oil produced in the country. All this means that the Russian economy has become an empty shell; inside one finds only financial speculations and fighting for petrodollars that keep pouring in; some of these are exchanged for imported cars, consumer goods, foods and services.

Since 1985, the Russian economy has almost ceased to generate new production facilities, and its fixed assets are aging rapidly. During the entire post-Soviet period, the country has not built a single cement mill, petrochemical plant or oil refinery. Instead, over the past five years alone Russian companies have spent more than 14 billion dollars on the acquisition of oil-refining facilities abroad. Whereas in 1985 the RSFSR produced 2.14 times more electricity than China and “only” 53 percent less cement, today’s Russia is lagging behind China in electricity and cement production by a factor of 3.7 and 32.4, respectively. In the production of trucks, watches and photo cameras, Russia was 1.2, 1.9 and 4.8 times ahead of China in 1985, but today it is lagging behind by a factor of 36, 230 and 1,100, respectively.

Over the past twenty five years Russia has been virtually the only country in the world that saw a reduction in the length of its railways (by 4.2 percent from 1985); in Brazil, for example, the length of railways has increased by 10.7 percent, and in China, by 140 percent. Developing infrastructure projects in Russia is enormously costly: for example, the price of one kilometer of a projected highway between Moscow and St. Petersburg is estimated at 904 million rubles (29.3 million dollars), while the construction of a road of similar quality in France costs about 7.9 million euros (10 million dollars), and in China, more than 40 million yuans (6.25 million dollars). The list can be prolonged.

This kind of business climate is largely due to pervasive corruption and weak governance, but a much more significant role, in my opinion, was played by the originally wrong course towards financialization and de-industrialization of the Russian economy. At the end of the 1980s (and then for some time in the late 1990s), Russia had a unique chance to use as its main competitive edge the extremely low domestic energy and raw materials prices and liberalize to the maximum the transfer of manufacturing industries, primarily from the European countries. In combination with skilled workforce and relatively developed infrastructures it might give a powerful impetus to Russia’s economic development. (Let us recall that precisely this type of policy – even without cheap energy resources – brought about an industrial renaissance in Eastern Europe, where in 2009 Poland produced more passenger cars than Russia.) However, hasty decisions on the privatization of basic industries, coupled with the illusory hopes that the rise of domestic prices of raw materials would reduce the energy intensity of the economy, entailed the terrible consequences that we have today – the very same consequences President Dmitry Medvedev is urging the Russians to overcome, although the current Russian elite looks pretty happy about them.

*  *  *

The Soviet Union, contrary to many expectations, survived the year 1984 – one of the last years of the industrial age. But it proved helpless in the new conditions, when the development of post-industrial countries demanded greater flexibility and innovation from the rest of the world. As for Russia, over the years since the end of the Soviet era, it has grown, it looks, richer somewhat – due to the rampant sale of resources and tight cost-saving on investments into maintaining the industrial and infrastructural potential – but its basic features have remained Soviet all along.

In recent years, the authorities have begun to speak about economic modernization – but this is understood primarily as the creation of groundwork for an innovative economy. In my view, this course is unlikely to be successful. Although in general everyone can agree with President Medvedev’s words that it would be incorrect to “set off innovations as such against the development of our industry, the modernization of our industrial capabilities,” severing the link between them would also be wrong. It makes no sense to go ahead with innovations in a country that possesses no industry that can make use of them – and large Russian enterprises today are even more indifferent towards using innovation technology than they were in Soviet times. So I have a growing conviction that if the country keeps following the current path, its incipient stabilization and even “getting off its knees,” about which the ruling elite keeps talking, will end in another debacle very soon. And then, the still more remote year nineteen eighty-five will have to be remembered with far greater sadness than it is today – even if now there are more than enough grounds for such nostalgia.

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