08.03.2009
A Global Answer to a Global Challenge
№1 2009 January/March
Vladimir Yevtushenkov

Vladimir Yevtushenkov is Chairman of the Committee on Scientific-Technological Innovations and High Technologies under the Russian Chamber of Commerce and Industry.

It is difficult to agree emotionally with the analysts and
publicists who point out positive aspects of the on-going global
economic crisis, yet there is undoubtedly one positive factor in
it. The crisis has not only caused people to mobilize material and
intellectual resources, but has forced one to consider how the
economy may change in general and what has to be adjusted to secure
its further development.

It is quite possible that anti-crisis measures, as hostages of
inertia thinking, are far off the mark, and other solutions will be
needed based on another paradigm for analyzing the economic matter.
Regardless of speculations about the causes of the crisis, we all
understand that the post-crisis economy will be different. What
kind of economy will it be?

The very real possibility of a dangerous divergence between
reality and expectations requires active efforts to develop the
future economic model not only on the part of academic scientists,
but also by those who are deeply involved in the economy and
influence the functioning of the economy to a certain extent, i.e.
business people. It is due to this involvement that the impact of
the crisis becomes much more painful, while the need for its
positive comprehension is felt more acutely. I will venture to
suggest that the suddenness of the crisis was the price for our
unwillingness to see and objectively assess quantitative changes
that were building up, shifts in the economic setup, and
fundamental changes in the qualitative characteristics of the
entire socio-political system.

NEW PARADIGM NEEDED

This is not the first time humanity is facing such a systemic
challenge that emerged as a result of evolution and the
incorporation of forced or desired innovations into economic
activities. A popular journal recently counted a dozen and a half
“famous” crises, beginning with the construction of the Panama
Canal. But if we analyze global crises, we would see that the
transformation from a natural economy to a market economy was as
dramatic and “unexpected,” although the situation was not viewed as
a catastrophe due to the scale of the world economy. Nevertheless,
crises are caused, as a rule, by a mismatch between established
ideas and actual economic relations.

The present crisis also suggests a transfer to an entirely new
paradigm of the idea of economic processes, which, in turn,
automatically requires fundamentally new mechanisms for their
regulation. The main feature of such a paradigm could be linked
with the concept of global internationalization – that is, a merger
between globalization as a general trend for active expansion of
economic systems beyond national economies, and
internationalization as a process of including agents of economic
activity in transnational co-operation. Before our eyes this
process, which is mainly effected through mergers and takeovers,
has acquired a huge dimension. Over the past decade such
transactions have made up at least 40 percent per year on the
average.

The globalization of the modern economy did not begin recently
and its structure is rather complex. Its core is the mega-economy
that began to take shape in the last quarter of the 20th century.
The interrelation between national economies has become so strong
that they all act as a single whole – albeit internally
differentiated – constantly changing and ridden with conflicts. The
prerequisite to this was the emergence of new information
technologies, a considerable increase in the volumes of
cross-border movement of capital, technologies, knowledge and
people, as well as a large-scale expansion of commodity and
financial markets.

THEORY AND MODELS

There is no need to build new models to justify in theory the
global internationalization of the economy. Rather, we should look
at the existing and well-known models, for example, the “Kondratiev
waves” model which proved the regularity of economic crises. Yet
this obvious conclusion is followed by a more significant premise:
in order to predict the behavior of an economic system, it must be
considered as a global hypersystem. Mathematicians proposed much
later the so-called fractal theory, which enables a formal analysis
of such systems.

The current article does not consider the extent to which this
theory might be applied to economic analysis, but it is important
to underline that the approach to the economy as an ordered set of
economic agents and institutions that provide for their functioning
is a special case. The fractal hypothesis assumes that an economy
has different levels, and that despite changes, the value of its
heterogeneity remains constant during an extended period of
time.

Arguably, the faster internationalization processes run, the
faster the emerging turbulence subsides. Crises therefore do not
just determine the accruing contradictions in the
internationalization of economic agents; they act as moderators in
their settlement.

From this point of view, the current crisis will contribute to
the establishment of such fractals of the modern economy as
regional common markets: in Europe, the United States and the
Middle East. Aside from the free movement of goods, they will
guarantee the free movement of the workforce, funds, common rules
for buying/renting real estate and purchasing stocks, as well as
equal terms for using the benefits of insurance, education,
healthcare and employment.

It follows from this theory that fractals create additional
incentives and opportunities to internationalize not only economic,
but also managerial activity. Recent proposals to set up
supranational bodies to regulate the market, even if they
materialize in different forms, are unlikely to yield the desired
effect. We should rather rely on integration ties between regional
regulators of socio-economic relations: only the emerging trend
towards deepening and expanding these ties can help avoid a
scenario of global development where conflicts between and inside
countries prevail and where protectionism governs economic policy.
As a result, sovereign defaults would no longer appear as something
extraordinary.

THE GEOPOLITICAL DIMENSION OF THE CRISIS

The first effect of the global internationalization theory,
which suggests what a post-crisis economy might look like, is its
geopolitical dimension. The geopolitical factor has always played a
fundamental role in strategic plans for developing socio-political
systems. But in the new conditions that are emerging as a result of
the implementation of anti-crisis measures, the national borders of
economies will lose their significance, as the world market is
becoming universal.

It would be trivial just to say, for example, that the BRIC
countries (Brazil, Russia, India and China) will move, in the
foreseeable future, from a group of developing states to developed
ones. But this fact will change considerably the geopolitical
picture of the world. In a certain sense, the positive side of the
crisis is that the intrigue regarding further development is
gone.

Perhaps it is a coincidence, but Paul Krugman received the Nobel
Prize in Economics in 2008 for his work explaining the
specialization of various countries in international trade amid
conditions of partial competition. Modern technologies (computers +
Internet + mobile communications + information systems) have
completely changed the general picture of economic exchange, by
joining space and time at every point in the world market. Plainly
speaking, transactions, as a realization of economic interests, are
no longer associated with a particular place of the production of
goods or services, while sellers (although certainly not all of
them) have become vendors peddling not so much a product, as a
brand to help consumers zero in on certain products so that they do
not get lost in the variety of alternative products.

Competitiveness is becoming the only reason for the right to be
present on the market. Even before the crisis, it had become
apparent that the points of growth of competitiveness could be
found in technological clusters. They are through technologies:
thanks to their universality, they have a high multiplying effect
that influences the entire production process – from design and
development to production and sale to consumers. By assigning the
leading role in economic development to technologies, the new U.S.
administration even plans to establish the post of director for
technologies.

A characteristic feature of technological clusters is that the
technologies they are based upon are applied in various fields,
thus enhancing the level of national competitiveness. It is no
wonder the economy has begun to be viewed abroad through the prism
of clusters, rather than through traditional groups of companies,
industries or sectors. Clusters fit better into the very nature of
competition and the sources of attaining competitive advantages.
The majority of cluster participants are not direct rivals because
they service different industries. State and private investments,
aimed at improving the functioning of a cluster, benefit a variety
of businesses. Incidentally, it is the clusters that have been the
least affected by the crisis – the crisis has paved the way for
them to win the market as such, regardless of regional or national
borders.

Therefore, although “decoupling” the global economy from the
U.S. economic cycle has not taken place yet, global
internationalization is leading national economies along this path
strictly and steadily, just as any objective law would. The crisis
has only sped up this process. A practical conclusion from this
seemingly theoretical premise is that the BRIC countries – and
Southeast Asia in general – will cease to be just a location for
mass production, but will become equal and, most importantly,
equal-ranking participants in production, innovative development
and the sale of competitive products.

The East-West confrontation will lose its economic significance
– albeit not as fast as one would wish – while geopolitical motives
in addressing the development problems of national economies will
give way to signals from macro-regional common markets that secure
coordinated development. The world is likely to realize that GDP
growth is not as important to the state as its balanced position on
the world market. So, apocalyptical forecasts (like a possible
collapse of U.S., European, Russian, etc. economies) simply stem
from traditional thinking.

Internationalization is based on the mobility of capital,
technologies and labor. From this point of view, the Russian
economy lags far behind developed countries, as it is very passive
in conducting its own policy of internationalization. This is
explained by a weak financial base and a low level of innovation in
production (machine-building companies have been producing 70
percent of their products without the benefit of innovations for 15
consecutive years). At the same time, there are apprehensions about
and obstacles to Russian companies in other countries.

Unlike many countries whose participation in
internationalization is associated with their producers entering
world markets, Russia opened its market in the course of this
process. That has played an adverse role to date – since we have
our own market, there is no need to seek a world niche, which
weakens competition and contributes to a sort of “colonialism.”
This is perhaps why the present crisis has hit Russia particularly
hard.

At the same time, the participation of the Russian economy in
internationalization is inevitable. Two Eurasian transport
corridors – Transsib and North-South, as well as Pan-European
transport corridors II and IX – run through Russia. There is also a
ramified network of existing pipelines and pipelines under
construction. Russia’s participation in resolving European energy
problems plays a role, as well. The strategy to develop power
generation within the next decade, approved by the Russian
government, envisions a considerable increase in electricity
generation based on modern technologies and boosting electricity
exports. Simultaneously, the program envisions sweeping measures to
launch energy conservation technologies; the energy intensiveness
of production in Russia is three times higher than in developed
countries. This opens a niche for a mutually advantageous “barter”
– energy in exchange for energy conservation technologies.

THE GOVERNMENT AND BUSINESS AMID THE CRISIS

It may seem tempting to try to overcome the crisis by defying or
even resisting the emerged trends. But this tactic is doomed to
failure. It would be much more productive to use it for a major
revision of one’s approach to the analysis of socio-economic
processes.

Changing one’s views of the role and place of the government in
the economy appears to be crucial. The concepts of the state as a
“night watchman,” a source of “general welfare,” etc. are fading
into history; they are being replaced by such notions as
“state-partner,” meaning business partner in the first place.

Admittedly, the history of relations between the government and
business is not simple, especially in Russia. There was a period
when the Russian government considered free enterprise as a
criminal activity. Later, the government shared its property with
everyone who was ready to start a business, thus becoming the main
source of establishing business. Russian business covered an entire
era within a mere decade. We can still recall the caricatures of
“new Russians,” financial pyramids, bankrupt banks and the
notorious 1998 government default. The state, with respect to
business, played different roles during this period – from
benefactor to sinister malefactor.

We are now on the verge of changes, and not just in Russia.
Look, for example, at the close-knit bloc forged between U.S.
business and the government in fighting terrorism or overcoming the
current recession. Not surprisingly, in calculating various
indicators that characterize a country’s economy, for example, the
competitiveness indicator – which the IMD business school in
Lausanne, Switzerland, publishes every year – spending on the
conduct of business and the effectiveness of government are taken
equally into account. For Russia, the first indicator by far
exceeds the second – for now at least.

If we turn to theory, we will find a large variety of models
there as well, which determine the position of business in the
economic system. Many concepts have been proposed since the time of
Adam Smith, who was the first to challenge the infinite wisdom of
statesmen in managing available resources. The classic liberal
doctrine assigns to the state the role of a “night watchman”: it
sets rules of conduct for the market and monitors strict compliance
with them. Of course, the rules are set not at the wish or whim of
the authorities. They are adapted to market behavior, i.e. to how
transactions are conducted, how incomes are distributed, how much
money is invested in production, how much is consumed, etc.

But even in a well-established pure market economy, the state
and business regularly revise their mutual relationships. The
scales, on which contributions to the economy by state management
and entrepreneurial diligence are weighed, periodically tilt
towards one side or the other. The Soviet economy, where the role
of the state was made absolute, showed convincingly that such a
path has no future.

Yet the crisis has again made many people speak of increased
government interference in the economy, of building of the
so-called power vertical, and of the equidistance of businesses
from the government decision-making center. The enthusiasm these
slogans evoke in officials – who have always wielded tremendous
power in Russia – is understandable. But it is unclear on what
premise the new model of relations between the state and the
business community will be built. The crisis has actually
reconciled the advocates of state-controlled economy with liberals,
because both have realized that the opposition between the state
and businesses has long become obsolete and should give way to
partnership.

However strange it might seem, it is easier to put such an
approach into practice in the Russian economy, which is still
routinely referred to as transitional. Despite considerable efforts
to liberalize the economic system and laws regulating relations
between the authorities and economic agents, the nation still pins
great hopes on the government as almost the only institution that
can ensure that public interests are duly observed. These ideas
should not be fought against, no matter how illusory they may seem,
but guided into a productive vein. The conditions are quite
suitable for this now.

The strategic goal is to build a dynamically developing and
socially-oriented economy that fits well into the international
division of the production, capital and labor markets. The main
objective is stable development. This would consolidate the
transfer from the mobilization economy of “besieged fortress” to
the economy of partnership and co-operation, and underscore the
requirement for the inclusion of Russia into the global economic
system.

Contrary to widespread belief, the state and business now have
an increasing number of common, mutual interests. For example, both
business and the state seek consolidation as a major management
task since it is easier to manage a large economic entity.
Accomplishing this task is crucial for further development.

One should make a reservation here: the path of co-operation
between business and the state is not straightforward. The main
difficulty is launching institutional mechanisms for the
participation of the dependent party (business) in establishing the
rules for their conduct. There might be a temptation to expand the
boundaries of one’s discretion, ease the burden of one’s
participation in resolving issues that have little to do with
business interests, evade sanctions for violations, etc. The crisis
may play the role of a catalyst here.

The crisis was mainly caused by the problem of regulating the
global and national markets. That is why no restructuring – not
even on a global scale – of capital, investments, loans, funds,
rights, demands, obligations, collateral, debts, assets,
shareholders’ stakes, transactions, etc. will yield a long-term
effect in full measure, if no fundamental changes are made to the
approaches and mechanisms of state interference in the economy.
Only the restructuring of institutions, especially development
institutions, can pull the economy out of the crisis.

The state is a regulator in the traditional paradigm. But even
in this role it does not prescribe the rules of behavior to market
participants, but increasingly often sets the so-called behavioral
conditions.

In the new paradigm, the state is an active participant in
market relations, and an economic agent. It is the implementation
of this pattern that resulted – accidentally or intentionally – in
the establishment of state corporations. The special position of
these organizations is proven by the high degree of independence of
their activities, which are beyond state management or control. But
in any case, state corporations have become subjects of market
relations, having brought the state and business considerably
closer to each other.

It must be admitted that this new kind of enterprise has caused
apprehensions that the state may take over private corporations,
not through nationalization, but through state corporatism. To
overcome or prevent this threat, business can adopt the tactic of
incorporating assets, or some of them, in a state corporation, on
the condition that state investments are swapped for
profit-sharing. In this form, it would not be direct budget funding
of the private sector, but private-state partnership, a mechanism
which has become very popular in recent years.

INDUSTRIAL POLICY AND CRISIS

The crisis does not only change our ideas of a mega-economy, but
also requires that we revise the principles of the functioning of
economic mechanisms at macro- and micro levels. Due to its global
nature, the crisis is changing the main guidelines for the use and
development of the research, technological and industrial potential
of a country, which is usually called “industrial policy.” In a
post-crisis Russia, this would be noted for a sharp contrast
between the quantity of industrial companies and the quality of
their contribution to the national economy.

Since the general objective of Russia’s economic policy in the
short-term is to help its producers join the world economy, the
industrial policy must remove the contradiction between production
and consumption: goods must be produced not because Russia has many
production capacities, but because there are many people wishing to
buy these goods.

Of course, products produced by some Russian enterprises not
only rival their competitors, but also excel them, although a
product per se is not yet a commodity in demand. The market
environment is a competition not only between the consumer
qualities of this or that product, but also between expenses
included in the production cost, labor costs, the level of
innovation and many other things. The state industrial policy
creates the groundwork – first of all in legislation – to enhance
the comparable level of Russia’s commodity production.

The national economic policy specifies the common guidelines for
a country’s socio-economic development in organizational, legal,
and production mechanisms for the operation of economic agents.
Taking into account the tasks the Russian economy is facing in the
short-term and the condition of its industrial potential, the
industrial policy could develop along the concept of
crystallization of variously-scaled production systems.

Admittedly, for a transitional economy, as the Russian economy
has been called in the past decade, many solutions that seem
well-known elsewhere have to be rediscovered. It is much easier to
design economic policy from scratch than modify an established
system of social relations.

But when entering a new era it would be hypocritical to discard
everything accomplished by previous generations, thinking of this
heritage as a burden that prevents us from attaining new heights.
Clearly no politician aspiring to be a national leader would risk
taking such a haughty stance with respect to the past.

We lean on everything accomplished by citizens of the vast
country in order to use it for further development – not contrary
to, but in accordance with the general laws of economic growth and
together with competitors/partners.

It is another matter that each national economy is described by
too many parameters to fit them into a single algorithm for all.
The selection of such an algorithm is up to the national industrial
policy which stems from the general national economic policy.

Shaping this policy is the state’s prerogative. The crisis, as
it was earlier said, has changed the position of the state with
respect to business, making them partners. Now these partner
relations should be extended to the process of drawing up an
industrial development policy. As business has a better knowledge
of and sensitivity to the essence of the market economy, it should
play the leading role in this process, since there is a real danger
that officials will set their own priorities and select mechanisms
for their implementation in such a way that the end result will be
quite different from what they expected.

So the crucial thing is to decide which objectives should be set
before the industrial complex, how the system of priorities should
be set, how they should be implemented, what mechanisms must be
used, and, lastly, how to distribute the roles between economic
agents in this process. Such issues must be settled jointly by
business and the state.

THE FINANCIAL MARKET, BANKS AND INSTRUMENTS IN LIGHT OF
CRISIS

One of the main instruments of globalization is the advanced
growth of the world financial market. This has made it possible to
speak of a financial globalization and its leading role in all
global processes. Its influence on the manufacturing sector of the
economy has been mostly felt in the rapid internationalization of
financial instruments, which has generated the term
“turbo-capitalism.”

Conceivably, the world banking system has become the main victim
of the crisis. Gone are global investment banks – a whole
institution that has been part of economic development in the past
decades. The 1929 economic disaster in the U.S. economy is called
the Great Depression – a dramatic description, yet it is no more
than a depression, whereas today the crisis has been pulling the
whole world system into the “shrinking” vortex of recession.

The avalanche of publications in the scientific and business
press has described in detail practically all aspects of the forced
restructuring of the banking system, intended to enable financial
institutions to not only survive, but also acquire new qualities to
meet the requirements of the modern global market. From this point
of view, we have to remember that banks are a special mechanism
that effects direct relations in the entire chain of economic
relations – which means they cannot but be involved in the
internationalization of economic processes that determine the
development of any socio-political system.

Bank internationalization in post-crisis conditions is likely to
increase dramatically. Its major feature is determined by the fact
that raising financial resources and concentrating them in one or
another area will largely depend on cooperative ties in the
international division of labor forces.

Only a successful solution to this difficult task will help
secure and expand the position of the national bank segment on the
domestic market, and also provide for an active expansion of
domestic producers beyond their country. Banks will actually
acquire not only financial, but also production functions, because
they will become an instrument for re-orienting production towards
the manufacture of competitive goods. This, in turn, will require
the development of innovation projects, the launch and speedy
transfers of high performance equipment, high technology, and
stringent standards.

Banks will thus turn into infrastructure (investment-financial)
clusters, differentiated by industries: investment-industrial,
agrarian, service, trade, etc. The general bank architecture will
acquire a network-like character. The value of a network product is
not so much in its physical or functional qualities, as in
consumers’ attitudes towards it. It is the consumers who assign
internal value to such a product, which is reflected in its market
value. Thanks to the use of modern information technologies, the
entire economy is gradually becoming a network product.

The establishment of such clusters will be accompanied by a
considerable enlargement of banks through takeovers and mergers,
and also due to natural growth. The number of captive accounting
centers – which at present act in the guise of banks – will
decrease in reverse proportion to the number of large transnational
agents operating on the market. At the same time, the emergence of
financial-investment clusters will resolve the old problem of
orientation towards universal or specialized services in banking,
by combining both, because such a division within a cluster makes
little sense. Perhaps the existence of the trend in fighting the
crisis explains why it is equally significant for the Russian
banking system, which is universally acknowledged to still be
poorly developed, and for the largest Western banks with a long and
positive credit history.

The bank’s leading role as infrastructure clusters in the global
economy is to optimize the distribution of risks in implementing
investment projects aimed at developing any socio-economic system
and all its sub-systems. Strategic management, to be implemented
within the framework of such industrial-financial clusters, will
provide for market segmentation, rather than just diversification
of production.

In raising development resources, IPOs will be replaced by
private equity funds (PEF), as more transparent and controllable
forms that combine design and investment approaches. The
establishment of transnational PEFs will help unify world financial
markets more effectively, which is regarded as a way to overcome
the crisis.

The structure of the financial market will become polycentric:
an increasing number of national currencies will be part of
transactions as long as trade increases, so financial centers will
lose their special – and privileged – significance. Investment will
become instable to such an extent that the volume of investment in
the economy will lose its index value, and the global openness of
the market will become a major indicator of development.

However strange this might seem, this change will reduce the
chances for blowing financial bubbles, which emerge in individual
markets, that – for the time being – are viewed as isolated from
the world market. The number and scope of projects will increase at
an exponential rate, above all due to the innovation factor. The
industrial development of nanotechnology alone, for example, will
require tremendous funds. It is enough to calculate how much
investment was needed to develop mobile communications – the best
known example of the use of nanotechnology.

THE RESOURCE ECONOMY AS A RESOURCE CIRCULATION ECONOMY

In talking about the consequences of the crisis, it should be
noted that the crisis has stripped the economy of illusions,
reminding it of its original purpose – the circulation of material
resources. The hypertrophied development of the financial sector
made it seem as a self-sufficient institution of economic
development. The crisis has dispelled this delusion and reminded
everyone that material resources are a fundamental factor of the
stable functioning and development of any economy. For Russia, this
realization is particularly important because its economy continues
to develop extensively, despite repeated statements from the
government that the Russian economy will stop being pegged to
natural resources.

Meanwhile, economic foresight suggests that extensive economic
development eventually leads to a blind alley. An exponential
increase in expenses for the mining and transportation of raw
materials forces one to seek new ways to optimize the resource
economy. There is only one way out – to launch innovation
mechanisms to seek and apply new technologies, including high
technologies, for processing raw materials, and to apply new
approaches to the use of resources that would ensure an exponential
increase in the depth and completeness of processing. Finally, it
is necessary to replace personnel with trained and re-trained
workers, engineers and managers, ready for and capable of working
in the new conditions.

The innovative ideology must bring about radical changes in
established conservative thinking and help conserve resources by
using them completely and recycling waste. Suffice it to cite one
example: the so-called “tailing dumps” of mining companies contain
more raw materials than they produce.

The heavy dependence of the Russian economy on the production of
raw materials means not just that the budget is totally dependent
on global oil and gas prices, but there is also a disregard for
opportunities offered by the circulation of raw materials, from
their production to use by consumers, and by the recovery of the
raw-materials base. The industrial policy is therefore mostly
focused on energy resources. Meanwhile, each barrel of refined oil
boosts its added value two-fold or more.

The Dutch disease has an inhibiting effect on the Russian
economy also because of the weakness of the resource circulation
system. Moreover, Russian legislation makes no mention of such a
system at all, although it mentions the circulation of
pharmaceuticals, for example. At the same time, the National
Security Strategy, approved by Russia’s Security Council, has
described the rational use of natural resources and the environment
as a top priority of the domestic economic policy.

Changing raw-material sectors over to new technologies would
accomplish yet another, one might even say a global, task – to
preserve the environment and provide for compliance with
environmental regulations in economic activity. It is not by
accident that the raw materials factor has been made the
cornerstone of the concept of stable economic development, put
forth by renowned scientists and supported by the governments of a
majority of developed states, including Russia.
 
Also, the concept of the social responsibility of business,
which has received broad public support, should provide for an
economical attitude towards natural resources – especially as such
an attitude determines the effectiveness of the whole economic
system.
 
Finally, the solution to the problem of rational development
of the resource economy is closely linked with Russia’s position on
the world market. Until now, the country’s position on the European
market has been determined exclusively as a supplier of fuels,
mostly oil and gas.
 
Meanwhile, the Reuters/Jefferies CRB index includes 19 kinds
of raw materials. Decades ago the Soviet Union did a great service
to Germany by removing all of its obsolete equipment as war
reparations, and thus forcing the country to renovate all its
production facilities. Now the crisis will act as such an
innovation “executor,” although one can hardly expect a new
Marshall Plan, for example, from the G20.
 
Economics would be a simple science if there were no politics
in it. Thus, the depth and clarity of the horizon in developing a
post-crisis economy depends on whether politics complies with
economic laws or goes against them.