Sunday, July 24, 2011

Russia's Economic Future: a differing point of view

"Russian industrial production has been growing at a rate as fast as that of any society of which we have record, and greater than most. The technical quality of their heavy industry is no less impressive....In 1928 in Russia 'the state of technology was generally backward, and labor skilled in modern technology was scarce'. Two years ago the Soviet Union produced more than twice as many bachelors
of science as the United States and over two and half times as many engineers."

Dean Acheson, Power and Diplomacy (1958), pp. 11-13.

"It is significant that in the 1970's Japan and Russia are at similar levels of per capita development. Individual indicators naturally vary, due to many factors. On a per capita basis, for example, Japan produces twice as much steel as Russia, but consumes only three-quarters as much energy. In terms of real gross national product
per capita the two countries were at about the same level in the 1960's, though since then Japan has forged ahead. Instead of being one-quarter to one-third the level of the United Kingdom in real GNP per capita, as they were in the 1870, they
are not about equal with it."

Cyril Black, et. al. The Modernization of Japan and Russia: A Comparative Study (1974), pp. 14-17 & passim.

As the above two texts clearly show, Russian economic prognoses have not altogether been a very clear-cut business. In retrospect, the near-paranoia of the American decision-making elite, circa the mid-1950's (Acheson's words hardly being unusual for that time period) reads most ironically indeed. Of course it is child's play to see post-facto, that beginning in the mid-1950's the Stalinist economic model had become dysfunctional and was no longer able to produce the requisite growth rates of earlier time-period for an economy which had au fond, become modernized (albeit at the costs of oceans of blood). It was only in the late 1960s', early 1970's that a dawning awareness was sinking in among both policymakers and academic experts that Sovietskaya Vlast was beginning to suffer serious problems in economic growth, productivity & efficiency 1. In that respect, the Cyril Black et. al., book appears to have been completely outdated prior to even publication. And of course one may very well ask how valid were the statistics that Black and company use to obtain those per capita income measurements that resulted in Sovietskaya Vlast being equal to or greater than the contemporary United Kingdom. At this point one may very well recall that the American intelligence outfit, the CIA, which still sponsored much academic Sovietology in the later Cold War, only considerably reduced Soviet GDP in the late 1980's in the period of Glasnost. In short when discussing the Russian economy (like one is tempted to say the contemporary Chinese economy), one is tempted to warn: caveat lector!

With all that being said, the article found below by Anatoly Karlin, is I believe worth reading inasmuch as he correctly I believe puts paid to a certain amount of negative analysis of the Russian economy which one reads rather constantly in the Anglo-American press 2. Not that per se there are not criticisms that one can make of the current Putin-Medvedev duumvirate. Merely that a good deal of the criticism made are either misplaced or completely erroneous 3. The chief one to my mind is the fact that with Russian having both rates of urbanization and per capita income which are measurably higher than that of the other so-called 'BRIC' countries, it is hardly possible to expect that Russia would duplicate the rates of growth of these countries. Especially since as Karlin points out, those of Brazil are hardly higher than those of Russia as of 2010. The upshot is that as Karlin correctly notes, 'declinist rhetoric' about Russia's economic future is based more upon comparing apples and oranges than about making a fully contextualized comparative study of Russia and those other economies which it should be compared to. But then again, Russia in the Putin era, if not before always seem to provoke these types of unfair comparisons. With that being said of course, one on the other hand cannot gainsay analysis such as those offered by the ever-wise, Dmitri Trenin and company that in point of fact, in absence of structural changes in the certain key sectors of the Russian economy in the next ten to fifteen years, what George Magnus in the Financial Times has characterized as the 'middle-income trap', will indeed 'trap' Matushka Russia 4.

"In the wake of the 2009 recession, declinist rhetoric has come to dominate discussion of Russia’s economic prospects. Jim O’Neill, the founder of the BRIC’s concept, has his work cut out defending Russia’s expulsion from the group in favor of Indonesia, Mexico, or some other random middle-sized country. Journalists in the Western media claim its economy is “not growing”, as do liberal Russian newspapers such as Vedomosti. Comparisons between Putin and Brezhnev (who presided over the Soviet Union’s period of stagnation, or zastoi) are piling up. Even President Medvedev isn’t helping the situation, telling a forum of international businesspeople that Russia’s “slow growth” hides stagnation.

I don’t want to exchange rhetorical barbs in this post (which you may note is not tagged as a “rant“), and my skills at mockery and picking apart tropes aren’t nearly as well developed as those of Mark Adomanis or Kremlin Stooge, so I’ll do what I do best and go straight to the statistics. And so we have Fact #1: what is described as stagnation for Russia is a growth rate of 4%. It grew 4.0% for 2010. It was 4.1% in Q1 2011, and the government predicts it will be 4.2% for the whole year. The World Bank predicts 4.4% in 2011, 4.0% in 2012; the OECD expects 4.9% in 2011 and 4.5% in 2012; and the IMF forecasts 4.8% in 2011, 4.5% in 2012, tapering off to less than 4.0% in the “medium-term.”

This does not strike me as being particularly bad by global standards. This is obviously no miracle economy of Chinese-like 10% growth rates, but Russia (4.4%; 4.0%) does not compare badly to the World Bank’s projected growth for other typical middle-income countries such as Turkey (4.1%; 4.3%), Thailand (3.2%; 4.2%), Brazil (4.4%; 4.3%), Mexico (3.6%; 3.8%), or South Africa (3.5%; 4.1%). Facing real stagnation, many countries in the developed world such as the UK could only wish for Russia’s growth rate; though this is an unfair comparison, because Russia is poorer and can therefore find it easier to grow faster (see economic convergence), it is not less unfair comparing Russia to countries such as India (8.4%; 8.7%) or Indonesia (6.2%; 6.5%) because the latter are so much poorer than Russia in their turn.

This discussion suggests that CONTEXT is vital when discussing the degree of stagnation in a country. One of the two major factors here is the current GDP of the country in question; real GDP, that is, because that is what growth refers to (i.e. if a country devalues its currency by half but output remains constant, then nominal GDP will fall by half but real GDP will remain constant; as such, real GDP per capita is also the better proxy for living standards and economic sophistication). Now there are two major estimates by international organizations of Russia’s real GDP. The IMF estimates it at $15,800 as of 2010, whereas the World Bank believes it is $19,800 (relying on recent joint research by OECD-Eurostat-Rosstat). There are grounds to believe that the latter is more accurate because the international price comparison data that goes into real GDP estimates is much more recent for the World Bank*. But regardless of which one you use, Russia’s GDP is still much higher than the other emerging markets or BRIC’s with which it is so frequently compared to – Brazil has $11,100, China has $7,500, Indonesia has $4,400, and India has $3,600.

This is extremely important for two reasons. First, it is much harder to grow quickly when you are already a mostly developed country (like Russia, Poland, Korea) than when you are a mid-level developing country (China, Brazil) or a poor developing country (India, Indonesia). The most important reasons are: (1) The potential to achieve rapid growth by transferring your population from rural agriculture to urban industry and services becomes exhausted; (2) the services sector, where productivity can’t be improved as fast as in industry, assumes a bigger share of GDP; (3) most importantly, those countries are far closer to the technological frontier or “best practice”, and hence must increasingly innovate their way to growth instead of reaping low-hanging fruit by adopting and copying from elsewhere. All this isn’t debatable – there is a ton of economic literature on this, it passes the common sense test, and it is basically a given.

The results, as you can see, are fairly stunning. A low population growth and relatively high base – Russia’s GDP per capita of $20,000 is equivalent to that of Poland, Hungary, and Estonia - means that as soon as 2020 Russia will be where Italy is today, with a GDP per capita of $31,500. Now granted Italy may have grown as well, but given its dismal record for the past decade and the growing financial tremors in the Eurozone even this is far from certain. In other words, even at “stagnant” growth rates of 4% per year Russia will have converged to the lower ranks of Western Europe’s rich countries (having overtaken Greece and Portugal outright)....

Nonetheless, the main facts remain intact: (1) It is growing from a relatively high base; (2) In an environment of approximately zero population growth; (3) The strength of state finances preclude any fundamental economic cataclysm as happened/is happening in Ireland, Greece, Latvia, etc. Taking into account these adjustments, a growth rate of 4% is entirely respectable and better than many if not most countries in the same general income bracket".

1. For an archtypical example of the state of the literature, circa the late 1960's, see the pertinent chapter in Alec Nove standard text of the time: Alec Nove, An Economic History of the USSR(1969).

2. Anatoly Karlin, "Russia's Economic Stagnation in Global Perspective," 19 July 2011, in

3. Anders Aslund, "The Kremlin's Crisis," Foreign Affairs. 20 May 2011, in, for a rather typical example. Others of the same ilk can be found regularly in the Financial Times, the Economist, the New York Times and the Washington Post inter alia`.

4. Dmitri Trenin et. al. "Russia in Mid-2011," Carnegie Europe Center. 22 June 2011, in; George Magnus, "China can yet avoid a middle-income trap," The Financial Times 29 June 2011, in The article intelligently describes and delineates the 'middle-income trap' generally.


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