WORKSHOP: ‘TRANSITION ECONOMICS MEETS
NEW STRUCTURAL ECONOMICS’
Boris KUZNETSOV bkuz@bk.ru
Higher School of Economics, Moscow
Evolution of Russian Industrial Policy:
the clash of theory and practice
School of Slavonic and East European Studies at UCL
June 25-26 2013
1
Motivation:
Why Russian experience may be of interest for IP researches
Russia is not the only but a quite rare case of a large country
which has not been trying to facilitate industrialization but rather
had been fighting deindustrialization.
 During the 20 years of transition Russian policies several times
switched from one concept of structural policy to another. It has
used a wide range of IP instruments and , thus, has a long history
rich with failures which
provides
a goodquestions
ground for analysis of
Motivation
– key research
determinants if not of successes but at least of flops of IP.
 Alas, Russia in particular can’t have a sustainable growth
without IP: major revenues are concentrated in a few industries
and locations and have to be redistributed in one way or another.
The Russian IP is now at a cross-roads again due to the crisis and
the changing environment. It is on a quest for theoretical base and
new concepts. The result to some extent will determine a longterm trends for Russian economy.

2
NSE/TE conference, June 25-26, 2013
Stages of IP evolution and structural changes
“It’s easier to ride a horse in the direction it is already going “
1992-1998
Transition shock
“Washington
consensus “
concept, little of
declared IP, actual
policy
Results:
diminishing
Manufacturing
(From 33% of jobs
in 1990 to 22% in
1998), growth of
Trade (8% =>15%)
1999-2006
Market –driven
growth
2006-2008
State-driven
growth
”New” IP,
Attempt to set IP
experiments with
high-tech priorities
horizontal
and to implement
instruments of
“Development
Motivation – key research questions
“creating
Institution” in a
conditions”
form of State
Corporations
Results: slower
but the same
trends Manufacturing
(From 22% of jobs
in 1998 to 19% in
2006), growth of
Trade (15% =>17%)
Results: growth of
investments
(mostly statedriven),
stabilization of the
structure but
without the change
of the trajectory.
2009- 2013
Crisis and
recovery period
Re-setting of
priorities:
infrastructure
projects, military
industrial complex
Results:
manufacturing
dropped 20%,
bounced back and
is stagnating. Little
private
investments and
FDI.
NSE/TE conference, June 25-26, 2013
3
Stage 1: endowments
used or wasted?
“Politics is the art of the possible”
Otto von Bismark
• Comparative advantages revealed =>Structural
changes toward “natural” endowments, i.e. resources,
energy intensive goods.
• Wasted endowments:
o capacities and competences in high-tech industries (military
oriented) == up to 30% of Russian GDP prior to the reforms;
o R&D competences
o Education and healthcare (Human capital)
o Competences in state management
o Morals
o Trust (civil contract between state, society, business)
New institutional system has been created. BUT not of
the Market but of Transitional type, full of institutional
traps.
4
Benchmarking Russia’s structure: Industry
45%
40%
Share of employment in industry
35%
30%
Industry benchmark
Russia in 2002
Change from 1990
Market economies
25%
20%
15%
10%
5%
1,000
2,000
3,000
4,000
5,000
GDP per capita at PPP in 1995 US$
Source: World Bank CEM Report of 2005
6,000
7,000
Benchmarking Russia’s structure: Market
services
40%
Share of employment in market services
35%
30%
25%
Market services benchmark
Russia in 2002
Change from 1990
Market economies
20%
15%
10%
5%
0%
1,000
2,000
3,000
4,000
5,000
GDP per capita at PPP in 1995 US$
Source: World Bank CEM Report of 2005
6,000
7,000
Stage 2: Macroeconomic environment in the 2000-s
FDI (accumulated, $bln)
World prices dynamic (Jan 2005=100%)
120
350%
100
300%
18.6
250%
80
200%
12.7
60
150%
81.6
40
100%
8.6
50%
6
0%
Jan/05
Jul/05
Jan/06
Jul/06
Jan/07
Jul/07
Jan/08
Jul/08
Jan/09
26.8
13.1
0
2005
Нефть
Газ
Сталь
Real interest rate
8
6
4
2
0
-2
-4
-6
54.6
20
2006
Total
Алюминий
•
2007
2008
Manufacturing
Formally the macroeconomic
conditions in the 2000-s were
extremely favorable for Russian
economic development and
provided good chances for proactive IP: high growth of demand,
low interest rates, inflow of FDI,
strong trade and budget surplus.
7
Stage 2: Time to throw
stones?
•
•
•
•
•
•
Special zones (Chinese type) =>
failed due to selection bias and
the Government not being able
to agree to lower taxes for
business.
Large innovation projects (cofinancing private projects) =>
mostly failed due to lack of
competence, corruption;
State program to overcome
“digital divide” => partly
successful , but truncated to Egovernment project =little impact
on the economic structure;
Venture funds = failed due to low
competence and mutual distrust
between business and the
Government
Special regimes for foreign car
producers => mostly a success
but not sustainable
…
- How many crops of potato you have
a year?
- Well, about 50, I’d say.
- How is that?
-Well, we plant it on Monday and dig
it up next Sunday.
- But why?
-Too hungry to wait longer.
Russian joke
Main reasons for failures were:
- Low quality of state officials;
- The state’s “greed”, i.e. unwillingness
to provide public goods for private
sector
- Lack of mutual trust, low property
rights protection
Most important: efforts of the
Government were not supported by
private sector
8
?
Stage 3: towards State
capitalism?
“The single most exciting thing you
The results of attempts
encounter in government is competence,
to change the structure by
because it's so rare. “
horizontal measures
Daniel P. Moynihan, American Politician
were disappointing.
It looked as the policy of “creating favorable conditions” for
everyone (open access institutes in the terminology of D. North
and his colleagues). The Government decided to take the future
into its own hands by re-creating a powerful state sector which
would be the majorMotivation
driver of – keydiversification.
research questions
 It was a three-fold approach: (a) to concentrate financial
instruments for modernization in state-controlled banks and
“development institutes (Development bank, Rosnano, etc.); (b) the
same time to concentrate industrial assets in several huge
corporations (Rosneft, United aircraft, United Shipbuilding,
Rostechologii , etc.) and (c ) – to invest into large-scale infrastructure
projects (APEC-summit, Olympic games, federal highways, etc).
 This type of policy presumes even higher standards of state
management. It’s early to judge but it will be another flop, probably. 9
NSE/TE conference, June 25-26, 2013
Russian Lessons for NSE and TE
“… there are governments and governments. When
asked, therefore, What are the functions of government?
we must ask in return, Of what government? Different
states have different conceptions of their duty, and so
undertake different things. “
Woodrow Wilson, the 28th President of the United States,
 Lesson one. While implementing IP one should pay attention not
only to economic considerations but to political constraints. The
question of “What the state should do to facilitate favorable structural
changes?” should be accompanied with the question: “Why the state
would do it?” The model of the policy should adequate to the
governments capacity to implement it.
10
Russian Lessons for NSE and TE
 Lesson two. In spite of the “death” of Washington consensus,
institutions still do matter. They are twice as important in case of proactive IP. One of the basic problem with IP in either traditional or
NSE form is that the government is presumed to be exogenous to the
structure of the economy, i.e. selecting priorities in accordance with
national strategic goals or comparative advantages. It’s rarely the case.
Money will go where the political power is . . . . It will go where
the union power is mobilized. It will go where the campaign
contributors want it to go. It will go where the mayors and
governors as well as congressmen and senators have the power
to push it. Anyone who thinks government funds will be
allocated to firms according to merit has not lived or served in
Washington very long.
—Senator William Proxmire, 1983
11
Russian Lessons for NSE and TE
 Lesson three. The success of the policy strongly depend
on coordination between the state and the private sector. And
this coordination presumes the dialog and a certain amount of
mutual trust. This trust is difficult to achieve but it can be lost
easily. The trust is easier to find if the state do not participate in
commercial projects, do not aim at getting direct monetary
returns from initiatives , focusing on producing public goods.
Well, comrades billionaires, and
now we’ll play the game “Who
wants to became a millionaire?”
12
Russian Lessons for NSE and TE
 Lesson four. While implementing any type of structural
policy it is important to design from the start alternative
scenarios, including the scenario of exit from the policy with
minimal losses. Nobody can (or rather should) be sure the
strategy is the right one and/or the selected instruments will be
working.
“Be afraid not of hunger and plagues,
Nor of jail, nor of living in rags.
Fear only Him, who will come and will say:
“Come with me. I’ll show the Way!”
Alexander Galich, Soviet poet
13
Thank you
for your attention
14