Karl-Heinz Paqué 1
February 2016
Great Challenges for Russia and Europe's East:
The New Global Division of Labor in the 21st Century
“Bygones are bygones!” This is the standard wisdom in Wall Street when somebody made
bad losses in yesterday’s financial markets. “Don’t look back, look ahead!” This is also true in
economics in general. Lost opportunities of the past are best forgotten quickly, or better:
quietly shelved from the economist’s to the historian’s realm of concern.
That said, it is clear that Russia and Europe`s East have a lot to forget and to shelve. After all,
their command economies and central planning over seven decades in the case of Russia and
four decades in the case of the rest of Central & Eastern Europe including eastern Germany
were in some important respects a lost period. True enough, industrialization did proceed at a
remarkably rapid pace, but it did so in a completely isolated and insulated fashion: isolated
from the global market that was integrating fast, and insulated from market signals that were
changing dramatically.
The disastrous outcome could be revisited after the Berlin wall had come down and the Iron
Curtain torn apart in late 1989. Isolation and insulation were gone, and a huge structural crisis
set in. It stretched over a whole decade and all across post-communist Europe, from eastern
Germany at the western edge to Russia at the eastern edge. In most of the post-communist
countries, the crisis-like structural adjustment process with a huge wave of privatization and
modernization finally converged to a new sort of economic equilibrium some time in the
2000s. That dramatic process, though not yet well understood in detail, is also by now history
to be quietly shelved. However, what is not history is the new equilibrium because it remains
the starting-point for the economic future of Russia and Europe’s East in the decades to come.
1
State Minister of Finance (retired); Professor of International Economics and Dean of the Faculty of Economics
and Management at Otto von Guericke University Magdeburg; Deputy Chairman of the Board of Directors of
The Friedrich Naumann Foundation for Freedom; Member of the Federal Board of Directors of the Free
Democratic Party. Email: paque@ovgu.de. Tel: ++49-391-67-18804.
2
That future is, of course, open. However, given the trends in the world economy that could be
observed during the last two decades largely independent of the idiosyncratic struggle of
Russia and Europe’s East, this future is likely to have specific features that can already be
recognized today. These features are of great importance to economic policy everywhere. In
essence they boil down to the catchword “globalization” though this term alone explains
nothing. In a more old-fashioned style of economic terminology, one could speak of a new
global division of labor that is emerging in the 21st century. And, obviously, it is an
enormously important question for any nation and its people where they will find themselves
in terms of absolute and relative prosperity in that “brave new world”.
In this paper, I will talk about exactly this – with a focus on Russia and Europe’s East.
Naturally, I have to do it from a bird’s eye view, just throwing light (if at all) at the big picture
and disregarding all details. Please, forgive me if the exercise will turn out to be highly
speculative, but that is unavoidable with a futuristic topic like the one I have chosen.
The paper has three parts. In part 1, I sketch the big trends of globalization. In part 2, I deliver
a preliminary grouping of nations according to their problem setting. In part 3, the main part
of the paper, I look at Russia, with a quasi-permanent side-view to the post-communist
Central & Eastern European nations plus eastern Germany.
1
Trends of Globalization: Where Do We All Go?
There are likely to be three major trends in the world economy in the further course of the 21st
century: (i) a massive push towards trade integration on a truly global scale, (ii) a massive rise
of migration notably of skilled labor, and (iii) a massive increase of the use of digital
information technology. All three deserve some brief elaboration of both causes and
consequences:
(i) Global Integration
In the 1990s, the term globalization emerged, and that was no coincidence. Until shortly
before (say, the early 1980s), trade integration was largely a phenomenon of the then OECDcountries, i. e. the “rich men’s club” in the world. Neither central and eastern Europe nor the
3
bulk of Asian and Latin American nations did participate as they pursued deliberately
protectionist and/or outright socialist policies with a priority on self-sufficiency and import
substitution. The few exceptions, notably the four Asian “tiger” nations as well as South
American Chile, proved the rule. That changed dramatically from the early 1980s on as a
number of large developing countries began to open up, notably China and India, but also
other big Asian and Latin American countries to be followed by the re-emergence of an open
Central & Eastern Europe including Russia. All this led by now, within three decades, to a
global income and productivity catching-up of huge masses of people living in so-far poor
countries, which is unprecedented in world history. To be sure, the emergence of all “NICs”,
the newly industrial countries, is a sea change in the size and structure of the (integrating)
world economy, which now easily covers more than, say, two-thirds of the world population.
While this process of catching-up has now started in earnest, it is not remotely completed –
though, of course, even particularly fast-growing countries may enter temporary adjustment
crises as now appears to happen even in China. Most NICs “virtuous” circle of good
education of people, high savings and vigorous capital accumulation as well as the growth of
knowledge and skills, which further improve in the course of integration, will keep the
dynamics of this process quite strong for another few decades. The consequences of this
catching-up are vast. Quantitatively, it means that ever more trade and production will involve
NICs and not the traditional OECD-members – thus pulling the shares of world trade of
output massively and irreversibly into the direction of the NICs. After all, there is a vast
number of people living there (think of the 2.7 Billion Chinese and Indians!), and once these
people really begin to be productive, they will dwarf the weight of what was the traditional
“transatlantic economy” consisting of Europe plus North America plus the oceanic European
offshoots.
Much more important, however, is the qualitative dimension of “global catching-up”. By
getting more productive, the club of NICs completely changes its production structure – from
agriculture via simple industrial products to a range of sophisticated high-technology
products. That is already evident in China, but it will gain momentum all over the NICs-world
in the next few decades. That will completely change the nature of trade: we will ever more
move towards a division of labor that is almost exclusively driven by “brains” and not by
mere “labor”. The ever larger forthcoming trade volumes will ever more consist of innovative
differentiated products that are, in economist’s jargon, produced by heterogeneous firms in
4
monopolistic competition, i. e. competing not just on price, but also on quality and product
characteristics that suit particular subgroups of global consumers. Note that this trend will
climb up and down all across the quality ladder of goods and tradable services – involving
traditionally “high technology”, but also what has been aptly coined “frugal technology”
meaning ingenious simple devices that are invented by smart brains in still poor countries
(say, India) for the huge masses of still poor domestic people, but also someday soon for
relatively poor people who live in rich countries.
This qualitative change has vast consequences for the richer part of the world, including
Russia and Central & Eastern European nations. These being middle income countries, they
face not only powerful competition “from above”, i. e. from the traditional high-tech club of
western countries, but also “from below”, with a huge mass of brains standing ready in the
still poorer countries of the world to enter markets with ever more sophisticated product
ranges. Hence the highway for the economic race has become much larger with many more
opportunities to differentiate and to reap economies of scale, but the sheer number of bright
and skilled competitors is also rapidly growing. Thus any sound growth strategy and
economic policy design must today be much more ambitious for Russia and Central &
Eastern Europe than it would have been if communism had broken down a whole generation
earlier. We come back to this crucial point in Part 3.
(ii) Skill Migration
Globalization has an important side effect, which is often overlooked by economists and
politicians, though not by sociologists. It is creating a global society of well educated young
people who do understand and speak English (or some minimalist form of it!), who easily
communicate via the internet, and who are very well informed about what is going on in the
world. Note that the access to a global exchange of news has made a great leap forward in the
1990s with the use of the World Wide Web. As it turned out, however, this was only the first
of many steps: in recent years, the invention of the iPhone and of Apps has added much fuel
to the flames so that the process, if anything, speeds further up and gains breadth and depth.
The consequences are far-reaching. Any type of “globalized young person” stands ready to
move and migrate to other places in the world where job opportunities and living conditions
are deemed to be much better. It just depends on whether there are enough good job offers
5
abroad and whether there are legal barriers to migration. As a rule, these barriers will be the
lower the scarcer skilled labor becomes in the regions of destination that anyway offer good
wages and good living conditions. As the top rich part of the world has also the most rapidly
ageing population and thus, from about 2020 on, shrinking indigenous labor forces, it is quite
likely to lure and attract much talent from other parts of the world. Naturally, Central and
Eastern Europe will be a major source to tap, notably because the cultural distance between
Western and Eastern Europe is quite small and educational standards in school are quite
similar.
Hence, clearly, Russia and Central & Eastern Europe will be under a persistent threat of brain
drain. Note that, if anything, this trend is likely to accelerate. Apart from further technological
advances towards a perfectly global information network, migration tends to feed on itself:
once the urban centers of the West become ever more cosmopolitan due to waves of
immigration from different nations, new urban communities and networks of (well-educated)
first-generation immigrants will emerge and grow. This makes life abroad ever easier – thus
reducing the psychic costs for further immigrants to join in. In their integrative capacity,
western European cities may in fact ever more become like American cities in the late 19th
century, though with a much more skill-selective immigration and a much more attractive
urban environment. Thus a self-enforcing process may come about: a virtuous “brain
attraction circle” in the countries of destination (the “West”) and a vicious “brain drain circle”
in the countries of origin (the “East”). We come back to this point in Part 3.
(iii) Information Technology
“The second machine age”, this is how the MIT-scholars Erik Brynjolfsson and Andrew
McAfee have aptly called the technological transformation we are entering – juxtaposed
against the first machine age, which began with the industrial revolution two hundred years
ago. 2 While the speed and eventual effects on productivity of this transformation are highly
controversial 3 , the mere fact of its advent and advance is not. Neither is the profound impact
that this transformation will have on the specialization pattern and growth potential of
different countries with different production structures. While the details may be highly
2
Brynjolfsson, E., A. McAfee (2014), The Second Machine Age. New York.
The optimistic view of Brynjolfsson, E., A. McAfee (2014), The Second Machine Age. New York, is heavily
contested by Gordon, R. J., (2016), The Rise and Fall of American Growth. Princeton N.J.
3
6
speculative, the broad pattern is straightforward to identify. Roughly summarized, it looks as
follows.
There will be countries that profit from the trend. Naturally, it will be those that have a kind
of long-standing strength in major branches of information technology in industrial
production and service provision. Characteristically, these are countries with strong
innovative start-up clusters around universities or related research centers. Also, those
countries that have a strong tradition in high-quality engineering may do well if (but note:
only if) the new innovative knowledge is rather easily absorbed, adjusted and further
developed for the specific high-quality engineering needs. In this case, the centers of
excellence in information technology may well be abroad, but the potential of emulation must
be at home. Finally, the big NICs may continuously profit provided they can become
innovative centers of transforming the new technologies to the needs of the local market by
making them “more frugal” in the sense that relatively poor people in the typical NICs income
ranges may use them for their specific needs.
On the other side, there will be losers. Obviously, one type of losers will consist of those
countries that have neither innovative clusters of innovation in information technology, nor a
strong tradition of high-quality engineering that stands ready to emulate the technological
evolution. If, in addition, they are already “too advanced” in aspirations and incomes of their
populations to hop on the frugal technology train as many NICs can do, they may face a bleak
future – in a way falling between the stools of the “innovative rich” and the “dynamic poor”,
thus ending up in a sort of “middle income growth dilemma”. That exactly may be one of the
core problems of Russia and Central & Eastern Europe in the decades to come. We return to it
in Part 3.
Note that a rich supply of resources and energy does not help to solve the growth dilemma.
This is so for two reasons. Firstly, it is exactly the high revenue from selling resources in
world markets that drives up the domestic cost and income level without providing an
appropriate innovative base of high value added production (the well known “Dutch Disease”,
which was also one reason for the gradual economic erosion of the Soviet Union 4 ). Secondly,
it is exactly the new information technology that, in the long run, may help to undermine the
quasi-monopolistic rents that can be achieved through the sale of resources in world markets.
4
Gajdar, J. (2016), Der Untergang eines Imperiums. Heidelberg. He speaks of the “curse of oil”.
7
After all, modern electronic control and regulation systems support and foster the switch to
more energy-efficient production techniques – in combination with the ecologically motivated
shift towards renewable resources, which is also facilitated by the intensive use of control and
regulation devices from innovative information technology. Hence being rich in resources is
by itself no solution, at least not in the long run.
2
The Current Equilibrium: Where Do We All Stand?
In broad brush, we have painted the economic trends of globalization. The next question is:
From where does Russia and Central & Eastern Europe start into the future stages of these
trends, roughly 2 ½ decades after the fall of the Berlin Wall and the tearing up of the Iron
Curtain? To see this, we provide a rough-and-ready characterization of major country groups
in the present-day world economy. We distinguish five groups, which partly overlap, with
some countries belonging to more than one group.
The first group might be called the innovative start-up leaders. These are highly developed
countries whose economies persistently churn out innovative ideas, products and services
from a strong start-up culture nurtured by an equally strong academic and scientific
environment. Obviously, it is above all the United States that belongs to this group, but also
Israel and to some extent the United Kingdom, but some regions of continental Western
Europe like western Switzerland or the German (start-up) capital Berlin qualify as well.
The second group might be called the high-quality engineering leaders. These are also
highly developed countries whose economies typically produce finely specialized high-quality
products for a broad range of market niches that do cover basically all classical industrial
branches in their modernized shape, with a highly skilled academic and non-academic
workforce. The classical example is (western) Germany, but continental Western Europe plus
Denmark, Sweden & Finland plus northern Italy by and large qualify just as well. Of course,
the top Asian countries Japan and South Korea also belong to this group.
The third group might be called the traditional industrial followers. These are mostly
European countries that are grouped around the innovative industrial core region of Europe,
mostly in the South and east of Germany. Obviously this is where Russia and central &
8
Eastern Europe belong to. Never since the onset of the industrial revolution did they reach
Western European levels of development, but never were they really completely cut off from
it. Except for the period of communism in the East, all these countries retained close trade and
investment links to the continental European core. On a global scale, they belong to the upper
middle ranges in virtually all rankings, whether in terms of per capita income or innovative
capacity. The one important exception is education where they do roughly match the top level
as their school systems by-and-large conform to a common European standard. Note in
passing that, oddly enough, eastern Germany belongs to this group: while it had been top-rich
and top-industrial like the German West until World War II, it is today – after the communist
intermezzo of four decades – no more than a traditional industrial follower.
The fourth group may be called the modern industrial followers. These are all those nonEuropean countries that only in the last few decades started a “great leap forward” towards
global integration and national economic growth. The classical example is today China, but
India, Indonesia and Malaysia as well as Brazil, Chile and Mexico and some others qualify as
well. Note that this is an utterly heterogeneous group with very different economic and
political histories. To lump them together is only justified with a view to the future: it is above
all their present and future growth into the world economy “from below” that serves as a long
drawn out sequence of shock waves that radically changes the global division of labor.
The fifth group might be called the resource-based economies. They include all those
countries that heavily rely on the exports of non-renewable energy, notably oil, gas and to a
much lesser extent still coal. Note that this group is extremely heterogeneous – covering the
rich Gulf countries with very little genuine economic development to highly industrialized
western offshoots of immigration like Australia and Canada. Included are also African
Nigeria, Middle Eastern Iran, and Northern European Norway and, most importantly for our
purposes: Russia. In a sense, all of these countries belong to two groups of ours at the same
time, in the case of Russia groups 3 and 5, what may be called “resource-based industrial
follower”.
This then is our rough-and-ready grouping of the countries in the world economy as far as it is
important for our purpose, i. e. the evaluation of the economic prospects of Russia and Central
9
& Eastern Europe. 5 It will serve us as a road map of economic geography; just as the global
trends sketched in Part 1 will serve us as a temporal guideline for the future. We can now
tackle in Part 3 the main question to be addressed in this paper.
3
The Great Challenge: Where Do Russia and Europe’s East Go?
3.1
Facts & Figures
The big trends we identified in Part 1 – global integration, skill migration and information
technology – put the group of traditional industrial followers under a vast adjustment
pressure. If they want to avoid (i) being left behind by the leading countries and (ii) being
overtaken by the huge fast growing modern industrial followers, they have to join the leaders.
This means: building up a production and export base that turns the skills and human capital
still abundantly available into an ever more high value-added output, be it of the innovative
and/or the high-quality engineering sort that the leaders provide. This is so for all Central and
Eastern European countries (as well as, incidentally, for the Mediterranean South of Europe
from Portugal to Greece). For Russia, this means in addition: it has to move away from its all
too strongly resource-based structure. Hence, above all, Russia has to diversify.
To be sure, this is anything but a new demand. In recent years, it was prominently put forward
by the European Bank for Reconstruction and Development (EBRD) in a comprehensive
report published in 2012. 6 A brief look at some structural characteristics shows that it is more
relevant than ever:
•
The remarkably fast growth of the Russian economy in the Putin/Medvedev era was
mostly driven by the global resource boom. In macroeconomic terms, this had many
beneficial effects: a massive rise of per-capita income as well as wages and living
standards, a massive increase of tax revenue, balanced public budgets, current account
surpluses and a further massive accumulation of savings and assets mostly by a rich
5
Needless to say that, beyond these five groups of interest, there remains a large number of very poor countries
notably in Africa, Asia and America that do not belong to either of these groups because they are too poor, too
small and in all likelihood not dynamic enough to make a major impact on the world economy in the decades to
come. For our purpose at hand, they can be left out.
6
European Bank for Reconstruction and Development (2012), Diversifying Russia. London.
10
class of capital owning oligarchs. Hence macroeconomic stability was fundamentally
restored, quite independently of the state of microeconomic efficiency.
•
During the resource boom years, Russia made no real progress towards diversification
and, compared to most Central & Eastern Europe, some regress in terms of world
market integration. Figure 1 shows that Russia’s export quota went down (despite the
oil and gas boom, which is included) while others’ export quotas in Central and
Eastern Europe went up, some of them quite steeply. Compared to the Baltic states
and the Vizegrad countries, the picture is dismal – and unique.
•
Worse still, Russia is very likely to have lost ground in terms of innovative drive and
high-quality engineering capacity. MIT-economists Ricardo Hausmann and César
Hidalgo have developed a so-called “index of complexity”, which tries to numerically
represent the diversity and ubiquity that characterize the products and services that are
exported by a country. 7 While the details of calculating this index may be subject to
debate, the magnitude and ranking of it is uncontroversial. Figures 2 and Table 1 show
selected results. They convey two stylized facts: (i) Russia’s index substantially
declined over time since the turn of the century and (ii) its ranking is anything but
impressive – way behind the innovative and high-quality engineering leaders of
Europe and somewhat behind even the post-communist Central & Eastern European
countries, which made substantial progress in terms of complexity over time. Table 1
also shows that the complexity ranking is highly correlated with the ranking in terms
of research & development-spending as a share of GDP – thus supporting the
impression that what is measured here is no statistical illusion.
Given this general picture, it is hard avoid the conclusion that, maybe more than ever before,
Russia faces an economic up-hill struggle. In some important respects, one may even speak of
a lost Putin/Medvedev-era in terms of the required structural adjustment to a really modern
economy with bright growth prospects. Clearly, the share of exports that consist just of oil and
gas plus closely related manufactures – all in all roughly 60 per cent – is way too high
(Figure 3). Note that it dwarfs the shares of other advanced resource-based economies like the
Canadian or the Australian one, which are in the range of 30 and 40 per cent (and are regarded
as too high as well by critical observers in these countries!). With the world-wide decline of
7
See Hausmann, R., C. Hidalgo (2013) et al. The Atlas of Economic Complexity. Cambridge Mass.
11
oil and gas prices (Figure 4), this resource boom has come to end – probably for a very long
time given the prospective supply and demand conditions in world markets. 8 Apparently, the
bubble has burst and the bonanza is over.
Note in addition that, despite the resource boom, the Putin/Medvedev era has not been a time
of a rising parity of the ruble, which might have systematically worsened the price
competitiveness of Russian (non-resource-oriented) manufacturing. In fact, this type of
“Dutch Disease” did not come about because, apparently, any pressures towards a ruble
revaluation were countered by expansionary policies by the Russian Central Bank, thus
further fuelling the domestic boom. Figure 5 delivers an illustration of this point as it shows
the exchange rate vis-à-vis the US-Dollar of the ruble and a number of other Central &
Eastern European currencies. The picture is clear: the quasi-default of Russia in the late 1990s
was accompanied by a massive ruble devaluation (Figure 5a), but after the successful
stabilization of the early 2000s, the parity of the ruble did not travel towards an ever higher
Dollar value (Figure 5b). To the contrary, after some years of stability and very moderate
revaluation, a trend towards devaluation was resumed by 2007/8. Hence, by and large, the
growth of (non-oil and non-gas) Russian manufacturing was not really hindered over the
period in question. And despite this, its growth and structural change has remained
disappointing.
By and large, then, the picture is gloomy, and there are no obvious excuses in sight. If the
trends go on in this way, it is hard to avoid the prediction that Russia will further fall back not
only relative to the innovative and high-quality-engineering leaders in the West, but also
relative to its post-communist cousins in Central & Eastern Europe, which in the 1990s still
shared the major structural handicaps of Russia and to a considerable degree still do.
However, they make progress while Russia does not.
3.2
Policies & Remedies
For economic policy, nothing is more difficult than steering a big market-based economy into
a new – and more promising – structural direction. After all, the laws of specialization
according to comparative advantage have an inherent tendency to favor what is already there
in terms of productivity and factor endowments, and not what could potentially exist. Besides,
8
The Economist of January 23rd 2016: “Briefing: Oil and the Economy”.
12
it is all too easy to envisage a bright growth future on a highly speculative basis than to
precisely identify some major bottlenecks that prevent a promising development.
That said, there are some very obvious deficiencies in Russia that hinder the tapping of the
huge potential that the comparatively well-educated – though ageing and shrinking – labor
force of Russia offers. They have been spelled out quite clearly by a number of experts,
notably in the EBRD-report “Diversifying Russia” in 2012. 9 In essence, they come down to
the standard toolbox that is used when it comes to improving the business climate for start-ups
and small & medium-sized companies (SMEs), which are rightly expected to form the basis
for future growth of exports and value added – thus pushing the country closer to the leading
industrial nations, be they of the innovative or high-quality-engineering kind. Instruments to
achieve this are the removal of red tape and bureaucratic barriers to exports, a businessfriendly taxation that supports responsible risk-taking, and a venture capital market that
allows the tapping of private savings beyond the boundaries of the traditional banking system.
In addition, better governance, more transparency and openness to immigration of
entrepreneurial talent and skilled labor is advocated, along with improvements in the
educational system – away from input-oriented models, which appear to deliver gradually
deteriorating results, to a modern output orientation.
All this correct. To some extent, however, it reads like the standard list of recommendations
that are also advanced by external observers for many other countries that aspire a higher percapita income and a more dynamic growth in the future. Let us there focus on bottlenecks and
opportunities that appear to be special in the case of Russia and, once seriously tackled, may
unleash a more dynamic forces than the many necessary marginal changes might do.
Naturally, given the size and weight of the country, this invariably leads into the core of “big
politics”.
The most fundamental observation to start from is the extent of Russian outward stock of
foreign direct investment (FDI). Table 2 shows that, in 2012, it amounted to a whopping 303
Billion Dollars (and this is, as we shall later argue, a conservative estimate). Most probably,
the bulk of this wealth is held in assets that are virtually unrelated to the Russian economy –
ranging from bonds and stocks of western states and firms to real estate in posh urban areas
like London’s Kensington or Berlin’s Grunewald plus, of course, stakes in top western
9
European Bank for Reconstruction and Development (2012), Diversifying Russia. London.
13
Football Clubs like FC Chelsea London. Note that many of these investments do probably not
yield more than a modest western average rate of return, potentially much less than the rates
that might be achievable in a catching-up economy like the Russian one. The reason for the
capital flight into low-yielding, low-risk assets in the West is obvious: a lack of trust in
Russia. Many oligarchs apparently consider Russia as too risky an investment object; and
among them there are even quite a few who are close to the ruling elite around Putin –
otherwise the sanctions recently levied by the West on Russian “Putin-close” capital would
have hit nobody. In fact, the mistrust is so deep that even those very close to power tend to
park their wealth abroad rather than at home. Under the prevailing circumstances, capital in
Russia is regarded as fundamentally unsafe.
It is hard to explain this perceived lack of capital safety by anything but politics. From a
bird’s eye view, the central problem is that the return to macroeconomic stability by the mid
2000s was not built on a strategy that might be called: “Economics First!”. Such a strategy
should have stood on two major trust-enhancing pillars: (i) an internal policy that puts priority
on micro structural reforms that foster economic diversification in the sense described above,
and (ii) an external policy that puts priority on the irreversible integration of Russia into the
global division of labor. In the Putin/Medvedev-era, almost exactly the reverse was done:
micro reforms were not decisively tackled, and in external relations, a policy priority was the
destabilization of neighboring countries with neo-imperialist interventions – from Moldavia
over Georgia to Ukraine.
Note that the economic damage of these interventions in Russia’s neighborhood had a shortrun and a long-run dimension. In the short run, it obviously burdened the public budget and
bound resources in essentially unproductive activity (not to speak of the human suffering
involved). In the long run, it soured international relations – just at a time when Russia was
joining the World Trade Organization (WTO), which led to hopes that the country was finally
becoming a “normal” trading partner. This thoroughly undermined the confidence of capital
markets, with the Western sanctions imposed being just a kind of visual proof of the rising
tensions. It is hard to see how this damage could be repaired without a fundamental policy
switch: away from a neo-imperialist to an “Economics First”-stance. In this sense, the return
to a sustainable long-run growth path is – first and foremost – a political question. If this
question is not positively answered, Russia will continue to slide down the path towards a
poor-performing resource-based traditional industrial follower country. Given the high
14
mobility of young globalized people, there will be a rising brain drain out of the country, thus
further weakening the long-term productive potential. Note that, as it slides down, Russia will
also gradually lose its political clout once the weight of the fast growing follower countries is
becoming big enough in the world economy. To be sure, this may take a few decades, but it
will inevitably happen.
That said, any recommendation for policies & remedies apart from this fundamental policy
switch can be no more than a kind of technocratic exercise – without much realistic
perspective. Be that as it may, let us briefly sketch what might be at least intellectually
conceivable.
3.3
A Technocratic Exercise
The current macroeconomic situation of Russia is characterized by five fundamental features:
•
The ruble is weak, weaker than at any time since its stabilization in the early 2000s
(see Figure 5). It is likely to stay weak for quite a while.
•
The sanctions hit the Russian economy hard, but in a very selective way – focused on
industries that are resource-intensive and/or produce military and dual-use goods.
•
Public budgets are to be tightened due to rising deficits, though the situation is not
comparable to the 1990s as currency reserves are large.
•
Inflation is high (around 15 % p. a.), though not yet rampant; unemployment is rising,
but still low by international standards.
•
There is no indication of widespread unrest. Apparently, the widely spread patriotic
mood makes people accept temporary hardships.
In a quite cynical way, this kind of configuration is a relatively good starting point for
initiating a genuine “supply-side program” to foster future economic growth. This is so for
three reasons:
•
In general, the weak ruble makes it much easier for new ventures and industries to
enter world markets. Price competiveness is enhanced without the negative side
effects of a domestic bubble in resource-based production.
•
Ironically, the actual pattern of the sanctions may be helpful for the restructuring of
the economy – away from the resource (and military) bias towards a more balanced
structure that focuses on product innovations and high-quality engineering.
15
•
Tight budgets and inflationary pressures make any initiatives to raise the elasticity of
the Russian production capacity all the more urgent. That may help to overcome the
usual political resistance against deregulation and red-tape curbing.
Even if a supply-side policy along the sketched lines was initiated, however, a major
bottleneck would remain: capital markets, notably for venture capital. 10 To remove this
bottleneck is a huge task, not only in Russia. The experience of other continental European
countries, notably Germany, shows clearly how difficult it is to initiate a venture capital
market without a long American-style tradition of top universities massively churning out
innovative ideas that are ready for commercial use.
Cynically, the recent economic history of Russia may give it a rather good chance of
developing a thick modern capital market for innovative ventures. After all, Russia is the
country with the largest stock of capital being parked abroad, presumably at relatively low
rates of return. Due to the oil and gas boom, it has run huge current account surpluses over
years (see Figure 6), which led to massive capital exports notably by oligarchs. The
magnitude of the Russian wealth abroad can only be guessed from some proximate statistics
that are not easy to interpret, but a number of 300 Billion US-Dollars is, if anything, a
conservative estimate, and 600 Billion US-Dollars something of an upper limit. 11 If a good
part of this wealth could be channeled back into a “venture capital cosmos” on Russian
territory, the bottleneck could be removed much easier than in a country like Germany.
An admittedly technocratic vision of smart long-run policy could look like this:
•
The Russian government introduces a very generous tax treatment for capital that is
invested in endowments of preferably newly founded technical universities or faculties
in Russia – focusing on anything related to information technology or any other
10
See also European Bank for Reconstruction and Development (2012), Diversifying Russia. London.
In the period 1992-2015, Russia almost persistently ran high current account surpluses, in particular since the
year 2000. The cumulative sum of these surpluses minus the (very low) sum of the current account deficits of the
two deficit years 1992 and 1997 amounts to 988 Billion US-Dollar (for 2000-15 alone: 929 Billion US-Dollars).
At the same time, the Russian Central Bank accumulated reserves of 385 Billion US-Dollar (as of Dec 31st
2014). According to recent statistics of the Russian Central Bank, the Russian owned FDI stock on June 30th
2015 was 308 Billion US-Dollars. Note that this includes both genuine FDI-working capital (i. e. machinery of
Russian firms that operate abroad) and private wealth held in whatever form. Note that the Russian owned FDI
capital stock in Cyprus and the British Virgin Islands alone accounts for roughly 150 Billion US-Dollars. – The
lower limit of Russian wealth noted in the text is the roughly 300 Billion US-Dollars published by the Russian
Central Bank; the upper limit is simply the net cumulative sum of all current account balances (mostly surpluses)
of Russia in the period 1992-2015 (roughly 1000 Billion US-Dollars) minus the accumulated reserves of the
Russian Central bank (roughly 400 Billion US-Dollars).
11
16
branch of high-quality engineering. Note that American legislation could be taken as a
blueprint – as it allows tax deductions for charitable giving to science and academics
of up to 50 percent of gross income.
•
The newly founded universities or faculties provide wages and working conditions
that are competitive in a global market for the smartest brains – thus turning the brain
drain from Russia into a brain run into Russia. Again, the shining American example
would be the model to follow, with excellence being the sole criteria for selecting staff
and funding for research projects.
•
Once established, these universities or faculties will develop a belt of economic startup activity as happened in the United States – provided they are properly supported by
a mostly unregulated environment with a minimum of red tape. Again, the venture
capital market could be fed by Russian capital returning home, preferably with a
business-friendly tax treatment.
To be sure, a venture-capital Russia of this kind – let’s call it “Ivy League Russia” – may at
present look like pure fantasy. At least in quantitative terms, it is not as Table 2 shows: The
total endowment of US universities is around 400 Billion Dollars, not out of range of the total
Russian wealth parked abroad. In this respect, the typically Russian high personal
concentration of wealth is a decisive advantage as the numbers in Table 2 indicate: With the
right incentives plus a dash of love for their homeland, the few richest Russian oligarchs
could quite easily create a Russian-style Ivy League world of Harvard, Yale, Princeton and
Stanford. Personally, they could become monumental heroes in Russian history, just like
Carnegie and Rockefeller as well as Gates and Zuckerberg in America.
Alas, this is fantasy indeed, at least so far. As long as the markets – including the oligarchs –
do not consider their assets to be really safe in their home country, no brave new “Ivy League
Russia” with blossoming venture capital markets will emerge. But at least the idea should be
kept in mind, not least because this is really a uniquely Russian vision.
1
Figure 1: Russia turns its back to the world market
Exports of goods and services (% of GDP)
100
90
80
70
60
50
40
30
20
1995
2000
2005
2010
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Russian Federation
Poland
Slovenia
Slovak Republic
Source: World Bank (2016) http://data.worldbank.org/indicator.
2015
2
Figure 2: Russia‘s poor record of export complexity
The economic complexity index
2
1,8
1,6
1,4
1,2
1
0,8
0,6
0,4
0,2
0
1995
1997
1999
2001
2003
2005
2007
2009
2011
Russia
Poland
Lithuania
Latvia
Estonia
Czech Republic
Hungary
Slovak Republic
Slovenia
2013
2015
Source: Hausmann, R., C. Hidalgo et al. (2016) http://atlas.cid.harvard.edu/rankings/.
3
Table 1: The economic complexity index and
research and development expenditure in % of GDP
Country
ECI Rank 2014
Japan
Germany
South Korea
Czech Republic
Hungary
Slovenia
Slovak Republic
USA
Israel
Estonia
Poland
Norway
Lithuania
Latvia
Canada
Russia
Saudi Arabia
Venezuela
Angola
1
2
4
7
9
11
13
14
23
25
27
33
34
35
39
50
74
105
124
R&D expenditure (% of GDP in 2012) 3.34
2.88
4.03
1.79
1.27
2.58
0.81
2.81
4.25
2.16
0.89
1.62
0.90
0.65
1.71
1.13
0.07 (2009)
NA
NA
Sources: Hausmann, R., C. Hidalgo et al.
(2016) http://atlas.cid.harvard.edu/rankings/
and World Bank (2016)
http://data.worldbank.org/indicator.
4
Figure 3: The export structure of Russia (2014)
Source: Hausmann, R., C. Hidalgo et al. (2016)
http://atlas.cid.harvard.edu/explore/tree_map/export/rus/all/show/2014/.
Jan 86
Nov 86
Sep 87
Jul 88
May 1989
Mar 1990
Jan 91
Nov 91
Sep 92
Jul 93
May 1994
Mar 1995
Jan 96
Nov 96
Sep 97
Jul 98
May 1999
Mar 2000
Jan 01
Nov 01
Sep 02
Jul 03
May 2004
Mar 2005
Jan 06
Nov 06
Sep 07
Jul 08
May 2009
Mar 2010
Jan 11
Nov 11
Sep 12
Jul 13
May 2014
Mar 2015
5
Figure 4: The oil price
Price in US-$
140
120
100
80
60
40
20
0
Source: GEM commodities, World Bank (2016)
http://www.indexmundi.com/commodities/?commodity=crudeoil&months=360.
6
Figure 5: Russia‘s Ruble sliding
a) Exchange rate (Local Currency Units
per US-$; 1995=1)
b) Exchange rate (Local Currency
Units per US-$; 2005=1)
1,8
9
1,6
8
7
1,4
6
1,2
5
1
4
0,8
3
0,6
2
0,4
1
0,2
0
1995
2000
2005
2010
2015
0
2005
2007
2009
2011
2013
Czech Republic
EUR/USD
Czech Republic
EUR/USD
Hungary
Russian Federation
Hungary
Russian Federation
Poland
Source: World Bank (2016) http://data.worldbank.org/indicator.
Poland
2015
7
Figure 6: Russia‘s current account surplus
Current account balance
(% of GDP)
Current account balance
(BoP, current bn US-$)
120
20
100
15
80
10
60
5
40
0
1990
-5
20
1995
2000
2005
2010
2015
Current account balance (% of GDP)
2020
0
-201990
1995
2000
2005
2010
Current account balance (BoP, current bn US$)
Source: Russian Central Bank (2016) http://www.cbr.ru/eng/statistics/?PrtId=svs. Note: A data revision took place in
2000. Since 2000 the balance of payment is calculated according to BPM6, before 2000 BPM5 was used.
2015
8
Table 2: Why not a Russian Ivy League?
Forbes list of wealthiest Russian
Oligarchs (2015)
Name
Vladimir Potanin
Mikhail Fridman
Alisher Usmanov
Viktor Vekselberg
Alexey Mordashov
Vagit Alekperov
Leonid Mikhelson
Vladimir Lisin
Gennady Timchenko
Mikhail Prokhorov
Russian outward FDI stock (30th of June, 2015)
Net Worth
$15.4bn
$14.6bn
$14.4bn
$14.2bn
$13bn
$12.2bn
$11.7bn
$11.6bn
$10.7bn
$9.9bn
$308bn
Sources: Forbes (2015) The World’s Billionaires.
http://www.forbes.com/billionaires/list/#version:static_country:Ru
ssia. and Russian Central Bank (2016)
http://www.cbr.ru/eng/statistics/?PrtId=svs.
Endowments (US Universities in
2012)
University
Harvard
Yale
Princeton
Stanford
MIT
Columbia
Chicago
Pennsylvania
US‐average
US‐median
Total US university endowments
Endowment
$30bn
$20bn
>$15bn
>$15bn
$10bn
$10bn
$7bn
$7bn
$500m
$100m
$400bn
Source: Piketty (2014): Capital in the 21st Century.
Cambridge Mass. p. 447.