Why should
Russia lag so far behind other industrial countries, why is it unable to make
more of its obvious economic potential?
Admittedly, the country is
penalised by a number of initial structural handicaps. Culturally, it is neither
fish nor fowl, being neither wholly European nor wholly Oriental on personal
characteristics and traditions, suspicious of and suspected by both worlds. It
extends over too large an area compared to its population, saddling both the
production and the distribution of its output with heavier transport costs than
countries of denser population have to bear. Perhaps most important, it has an
unfriendly climate. Some historians, tongue in cheek, explain the expansionary
drive of Russia over the last three centuries by the longing of its people to
escape from the climate of their homeland and settle under a sunnier, less
humid, healthier sky, yet still their own empire. As for cultivating the land,
the saying goes that there are four natural catastrophes in Russia every year,
Spring, Summer, Autumn and Winter.
All in all, however, the
endowments almost certainly outweigh the handicaps. Russia, even after the
secession of the Ukraine, has enough high-quality farmland. It has
inexhaustible resources of timber and vast deposits of every kind of ore from
iron and bauxite to gold, much of it low cost. Using these resources, there is
a reasonably educated work force of mixed quality, working 1,900 hours a year
that compares with about 1,500 in Western Europe. Russian workers are mostly
obedient and bow to authority, they have weak unions, strikes are rare and
wages are settled on the level of the enterprise rather than of the nationwide
industry, an advantage the Russian labour market has over the West and that keeps
unemployment at just over 5 per cent, close to the level of practically full
employment. Skill from shop floor to middle management level is adequate. Far
more decisive than any of these more or less commonplace advantages is Russia's
exceptional oil and gas wealth, of which more below. Taking a rough-and-ready
account of both the obvious helps and hindrances, the visitor from Mars would
expect Russians to be no less prosperous than Englishmen, Frenchmen or Germans.
His expectation would be legitimate, but very far out.
Accepting Russian statistics
at face value the per capita revenue of the population of 142 million is
$17,000, though a different basis of calculation gives less than $15,000. This
compares with the average in the main Western European countries of about
$40,000. GDP has recently been growing at just over 4 per cent per annum and is
expected to maintain this rate in the near future, assuming that the price of
oil remains above $100 a barrel. With the sharp rises in the price of oil since
1998, growth in Russia was relatively easy to achieve and should not be hard to
maintain, though the shape of the economy would become ever more like that of
an oil sheikdom, with the non-oil sector falling further and further behind and
needing state protection to subsist. The Russian government has scores of good
economic advisers and is quite aware of the dangers of such dependence on oil
and gas, but cannot give up the great budgetary ease that oil provides. Nor can
it conjure up industrial development by wishful thinking and exhortation.
Russia is inspiring confidence
by running a current account balance of payments surplus of 3 or 4 per cent of
GDP. If oil and gas are excluded (and all other things remain equal, which of
course they would not do), the surplus turns into a far less reassuring deficit
of 10 per cent of GDP, meaning that the Russian economy produces only 90 per
cent of what it absorbs—a ratio that cannot be sustained for any length of
time.
The state levies a hefty
export tax on oil, which is good for the budget and popular with consumers
because it keeps the domestic price down. However, it also causes careless and
uneconomic use of energy. Russia uses about twice as much energy to produce a
unit of output of all goods and services as the best modern practice in the
West. Waste of energy is the beginning of the explanation of Russia being so
much poorer than it should be. Waste of everything else furnishes a bit more of
the explanation.
Three generations of Russians
now living have inherited some quite nasty things from socialism. One of which
is a vacuum where in a non-socialist society certain incentives would direct
people's behaviour. Under socialism in Russia from 1917 to 1989, nearly
everything belonged to the state, that is in practice to nobody, and very
little belonged to anybody in particular. The result was the withering away of
some of the habits that are formed by the incentives bred by ownership. Looking
after one's own property, respecting that of others, disapproving and
discouraging senseless waste as well as theft in general and not only the theft
of one's own chattels, are some of these habits that go almost without saying
in normal civilisations but that have been "bred out" of far too many
modern Russians. Even after two decades of capitalist practice after 1989, the
waste of time, the quantity of spoilt output and the waste of material that
goes uselessly into the typical Russian industrial product, are staggering to
see. Twice as much steel is used to manufacture a Russian tractor, a bicycle or
a tool as in the West simply because it does not occur to producers that
economising is a good thing even if they do not directly profit from it.
Ceaseless sermons under socialism used to teach them that to be economical and
avoid waste is good for the community, but the vacuum of incentives acted more
strongly than the sermons. It is still acting fairly strongly, as a lost habit
that it will take time to restore even if government policy does not frustrate
the process by counter-productive tinkering.
While socialism left a vacuum
where there used to be an incentive, and thus has educated people not to bother
about economising anything that was not directly their own, it left another
incentive to run wild. In normal civilisations, the incentive to appropriate
anything valuable belonging to others is to a greater or lesser extent, and in
very honest countries like Finland and New Zealand almost completely,
neutralised by the threat of retaliation by the owners, by organised law
enforcement and by social ostracism. Where these checks are eroded, theft,
robbery, usurpation and the abuse of mandates "agency", e.g. power
delegated to the police, the judges and the officials entrusted with spending
the public funds, can run rampant. In Russia, they do. The checks, deterrents
and social sanctions have been weakened to the point of extinction under
socialism.
The Berlin benevolent
organisation Transparency International1 prepares and keeps up to date a rank order
of countries according to how corrupt they are. Among the 40 OECD member
countries, it ranks Russia in 40th place, i.e. as the most corrupt. The type of
corruption that Transparency International seeks to measure concerns government
to business, business to business and government to people relations. Some
economists argue that much of this corruption is in fact useful, for it does
the job of efficient allocation that competition would do if there was enough
of it. The government official will award the bridge-building contract to the
builder who offers him the biggest bribe, and this is as good as awarding it to
the lowest bidder; the builder who can afford the highest bribe is the one who
could tender the lowest price for building the bridge. Efficient allocation is
ensured either way.
This reasoning does not quite
hold water, but there is no place here to demonstrate why. Instead, it is
instructive to look at another version of corruption where organised crime has
police officials, prosecutors and judges as sleeping partners and that is
thriving in post-socialist Russia.
An enterprising Russian
launches a business, runs it successfully for a while and when it has taken
root, two strangers visit him. They declare that henceforth the business
belongs to them or to friends of them, and ask the owner kindly to give them
all keys, passwords and vital documents, sign a bill of sale, and say goodbye.
Resistance is mortally dangerous and appeal to the police futile. Former President
Medvedev used to announce campaigns to "strengthen" the rule of law
and among other practices it was this type of unchecked robbery he must have
had in mind. Nothing ever came of this pious campaigns. The tight network of
mainly ex-KGB officers who exercise supreme executive power always shrugged off
Medvedev initiatives with a pitying condescension.
However, the precarious tenure
of business property, one of the heaviest items in Russia's socialist heritage,
has turned out to be the source of a most interesting phenomenon. Russia's
businessmen, from oligarchs down to proprietors of medium and even small firms,
are beating a path to the West and some of their money is going along with
them. Their favourite destinations are London and the French Riviera. House
property coming up for sale in Knightsbridge, Belgravia and Chelsea is likely
to be snapped up by Russian buyers, as do villas from Nice to the Italian
border. Agencies in London run by young women who know everybody who is worth
knowing, specialise in finding property and domestic servants for Russian
newcomers, as well as performing such miracles as securing admission to Eton or
Harrow for little Volodya, and maybe for other little Russian boys yet to be
born. Most of these Russian pilgrims do not permanently remain in London or
Cannes, but want to have a hidy-hole to run to and shelter some of their
fortune outside Russia if and when things there turn really nasty.
The numbers generated by this
flight to safety look awesome. Russia's current balance of payments has an
annual surplus of $60 to $70 billion thanks to oil and gas. In addition,
foreign direct and portfolio investment in Russia was recently running at about
$90 billion (though this figure is not very reliable). Capital outflow from
Russia must be the mirror image of the total of the sum of the current surplus
and the inflow, or say $150 billion a year (for the balancing item, official
foreign currency holdings, is not large enough to make much difference).
It is difficult to believe,
but also difficult to dismiss the statistics that point to it, that capital
flight from Russia has the colossal order of magnitude of $150 billion per
year. What a heritage socialism has left!
Footnotes
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