Russia Set to Fall Further Behind US in Terms of Living Standards

DSCN2995“Change Yourself for the Better.” If you read the following article, about the OECD’s forecast for economic growth in Russia, between the lines, you will discover a takeaway message that has been apparent to numerous observers for a long time. Until Russia does away with official kleptocracy, rampant corruption, outrageously bad governance, and the shock-and-awe policing of politics and business by the siloviki—i.e., unless it renounces Putinism and all its ways—there is little chance the living standards of ordinary Russians will improve much in the next forty years. Photo by the Russian Reader

Russia Set to Fall Further Behind US in Terms of Living Standards
OECD’s Experts Have Predicted the Futures of the World’s Major Economies
Tatyana Lomskaya
March 7, 2018

Russia is one of the few member states and parters of the Organization for Economic Cooperation and Development (OECD), in which real per capita GDP will fall by 2060 relative to the benchmark, the United States, according to an OECD reported entitled “Long-Term Prospects: Scenarios for the World Economy, 2060.” Vedomosti has had access to the eport. A source at the OECD confirmed its authenticity while noting it was a preliminary draft.

In the absence of reforms, Russia’s per capita GDP will grow only 0.7% in the next twelve years, predict OECD economists. The stumbling block is low workforce productivity. In recent years, it has not increased at all, and it will accelerate to a mere 0.5% in the period 2018–2030. Another brake on economic growth is poor demography: the economically active and able-bodied segment of the populace has been declining. By way of comparison, due to its positive demographic circumstances, Turkey’s standard of living will increase considerably by 2060 to about three fourths of the figures for the US, write the report’s authors.  In Russia, it will increase to 40% of the benchmark before decreasing slightly.

It is hard not concur with the diagnosis, notes Alexander Isakov, VTB Capital’s chief economist for Russia. Demography and workforce productivity are the biggest constraints on economic growth in Russia.

In his March 1, 2018, address to the Federal Assembly, President Putin promised to increase per capita GDP by 50% by 2025. He said = Russia must firmly gain a foothold among the world’s top five economies by then. Putin meant GDP at purchasing power parity (PPP), Economic Development Minister Maxim Oreshkin explained on the TV program Pozner. According to the IMF, Russia is now in sixth place in terms of GDP (PPP), four percent points behind Germany. The goal is to “bypass Germany,” explained the minister.

The goal can be brought within reach by applying active budgetary (e.g., tax cuts and increases in oil and gas costs) and monetary (e.g., lending) stimuli, says Kirill Tremasov, director of the analytics department at Locko Invest, but this is fraught with great risks.

Without reforms, Russian and the other BRICS countries will slow the growth of the world’s real GDP for forty years beginning in 2019, warn the report’s authors. To accelerate growth, they must increase workforce productivity by reforming governance, increasing the duration of schooling, and reducing trade tariffs.

If during the period 2020–2060, the BRICS countries develop the rule of law (which the World Bank evaluates on a scale from minus two to plus two), increase schooling to the median level of the OECD countries, and decrease trade tariffs to OECD median levels by 2030, the growth of per capita GDP will be 25% to 40% higher than in the baseline scenario. A key factor is governance reforms: combating corruption, improving law enforcement and the judiciary, increasing the efficiency of the civil service, and involving ordinary citizens more actively in politics.

The report notes this is especially important for Russia. Among the BRICS countries, Russia has the worst score for rule of law (-0.8) and the best score for average length of schooling (10.8 years). The Russian civil service has been adapted to the current political system, which assumes maximum centralization and the absence of political competition. Tremasov is skeptical: it is impossible and pointless to reform the civil service without democratizing the political system.


“How Living Standards Will Change: The OECD’s Baseline Scenario. Real Per Capita GDP at Purchasing Power Parity in 2010 Prices (US=100).” The blue horizontal lines represent predicted outcomes for 2018; the red lines, predicted figures for 2060. The countries included in the survey, as  listed from top to bottom, are Brazil, Russia, Turkey, Poland, Italy, France, Great Britain, Finland, Germany, Switzerland, Norway, and Ireland. Source: Preliminary Calculations from the OECD. Courtesy of Vedomosti

In his May 2012 decrees, Putin charged the government with increasing workforce productivity by one and a half times by 2018, but it had increased only by 3.8% as of 2016. Minister Oreshkin listed the obstacles: underinvestment, insufficiently developed infrastructure, and a lack of resources to upgrade productive assets.

Managers do not have a “culture of constantly improving efficiency and productivity,” he complained.

Workforce productivity is indeed the main obstacle to economic growth, but an increase of investments is needed in order to increase it, notes Natalya Orlova, chief economist at Alfa Bank. In 2017, about 50% of the increased investments in Russia were due to the extractive resources sector, although the bulk of GDP is generated in other sectors, says Orlova. Investments in agriculture grew by a mere 1.3%, fell in manufacturing and construction, and the commercial sector crashed altogther, falling 9.7%. Investment growth has been hindered by economic and geopolitical uncertainty, and the government has an ever harder time of reducing that uncertaintlywith sanctions in place, notes Orlova. Business, on the contrary, needs guarantees the rules of the game will not change for a long time.

Growth in productivity is impossible without increased competition, Tremasov points out. It is competition that compels companies to introduce new technology, reduce costs, and improve management. The more intense the competition in a sector, the higher the productivity, he notes, citing the retail trade and metallurgy as examples. Therefore, the main means of increasing economic efficiency is reducing the state’s share in the economy, argues Tremasov, as well as attracting foreign investors, reforming the judiciary, and reining in the security services [siloviki].

Measures to improve the country’s demographic circumstances will bear fruit in twenty-five years, when the corresponding generation enters the labor market, notes Isakov. The authorities should thus concentrate on increasing productivity.  If the market functions smoothly, the difference in productivity between companies in the same industry decreases, he argues, because they borrow technology and methods from each other, while inefficient companies are forced out of the market. In Russia, on the contrary, differences in productivity within industries are some of the highest in the world, due in part to gray sector employment practices, Isakov concludes.

Economic growth could take off if reforms are implemented, argues Orlova. The Russian economy is currently so inefficient that the jumpstart supplied by reforms would be huge.

Translated by the Russian Reader

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