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

Breaking Bad

The Vicious Circle of Bad Governance
Vladimir Gel’man
May 17, 2016

Why is the quality of governance in Russia and some other post-Soviet countries much worse than we would expect based on their level of socio-economic development? According to numerous international assessments of governance, they are sometimes on a par with the poor and underdeveloped countries of the Third World, lagging behind similar countries in Eastern Europe. They are typified by bad governance, whose symptoms are perversion of the rule of law (the unrule of law), endemic corruption, the low quality of government regulation, and ineffective government policies.

Post-Soviet bad governance appears not as a grab bag of discrete, particular defects but as a consequence of the prevailing political and economic order in these countries. Its most vital feature is the fact that rent extraction is the principal purpose and main content of governance at all levels. So the mechanisms of power and governance tend towards a hierarchy (the “power vertical”) with a single decision-making center that seeks a monopoly position, while the autonomy of economic and political actors within the country vis-à-vis the center is relative and can be arbitrarily altered and/or restricted. In turn, formal institutions (constitutions, laws, etc.) are a byproduct of the allocation of resources within the power vertical. They are meaningful as rules only to the extent they contribute to rent extraction. As part of the power vertical, the government administration is divided into organizations competing for access to rent and informal cliques.

Bad governance is the most important means of maintaining this political and economic order. Since the state is governed merely in order to extract rent, corruption in its various shapes and manifestations is an essential device for achieving these goals, while the poor quality of regulation and perversion of the rule of law contribute to the stability of the power vertical. Bad governance acts as a stable but ineffective balance, which is restored even in instances of deep external shocks such as regime change (e.g., Ukraine and Kyrgyzstan), while the state apparatus proves less and less capable of implementing structural reforms for improving government efficiency.

What are the causes of this state of affairs? What the post-Soviet countries have in common has been a coup d’état from within on the part of rent seekers in the administrative apparatus and influential members of the business world personally associated with them. In an effort to privatize benefits and socialize costs in the process of governing, these players have deliberately and purposefully established and maintained inefficient rules of the game. But since their planning horizons are short-term due to the risks of the regime’s being overthrown and the questionable prospects of a smooth succession, they have behaved, in Mancur Olson’s terms, like “roving” and not “stationary” bandits. They plunder the resources of states at all levels of governance, and the term kleptocracy, previously used to describe African countries, comes across not only as an op-ed writer’s gimmick but also as a fair description of the rule of a number of post-Soviet leaders. (In particular, Karen Dawisha analyzes the Russian regime in these terms.) The end result is a vicious circle. The machinery of bad governance has been reproduced under different rulers, and attempts to overcome it (if such attempts are made) have run into strong resistance and with a few exceptions (such as Georgia during the presidency of Mikheil Saakashvili) have produced modest outcomes in terms of the quality of public administration.

In the work of researchers and the jargon of experts and consultants, bad governance (not only in the post-Soviet countries) has usually been associated with the “poor quality of institutions” and an “unfavorable institutional climate.” Although the poor quality of institutions is an attribute of bad governance, it is merely a consequence of the poor quality of regulation and the absence of the rule of law, and not the cause of the phenomenon. Institutions themselves are the outcome of the balance of forces and the interests of key players. Substituting the diagnosis of a disease with a description of one of its symptoms leads to incorrect courses of treatment. The desire to change only formal institutions by borrowing advanced foreign know-how or cultivating the best specimens on domestic soil without fundamentally rethinking the political and economic order as a whole either produces no improvements or even changes the situation from bad to worse.

The emergence and establishment of authoritarian regimes in the post-Soviet countries has generated an environment that promotes bad governance. The rare examples of high-quality public administration in autocracies may be briefly summarized by Dani Rodrick’s statement that for every Lee Kuan Yew in Singapore there are lots of Mobutus in the Congo. But electoral authoritarian regimes (such as Russia) are the worst option in terms of bad governance. They are typified by the politicization of public administration and economic management, which ranges from mobilizing voters at their workplaces to turning the state apparatus into a political machine for ensuring that voters vote for the ruling groups. As a consequence, a country is unable to develop decent incentives for improving the quality of public administration, in particular, regularly rotating senior personnel and making the upward career mobility of officials depend on achieved outcomes. On the contrary, the power vertical encourages officials to demonstrate political loyalty to the detriment of effective administration.

The paradox of post-Soviet countries is that even political regime change per se does not lead to a rejection of bad governance. On the contrary, it might even exacerbate the disease. Thus, although the fall of the Yanukovych regime in Ukraine in 2014 was followed by the emergence of a competitive democracy, the quality of public administration has not significantly improved since the days of Yanukovych. Often accompanied by a popular mobilization, the conflict among elites preserves the predatory nature of governance, involving rent extraction, even if it does lead to a change of ruling groups. The politicization of government and the economy and the incentivizing of loyalty at the cost of efficiency are inherent to post-Soviet competitive democracies almost to the same extent as electoral authoritarian regimes. However, given a favorable combination of other political conditions, democratization can open up a window of opportunity for the fundamental renewal not only of ruling groups but also the the entire state apparatus by breaking up previous hierarchies and effecting a series of structural transformations that can significantly reduce the detrimental effects of bad governance, if not vanquish it. Only in such cases does regime change not turn into a bad infinity that merely maintains the status quo in government. On the contrary, the entrenchment of ruling groups, limitation of vertical mobility, and restriction of channels for recruiting elites are means of maintaining bad governance: incentives for efficient management of the state and the economy are seriously undermined for the long term.

Although it is unrealistic to expect a rapid rejection of bad governance, numerous experts (e.g., Daniel Treisman) have suggested that as a result of long-term, stable economic growth and a generational change of leaders, the demand for rule of law and increase government efficiency would grow, thereby encouraging a clampdown on bad governance in the course of democratization, within a couple of decades. But how justified are these expectations when it comes to post-Soviet countries? There are no grounds for ruling out a different sequence of events. Governments can continue as before to handle the most serious challenges, avoiding disastrous failures, while maintaining the principles of bad governance unchanged. The emergence of a quasi-hereditary kleptocracy and a succession of corrupt and inefficient governments, focused on the extraction of rent, can put an end to any attempt to limit bad governance. Continuing the medical metaphor, it is worth noting that if a patient burdened by a serious illness not only ignores the advice of his doctors but also leads an unhealthy lifestyle, thus exacerbating his health problems, death is probably inevitable. Unlike individuals, however, states and societies do not die and disappear from the map of the world, however badly they are governed. Dominated by bad governance, they continue their existence, an existence that is often senseless, useless, and hopeless, complicating and worsening the lives of their citizens and increasing the risks for other states and societies.

The author is a professor at the European University at St. Petersburg (EUSP) and Helsinki University. The article is based on the report “The Political Basis of Bad Governance in Post-Soviet Eurasia: Outline for a Research Agenda,” published by EUSP Press. Translated by the Russian Reader. Photo by the Russian Reader