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Putin’s Third Term: “Potemkin reform”

Posted by democratist on May 2, 2012

May 2nd 2012,

In our last article, Democratist wrote about the concept of “international society as homogeneity”: The basic idea is that states become more like each other over time because of the spread of ideas or ideologies at the international level; for example, the French revolution of 1789 popularized the ideas of nationalism, democracy and a more centralized state, which then became influential throughout Europe in the following two centuries. At around the same time the rise of the British Empire underscored the importance of science for national power through the industrial revolution.

As states compete against each other they promote ideas like nationalism, mass education, investment in infrastructure, and innovation to improve their international position: In each case the elite seeks to protect itself from the ultimate threat of military defeat through modernization.  As a result, states begin to resemble each other not only because of globalization or the exchange of ideas, but because their rulers have a vested interest in becoming more “modern” in order to protect their legitimacy at home, and compete internationally.

In many countries, this process has contributed to the adoption of democracy. In Britain for example, the extension of the franchise to the working class in 1918 can be seen, at least in part, as a reaction to the 1917 revolution, and fear of its influence on soldiers returning from the trenches by the British government.

In Russia there at least two major contemporary sources of this kind of international pressure on the state. The first is the idea of democracy itself as a form of legitimation: Internationally this pressure has grown sharply over the last twenty-five years. Domestically, it remains weak, but is growing as a result of flawed elections and government intransigence.

The second major source of pressure (and one of more immediate concern to the leadership) is the need for scientific innovation, especially in terms of military applications. This is of course not new; Russia has been trying to catch up with the west since at least the time of Peter the Great. However, since 2008 we have seen a resurgence in this issue, as it has become apparent that Russia is falling further behind.

Indeed, this problem was the main driving force behind the “Russia 2020″ programme: First outlined in a speech given by Vladimir Putin in February 2008 (i.e just before the start of the Medvedev Presidency), “Russia 2020″ suggests three alternative scenarios, in terms of the potential trajectories of Russia’s economic development;

  • The ”innovation” scenario. This presupposes the development of a national innovation system, competitive human capital, and regional development centers, and requires a comprehensive reform and investment programme.  It foresees an average annual GDP growth of 6.5%.
  • The “energy and raw materials” scenario, which is based on faster development and modernization of the extractive sector, and projects an average annual growth of 5.3%.
  • The ”inertia” scenario,” which assumes no significant improvement, and therefore forecasts an average growth rate of 3.9% per year.

In our opinion, while over the course of his presidency Dimitry Medvedev has genuinely attempted to put some flesh on the bones of the proposed “innovation” scenario (tax breaks, technology parks, abolishing import duties on high-tech equipment, trying to encourage foreign investment), over the last couple of years it has shown increasing signs that it is encountering resistance from within the ruling class.

The reason for this impasse is that many in the nomenklatura are opposed both to economic reform (which threatens their privileged positions) and even more so to the implied political changes which would be the backbone of an innovative economy.

In this regard, we consider Putin’s return to the presidency on 7th May as indicative of a broader reassertion of power by these interests, and an indication that they remain eager to avoid the potentially “destabilizing” effects of the political and economic reform required to both attract increased investment, and meaningfully achieve the “innovation” scenario.

Instead, they appear to be hoping that a continued recovery in hydrocarbon prices over the next few years will allow Russia to return to a greater emphasis on the second, ”energy and raw materials” development path, with its promise of a (still robust) 5.3% average annual growth.

They may or may not achieve this goal. But while such growth rates are impressive, especially when compared with a still crisis-ridden West, the inability to modernize which this choice implies suggests serious problems for Russia’s military capabilities: In the absence of innovation from within the domestic public or private sectors or from foreign investors, and with a continuing “brain-drain”, Russia’s aging cadre of engineers and largely soviet-era industrial base are falling behind.

As Alexander Golts wrote in Yezhednevny Zhurnal on 24th April, the leadership is now worried, “that the technological revolution sweeping the world could devalue their most important legacy from the Soviet era – its nuclear arsenal.” However, as he also correctly argues, “any serious reform in education or the defense industry “will eventually run up against Putin’s unyielding power vertical”.

Pressure from the international level is therefore increasingly making itself felt in Russia’s domestic politics: The opportunities for democratization, liberalization and innovation exist and all three are interconnected. However, the threat they pose to key vested interests make all equally unlikely. Instead we will more likely see “Potemkin reform”; pre-selected candidates for gubernatorial elections and a multiplicity of insignificant parties instead of democracy; promises, corruption and profligate spending instead of innovation.

But while you can ignore reality, you can’t ignore the results of ignoring reality: In the event that the Russian military were to face a humiliating defeat or serious setback over the coming years as a result of its increasing comparative backwardness, while growing demands for political change remain unanswered, the domestic political impact will be devastating.

Posted in Autocracy and Innovation, Russian Liberalization | Leave a Comment »

Russia 2012: Mr. Kudrin takes a (semi) stand.

Posted by democratist on April 23, 2011

23rd April 2011,

Some fascinating statements from Russian Finance Minister, Aleksey Kudrin at a meeting of the Board of the Russian Union of Industrialists and Entrepreneurs on 21st April. These have so far received limited coverage in the Russian press, but we have pieced them together from reports in Izvestia and elsewhere.

Kudrin said he considers any GDP growth below 3% as tantamount to stagnation, and 3% -4.5% as “minor, unsteady” growth, because at less than 4.5% growth companies would have no time to update their fixed assets.

He stated the Russian economy is currently growing at about 3% and that investment growth is currently 8% - compared with the 30% annual increase he believes is required for modernization.

While the price of oil has climbed about 30% so far this year to $124 per barrel (auguring a dramatic improvement of Russia’s fiscal situation) Kudrin believes that a further increase in oil prices will have a negative effect on the Russian economy through inflation, and that petrostate model of development “has failed.”

He explained that the government has prepared several hypothetical scenarios for the economy, which include various possible price levels for oil, but in all the scenarios, the growth rate remains the same. He stated,”This is confirmation of the unfortunate fact that the price of oil, which before the crisis was an impetus for growth, is no longer such.”

Kudrin’s position is rather telling when compared with Putin’s statement to the Duma the previous day. Putin stated growth would be 4.2% this year, and much of his speech seemed to consist of assurances to various sectors of society that the state would soon lavish spending on them.

The model reflected in Putin’s speech then could be characterised as “back to 2008.” It is dependent on a continued growth in oil prices (or at least a continuation of the current price), and the distribution of the resultant wealth throughout Russian society in a nation-wide divvying up of the spoils. Despite some lip-service to technocratic modernization, there is little prospect that this is going to take place, leading to both stagnation and a continued withering of Russian industry, not least the high-tech sector, including military innovation.

In this light Putin’s position appears shortsighted – and Kudrin is strongly aligning himself with a liberalising agenda, without (as yet) openly backing Medvedev.

Will he go that far? Or is this just political manoeuvring designed to have a moderating influence on Putin? Either way Kudrin is levering himself into a more influential position which will become more evident and important as we move towards Parliamentary and Presidential elections over the next few months.

Posted in Autocracy and Innovation, Democratization, Hydrocarbons, Liberalism, Russia 2012 Elections, Russian Economy, Russian Liberalization, Russian Politics | 3 Comments »

Democracy and Innovation: Mr Putin’s Very Very Large White Elephant.

Posted by democratist on April 21, 2011

21st April 2011,

Apart from its political implications, the most interesting thing about Prime Minister Putin’s speech to the Duma yesterday is what he said with regard the future of Russia’s five trillion rouble military innovation programme, and how this optimistic vision conflicts with the current state of the Russia defence sector as we see it.

Democratist was especially interested to hear Putin say that, while Russia will need to almost completely rearm and re-equip its armed forces over the next decade (implying that similar attempts over recent years have been less than successful), “I am absolutely convinced the modern weaponry for our army and navy can and must be supplied by the Russian defence industry. Obviously, certain technology and weapons types can, and probably should be purchased abroad. But we need to understand that nobody will sell us the most advanced and latest generation technology.”

As regular readers will know, since we set up shop almost a year ago, Democratist has considered Russia’s increasing national inability in the sphere of (especially military) technological innovation as one of the key motivating factors behind the Russia 2020 ”modernization” drive. While superficially novel, this desire for modernization reflects a historical preoccupation with the importance of military competition against comparatively advanced western nations, that runs throughout modern Russian and Soviet history at least as far back as Peter the Great, and which has provided the impetus for various spurts of attempted technological modernization.

However, elite and popular resistance to liberalisation combined with the expectation (and now realization) of a rise in hydrocarbon prices over the last few years have meant that genuine and deep systemic economic reform was always going to be something of a non-starter: From our perspective, the Medvedev liberalisation project always had more to do with encouraging (mostly state-partnered) foreign investment than the introduction of meaningful, economy-wide reform.

Subsequently we have argued that, in the general absence of a culture of innovation from within the domestic Russian public or private sectors, or from foreign investors, and with a continuing “brain-drain,” as many of Russia’s most talented young people leave to pursue careers abroad, the State would seek the innovation it has historically seen as essential in order for it to remain militarily competitive, through an enhanced reliance on espionage. This seems set to remain the case despite increased arms sales to Russia by European firms because, as Putin has effectively admitted the West remains fundamentally unwilling to sell the Russians their cleverer toys – lest they eventually find themselves on the wrong end of them.

However, even if (what is probably a much weakened) SVR or FSB still manage to come up with the goods in terms of stolen intellectual property, Democratist remains far from convinced by the Prime Minister’s claims that the (still largely Soviet-era, and extraordinarily corrupt) Russian defence sector will be able to supply the armed forces with modern weaponry in the numbers required any time soon.

In short, our prediction is that, without a sharp change of tack, the next decade will see a the technological gap between the Russian armed forces and those of the West widen, despite these proposed investments.

Posted in Autocracy and Innovation, Russian Corruption, Russian Economy, Russian Espionage, Russian Military | 3 Comments »

Nomenklatura has little interest in Russia’s WTO accession.

Posted by democratist on April 12, 2011

12th April 2011,

At the beginning of the year, Democratist commented on Russia’s chances of joining the WTO, following an agreement with the EU in December 2010 which had supposedly brought accession closer to reality.

At the time we said,

“…there remains a great deal of protectionist sentiment domestically within Russia. This is best exemplified by Putin’s own attempts last year to modernize domestic industry through a renewed emphasis on industrial policy (to be funded by raw materials rents). A lack of cash seems to have put paid to that strategy for the time being, but Democratist maintains that a rise in raw materials prices beyond a certain point will likely prompt a shift back towards protectionism.”

And lo and behold! With oil heading up towards the $125 per barrel mark, yesterday’s Vedmosti reports  on a recent spot of petulance from Vladimir Putin with regard to WTO (at a conference in Saint Petersburg last Friday). Apparently, “Russia is not going to meet the demands extended to WTO members before becoming a member itself…We are not going to observe anything of the sort as long as we are not members. Period.”

But as the paper ruefully notes, in relation to Russia’s (frequently diverted) path towards possible WTO membership over the last decade; “the government of Russia and Putin himself bear at least part of the blame for the state of affairs where Russia cannot make use of any WTO advantages. As happened on several occasions already, the moment Russia approached the coveted membership, Putin pulled off something unexpected that caused a delay or detour…All speculations on how Russia is kept out of the WTO are really a smoke-screen designed to conceal the lack of genuine interest in the membership. Russian businesses keep seeing the WTO as a threat. The Russian leadership has but a dim awareness of the advantages that go with the membership but know that at the very least it will require transparency of the kind Russia is not accustomed to. There is no powerful group of interests in Russia interested in the WTO membership.”

WTO membership, and the huge boost it would imply for liberalization, is not an option unless the nomenklatura decides it is serious about economic reform. But as long as the oil price remains high there is no incentive. Why risk “instability”, when you can just divvy up the spoils with your old chums from the KGB – with enough left over to keep the proles in line, until the next crisis?

It is this old guard whose opinions count, and which will still count after the Presidential elections, regardless of whether Putin or Medvedev “wins.”

Posted in Autocracy and Innovation, Elections, International Political Economy, Liberalism, Russia & the WTO, Russian Liberalization | Leave a Comment »

The FSB and the Web: Out innovated, yet again.

Posted by democratist on April 8, 2011

8th April 2011,
A great piece in www.Gazeta.ru today, brought to our attention by Miriam Elder.
It would appear, on the basis of a recent statement from the Ministry of Information that the Russian Security Service (FSB) is currently unable to effectively monitor communications on Gmail, Hotmail, Skype (and presumably other similarly protected sites) because the encryption built into these systems has become too sophisticated to allow for easy state snooping.
Apparently, the FSB now considers these services a threat to national security, and would like to have them banned (although this remains unlikely, for the moment).
If this story is true (rather than some kind of sneaky FSB bluff) it means that Russia’s Signals Intelligence (SIGINT) outfit, the “Service of Special Communications and Information” (part of the FSB since 2003) is unable to easily break into commercially available Western cryptography with the equipment currently at their disposal.
Our guess is that it almost certainly is true - and would help to explain (for example) the FSB’s repeated inability to prevent bomb attacks in Moscow over the last few years.
And if the FSB can’t crack the commercial stuff, what are the odds they can still break into the secure communications systems of Western governments and militaries on a regular basis (normally one of the principle tasks of such agencies)?
More fundamentally, this announcement yet again underscores that, while the Russian government is continuing to make a concerted attempt to drive innovation through increased funding, corruption – both within the government and the wider economy, is slowly degrading even those parts of the state which the regime has sought to privilege.
As we saw last June, the SVR has been penetrated (probably repeatedly) by the CIA in recent years, and has now resorted to using “super-spy” Anna Chapman as a domestic propaganda tool - replacing real success with a pale fictive copy. As for the military industrial complex, while weapons designers are still coming up with innovative ideas, the state of the defence industry is such that it is unable to reproduce these systems in the numbers required. In the wider high-tech sector, government policy to encourage growth through the creation of large state controlled agglomerates – especially in armaments, the nuclear industry and aerospace – has not been effective, and such industries continued to account for only about 3% of GDP in 2008.
Over the last few years then, Russia been unable to modernize, but it also now seems more handicapped than ever in its efforts to catch up with the West through espionage (a strategy employed, albeit at unsustainable cost during the final phase of the cold war - and which continues today), or to convert stolen, or new ideas into usable weapons or products in significant quantities.
In terms of the internet specifically, the state appears to be using amateur “patriotic hackers” to carry out DDoS attacks on opposition websites such as LiveJournal, because they dare not attack them directly under current political circumstances. But while LiveJournal in particular may be open to greater direct pressure in the future (a fact Russian bloggers might want to consider), this recent statement implies a deeper, a more serious technical malaise at the FSB than has been so far publicly apparent.
The Russian state is becoming increasingly out-innovated in terms of its ability to compete with the West, to monitor its citizen’s communications, and to control the information to which they have access. Structural international pressure on Russia to reform is still somewhat limited for the time being, but seems likely to grow more intense over time.

Posted in Autocracy and Innovation, Russian Economy, Russian Espionage | 3 Comments »

The Russian Military Industrial Complex: An Unresolvable Discrepancy.

Posted by democratist on March 15, 2011

15th March 2011,

In our last article in our “Democracy and Innovation” series we looked at Crane and Usanov’s analyis of the relationship between Russian government policy and the main internationally competitive high-tech sectors of the Russian economy.

Among their (very measured) conclusions were that current policy to encourage growth in these industries through the creation of state-controlled agglomerates had not been effective, and that a favourable outlook was largely dependent on the extent firms were integrated with, and open to, the global economy. However, prospects for the Russian defence industry were limited in this regard, precisely because of its insularity.

In line with the “liberal” innovation model outlined by WolfDemocratist maintains that, while the Russian state is continuing to make a concerted attempt to drive innovation through increased funding and R&D, contemporary corruption, lack of competition, problems with the rule of law and government accountability have all had a demonstrable impact on the ability (and willingness) of many Russian high-tech firms to innovate, commercialize their ideas, expand, and reach their full potential.

With regard to the military-industrial complex more specifically, in an article published todayin the World Politics Review  Dr. Richard Weitz (also of the Hudson Institute) provides some additional and very relevant detail about how such problems are affecting Russia’s current proposed, decade-long $650 billion rearmament programme (supposedly set to include the procurement of 100 ships, 600 aircraft, and 1,000 helicopters).

Here’s a sample;

“….although Russian designers can still develop first-class weapons, Russian defense companies — which have yet to recover from the traumatic disintegration of the Soviet military-industrial complex — remain unable to manufacture large numbers of some advanced systems. As a result, the Russian government has made the unprecedented decision to purchase expensive Western military equipment.”

“…the record of recent SAPs [State Armaments Programs] is not encouraging. They all envisaged providing the Russian armed forces with hundreds of new weapons, but their execution was undermined by insufficient financing, the inefficient and ineffective Russian defense sector, and pervasive corruption.”

“Estimates suggest that one-third of Russia’s defense companies are bankrupt, while another third desperately need an infusion of financial and human capital to modernize their aging production lines and work force. Pending modernization, many defense firms will prove unable to design and produce sophisticated weapons without frequent cost overruns and production delays.”

“…according to some observers, corruption absorbs as much as half of all Russian defense procurement spending due to the irresistible opportunities for graft that exist behind the veil of military secrecy. Serdyukov’s surprise 2007 appointment as Russia’s first civilian defense minister reflected the Kremlin’s hope that, as an outsider, he might be more willing to tackle defense inefficiencies and corruption. Unfortunately, some bad practices have become so ingrained in Russia’s defense sector that they could take more than a decade to root out. “

From Democratist’s perspective, what is most immediately interesting about what Weitz says is that, while Russian weapons designers are apparently still coming up with the goods in terms of innovative ideas, the state of the country’s defence industry is such that it is unable to reproduce a proportion of the required systems in large numbers.

We see this inability as being at the core of the Russia’s “innovation deficit”; it isn’t that the ideas and the creativity aren’t there – they are. But the unreformed Soviet-era military-industrial complex lacks the competition, investment and flexibility that an advanced industrial economy – and an advanced defence industry require.

In our opinion, this unresolvable discrepancy between design and finished product, between planing and implementation, and subsequently in Russia’s military position in relation to the West (and therefore also the desirability of her military exports) can only become wider in the future, given the current politico-economic system.

Posted in Autocracy and Innovation, Russian Corruption, Russian Economy, Russian Military, Russian Politics, Russian Science | 3 Comments »

Policy and innovation: A more detailed view.

Posted by democratist on March 14, 2011

March 14th 2011,

So far in our “Democracy and Innovation” series, Democratist has outlined the liberal case that innovation generally requires the development of a creative and competitive culture, which must in turn be based on democratic government and the rule of law; we have briefly explored Niall Ferguson’s argument that the command economy led to Soviet economic stagnation in the 1980′s which, combined with an unsustainable levels of defense spending in order for it to be able to compete with the (more innovative and competitive) West, drew it inexorably towards collapse;  and we’ve looked at Kolesnikov’s argument that Medvedev’s Skolkovo project will not solve Russia’s underlying problems in relation to innovation, because it does not include an element of political, or systemic economic reform.

Now let’s take a closer look at Russian government policy and its relationship to the most important internationally competitive sectors of the wider Russian economy, so as to establish a more detailed picture ofthe key problems facing these sectors, and how they have been affected by the way the country is governed.

A good starting point here is Crane and Usanov’s article “Role of High Technology Industries,” in Aslund, Guriev & Kuchins’ (Eds.) Russia After The Global Economic Crisis. (CSIS, 2010).

Crane and Usanov begin by noting that both Putin and Medvedev have envisioned increased output from high-technology industries as driving Russia’s future economic growth, and (thanks to the massive and unsustainable funding highlighted by Ferguson) that the USSR passed on to Russia a large cadre of well-trained scientists and engineers, and a highly developed system of national laboratories and research institutes, capable of building sophisticated machinery, such as the world’s first satellite (Sputnik), nuclear weapons, advanced fighter aircraft and intercontinental ballistic missiles.

However, the number of active research laboratories has fallen sharply since the Soviet period, and the aging Soviet-era industrial base still forms the core of Russia’s current high-tech industry: Software is the only substantial high-tech sector to have emerged in Russia since 1991.

Crane and Usanov’s article explores the current state of Russia’s software, nanotechnology, nuclear, aerospace and armaments industries in turn;

Software

Software has been a post Soviet success story, but is still operating on a small-scale (gross revenues of about $5.5 billion in 2008 compared with $60 billion in India). It benefits from its young workforce, low entry costs, absence of legacy assets and small size (as the government has not yet bothered to regulate it).

However, “…the greatest barrier to the development of the industry is thuggery and corruption that Russian entrepreneurs face from the police and other government officials. Bribing inspectors, tax collection agents, and the police places a substantial burden on companies…. This climate of intimidation and fear discourages entrepreneurs from expanding their businesses and puts a premium on moving assets outside of Russia.”

Nanotechnology

This field is considered a key technological priority by the government, and several well-funded programmes have been set up by the state to support it.  Russian scientists have been relatively productive in theoretical research, but performance has not been as strong at the commercialization stage of the innovation process. Russia has only produced 0.2% of the total of global patents related to nanotechnology (2008).

Nuclear

In 2007 the civilian and military sides of the industry were integrated into the State Atomic Energy Corporation (Rosatom – $11.7 billon of sales in 2008). Rosatom’s subsidiary Atomenergoprom is one of the world’s largest nuclear companies, and Russia has a  strong competitive position in the nuclear fuel cycle. The Russian state has continued to invest in R&D, funded construction of new plants domestically, and provided strong political support for projects abroad. Nuclear power and related industries are one of the few high-tech sectors in which Russia has a serious R&D base and can compete on the world market.

Aerospace

Russia remains a world leader in the production of space launchers, and now the US Shuttle has been retired, Russia’s Proton rocket remains the only well-tested rocket capable of ferrying people and heavy payloads into space. By contrast, Russian communications satellites have not been competitive internationally. Wider use of GLONASS, is hindered by inferior quality and the higher cost of receivers. Other satellites tend to be for military use only. Soviet aircraft were never competitive internationally, and there has been little improvement since the Soviet period (although a number of recent foreign partnerships may change this).

Armaments

During the 2000′s exports grew rapidly, especially to India and China (which accounted for about 70% of total sales). The Putin administration made a concerted effort to consolidate the industry by creating large holding companies. This trend has continued under Medvedev, and has had the negative consequence that prices have risen domestically, as a single seller makes it more difficult for the government to negotiate lower prices.

Conclusions 

One of the main conclusions of this study is that Russian government policy to encourage growth in high-tech industries through the creation of large state controlled agglomerates – especially in armaments, the nuclear industry and aerospace – has not been very effective, and such industries continued to account for only about 3% of GDP by 2008.

This is fully in line with what the liberal model of innovation would predict; while the Russian state is making a concerted attempt to drive innovation in many of these fields through increased funding and R&D programes, the evident lack of competition stemming from the creation of agglomerates, problems relating to corruption, the rule of law and government accountability, have had a demonstrable impact on the ability of many firms within Russia’s high-tech sector to innovate, commercialize their ideas, expand, and reach their full potential. This is having a gradual impact on the ability of many of these firms to compete internationally.

Crane and Usanov believe that those companies or sectors that are most integrated with, and open to the global economy have the most favourable outlooks; software, scanning probe microscopes and uranium enrichment. They suggest,  “The record of the past two decades indicates that future success in these sectors will depend on increased integration into the global, especially European economy. In aerospace, sales of rockets, aircraft components, aircraft design services, and the new Sukhoi Superjet have depended on collaborating with foreign manufacturers. Prospects for Russia’s armaments companies are dimmer because they remain much more insular than firms in other sectors.”

Posted in Autocracy and Innovation, Democratization, International Political Economy, Russian Corruption, Russian Economy, Russian Liberalization, Russian Military, Russian Science, Soviet Economy, Soviet Union | 9 Comments »

Democracy and Innovation: Mevedev’s Skolkovo Illusion.

Posted by democratist on March 10, 2011

 

10th March 2011,

In our last article, Democratist looked at Niall Ferguson’s insightful analysis of the impact of autocratic government and the command economy on the Soviet Union, and the effect this had on the USSR’s ability to compete with the United States, and its eventual collapse.

But the Soviet Union has been history for almost twenty years. The more skeptical among our readers will doubtless be thinking, “The Command economy may be finished, but surely the Chinese example shows that authoritarian capitalism can come up with the goods just as well as democracy, if not better. Why shouldn’t Russia follow an authoritarian capitalist model?”

One obvious answer to this question is that the Russian elite has been following their own interpretation of just such a model since 2000, and that the results in terms of Russian economic diversity, industry and technological capability have been poor at best. 

While economic growth was indeed strong for much of the last decade (and is returning) this has been largely a result of Russia’s vast natural resource endowments, which account for around 70% of exports, and which played an important role in attracting the financial flows that boosted other sectors such as construction and the retail trade: Given easy access to money from hydrocarbons after 2002, and an ingrained fear of the social dislocation that would arise from the introduction of a genuine market economy, with a couple of notable exceptions at the start of Putin’s first term in office, the nomenklatura came to largely ignore the need for economic reform between 2000 and 2008.

One of the results of this has been that the Russian industrial and technological base has stagnated; while Soviet science and technology were inefficient and generally lacking in innovation, they at least had the advantage of being seen as strategically important and prestigious: Under the current system a mixture of cynicism and deep corruption, misjudged industrial policy and protectionism have set in, and while recently the government has again come to see science and technology as strategically critical, they face the problem that (following the nomenklatura’s own example) many of their brightest young people seem more interested in milking the state than serving the nation as scientists. Subsequently, the old Soviet engineering culture is slowly starting to die out.

But, as Andrey Kolesnikov, a columnist for Novaya Gazeta wrote in an excellent article for Open Democracy last July, even since 2008 President Medvedev has felt obliged to restrict his plans for Russian innovation within the confines of the “ghetto” of the Skolkovo project, and in a manner heavily reliant on foreign investment, as opposed to domestic innovation.

According to Kolesnilov, Medvedev is attempting, just like Peter the Great, Stalin, Khrushchev and Brezhnev before him, to import technological know-how into Russia from the West, lest the reforms necessary for the development of an innovative culture at home threaten Russia’s social order, and the existing power structure.

But as we saw in our piece about the roots of innovation, genuine innovation (as opposed to re-engineering the ideas of others) can only come from the kind of flexible, creative and inventive culture that emerges from a competitive market economy, backed up by democracy and the rule of law.

Kolesnikov states that the results of this are that;

 “…currently just over 9% of Russian enterprises invest in innovative technology. A comparison: in Germany, the number is eight times that. Fundamentally new Russian products account for just over 70 billion roubles (£1.5 billion). This was 0.4% of the total volume of industrial production in 2007 (in Finland, the figure was 16%). The percentage of innovative production in the total volume of sales in Russian industry is around 5%. Put another way, Russia is backward. 98.5% of patentable innovations are created by 15% of the world’s population, and Russians do not number among them (we are talking in the main about OECD countries)…And this technological gap can only get worse, since the speed of progress is increasing with each year: if in earlier times, moving from one technological generation to another was a matter of 10 or 15 years, now we see that, in aviation at least, this is happening every five years (my source of data are the four 2009 editions of Moscow’s Higher School of Economics Foresight magazine).”

In the first article we posted to Democratist in May last year, we quoted Dimitry Trenin as saying, “The Kremlin …[has been]… forced to come to terms with the fact that Russia cannot modernize on its own and that it needs Western investment and strong business partnerships with the West.”

But upon reflection, even if that partnership were to bear fruit in Skolkovo this still would not really resolve the broader problem of the stagnation of Russian science and technology: That kind of change implies a deeper political and cultural shift.

 

Posted in Autocracy and Innovation, FDI, International Political Economy, Liberalism, Russia - US Relations, Russian Corruption, Russian Economy, US - Russia | 3 Comments »

Democracy and Innovation – A Cold War Case Study

Posted by democratist on March 9, 2011

March 9th 2011, 

So we have established a liberal theoretical model of the interrelationship between democracy and innovation.

But before we look at how a lack of democracy and rule of law have effected contemporary Russia, let’s take a step back, and explore to what extent the historical presence/absence of democratic government, the market economy, competition and property rights might be considered as factors in US-Soviet economic competition during the Cold War, and in the eventual collapse of the Soviet Union. 

Fortunately, we have some very high quality research close at handProfessor Niall Ferguson gave a talk on “The Political Economy of the Cold War” at the LSE in October last year. The aim of this lecture was to chart the competition that existed between the US and Soviet economic systems, and assess how far the fall of the USSR was economically pre-determined.

As Ferguson  points out;

  • Soviet growth rates declined dramatically after Khrushchev’s period in office, and more importantly, total factor productivity (a measure of the efficiency of the utilization of economic resources) plummeted to the point that Soviet factories eventually became value subtracting (the raw materials were worth more when they went into the factory than when they came out as finished products).
  • Price controls and a planned economy fundamentally did not work, because in the absence of market signals resources were grotesquely misallocated, so that for example, steel consumption was four times higher in relation to GDP in the Soviet Union than in the United States. Monstrous inefficiency was in fact a predictable consequence of economic planning.
  • The only thing that kept the Soviet show on the road after 1969 was the rise of the oil price on international markets.
  • Corruption was endemic to the planned economic system because incentives were completely misaligned. As Paul Kennedy correctly argued at the time,  the Soviet Union crippled its economy with its excessive defence expenditure. Even in 1991 the USSR was still spending 14% of their GNP on the military in an attempt to keep up with the US (which was spending 5%).
  • Comparing the rate of Soviet growth in total factor productivity with the major Western economies, and particularly with the West European economies, where productivity grew rapidly even in the 1970′s, it’s clear that the USSR was in serious trouble after 1973. By the end of the Cold War Soviet GDP was probably about 36% of the US level.
  • In order to match the (three or four times  larger) US economy in an arms race that was conducted at every level, from space to espionage, the Soviets had to spend a significantly larger portion of GNP on the military. A reasonable figure is that even on the eve of collapse the defense budget was 14% of GDP, while the US was averaging about 5%.

The Soviet experience after the late 1960′s therefore shows the devastating impact of autocratic government, a command economy, along with no competition or property rights on the economy of the USSR.

It also demonstrates that how by the early 1980′s, as a result of economic stagnation (combined with a huge temporary cash injection from oil exports in the early 1970′s), the USSR came to spend an unsustainable proportion of its GDP on military competition with the US.

At the same time the United States and Western Europe were able to maintain economic growth while keeping military expenditure comparatively limited (as a proportion of GDP). The USSR had to spend so much on their military to keep up, that this further compounded their already serious economic problems, leading inextricably towards eventual collapse.

Posted in Autocracy and Innovation, Soviet Economy, Soviet Union | 2 Comments »

Democracy and Innovation: the Liberal Model.

Posted by democratist on March 8, 2011

March 8th 2011,

As many of our readers will be aware, Democratist is fascinated by the interrelationship between democracy, economic growth, and scientific innovation.

We have often suggested that autocratic rule in Russia (and its attendant corruption) is having a devastating (and continuing) impact on Russian industry and technology.

Recently however, we decided to look at this question from a slightly different perspective. Instead of saying what we think is wrong with the Russian government, and the impact this is having on Russian S&T, we decided to go back to basics a little and look at what actually it takes for a country to develop an advanced industrial economy, and a flexible, creative, inventive culture.

We have found a good general explanatory model of the social, political and cultural basis of innovation in Why Globalization Works (Yale, 2004) by Financial Times chief economics commentator Martin Wolf. We will call this the “liberal model.”

Wolf writes that the historical record suggests that the really key thing you need to promote an inventive culture is a market economy, backed up by the rule of law.

As Wolf states;

“The liberating technological changes of Promethean [i.e. technological] growth did not emerge from nowhere. They reflected a new way of organizing the economic activities of society as a whole – a sophisticated market economy with secure protection of property rights. Unshackled from the constraints of tradition and driven by hope of gain, economic actors were tied by competition to the wheel of what the great Austrian economist Joseph Schumpeter called “creative destruction.” To achieve success in their battles with their competitors, businesses have been driven to exploit the ever burgeoning power of technology and science. Within a market economy the hope of gain and fear of loss drive inventors and innovators to apply new ways of doing things, or to produce new products.”

But how does democracy fit in here?

First of all, Wolf explains that democracy has the same cultural roots as the market economy: historically, protestant culture put an intrinsic value on all individuals, and moulded them to accept personal responsibility for their actions. Moreover, this was a key factor in promoting the initial development of liberal political and economic institutions in countries such as Great Britain (although evidently the post-1945 record demonstrates that their implementation is by no means restricted to protestant countries).

As Wolf explains;

“The bedrock of a liberal society is, as John Locke argued in the seventeenth century, the right of all individuals to own and use property freely, subject to well-defined, law-governed constraints. A liberal society is therefore a commercial society. But freedom to seek one’s own way in life, outside the boundaries of caste, class, community or, more recently of gender, cannot be restricted to economic activities alone. The culture of a liberal society is, for this reason, inimical to established hierarchies of power or opinion. It is no accident that commercial societies came to consider freedom of thought and expression of great value. A merchant is a practical man who must make rational judgements about the world, not least the risks he runs…The combination of practicality, rationalism and freedom of inquiry became the basis for the West’s greatest achievement – modern science. It is again, no accident that science reached its greatest flowering in a commercial West.”

If individuals are to be free, they need protection both by – and from – the state. For individuals to enter into long-term investments (which promote strong growth and innovation) they need to be able to trust each other, and the state. The condition for such confidence is normally expressed as the rule of law. This is a key driver of both economic growth and scientific innovation.

Historically, states which were both strong and beneficent emerged from a combination of forces including regulatory competition and internal representation; Regulatory competition developed from the multiplicity of competing states in medieval Europe. But;

“Regulatory reform is not enough. An absolute monarch may still seize the wealth of his subjects or default on his debts when his dynasty is threatened. Secure freedom requires governments interested in the long-term health of their countries. The best solution is a constitutional democracy with representative parliaments – government accountable to the governed. Such a democracy must be constitutional, that is law governed. It is not enough to move from the tyranny of one person to the majority.”

So democratic (or at least meaningfully representative) government an institutional prerequisite, according to the liberal model. This form of government will be accountable and therefore have a high degree of interest in the long-term health of the country it governs.  The rule of law is another sine qua non of long-term investment, the development of a market economy, and a creative competitive culture that leads to technological innovation and the emergence of an advanced industrial base and economic growth.

Posted in Autocracy and Innovation, Book Reviews, Liberalism, Russian Economy, Russian Liberalization, Russian Science | 3 Comments »

 
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