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Putin 2.0?

Posted by democratist on March 19, 2012

March 19th 2012,

In the wake of the presidential elections, commentators across Russia and the world have been asking how Vladimir Putin will govern Russia in his third term. How will he respond to the rise of an increasingly critical urban middle class? Is he about to recast himself as a reformer (“Putin 2.0″), or will he crack down on the unrest as a populist autocrat? Finally, will he imitate reform but actually maintain the status quo?

A mixture of the last two options looks most plausible. The rhetoric of reform will be pushed once again to the fore but the system will remain unchanged. Just as was the case with the Medvedev “liberalization,” “Putin 2.0″ looks likely to prove a non-starter; a convenient lie designed to provide the illusion that change may on the way in a society that is (mostly) aware that this is not true, but also one where many people are keen to keep up the pretence of reform.

In this regard, it is not much of an exaggeration to say that political and economic reform in contemporary Russia are “being implemented” in the same way that the communist utopia was “just a few years away” during the late Soviet period. In both cases this narrative serves the same purpose: A legitimizing tool that can be trotted out by those with an interest in keeping the existing system in place in the face of popular scepticism. In both cases the message is essentially the same; you are part of a “greater project”; stay the course; things will improve gradually; there is no need to rock the boat.

But the fact that issues of property rights, the promotion of small and medium-sized business culture, and especially corruption persist after 12 years of Putin strongly suggests that serious change is unlikely. Indeed, for an indication of the source of much of Russia’s corruption, we need look no further than Angus Roxburgh’s analysis of the extraordinary good fortunes of Vladimir Putin’s friends from his Saint Petersburg youth, and the Ozero dacha collective. (Strongman, I.B. Tauris 2012). Arkady and Boris Rotenburg, Putin’s erstwhile judo partners, each now have assets worth $1.75 billion. Yuri Kovalchuk, from the Ozero collective is worth just under a billion dollars. There are many other similar examples.

More broadly, Roxburgh notes, “…by far the biggest obstacle to foreign investment (or the creation of an international financial center in Russia) can be summed up in one word – corruption – a word so complex that one leading Russian businessman told me I would never, as a Westerner understand it. “Theft,” he said, “is not theft as you know it. It is the entire system – the political system, the business establishment, the police, the judiciary, the government, from top to bottom, all intertwined and inseparable.””

In this regard, Professor Alena Ledeneva (of University Collage London) has argued that the Putin corruption systema is fundamentally unreformable, and will remain in place until a change in the political or economic situation provokes a collapse. Given the evidence presented above, the continued popularity of the government, and the involvement of large sections of Russian society in various corruption networks, the re-election of Vladimir Putin is unlikely to herald a period of reform. Rather, a better case can be made that Putin has become captive to a system he helped to create, and will be unable to introduce the reforms Russia needs without alienating these constituencies.

Nonetheless, change is certainly coming, because the middle class is growing, and Russian society is changing. But the tipping point is years away. The oil price is again on the rise, and so social spending can remain high. This will be enough to placate large parts of the population. Many people are living materially better lives, and indeed have more freedom than Russians have enjoyed throughout almost all of their history.

Additionally the current system has the backing of the FSB, an organization which acts in a manner closer to an arab mukhabarat than western Security Services, and which sees the protection of the regime as a key priority. Therefore, in addition to the (already evident) shift towards renewed state media restrictions and manipulation, the FSB will not hesitate to use all of the many tools at its disposal (surveillance, subversion, kompromat) to ensure the opposition remains weak, divided and marginalized.

Posted in Russian Corruption, Russian Economy | 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 »

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: 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 »

Russia: FDI and the forthcoming elections.

Posted by democratist on February 18, 2011

18th February 2011,

Democratist was fascinated by Russian Finance Minister Alexei Kudrin’s speech in Krasnoyarsk yesterday.

According to Kudrin FDI into Russia fell to  $12-14 billion last year, the third successive year of decline since 2008.

“Direct foreign investment was one and a half times lower,” Kudrin said, “This is not much. In the best years it reached $27 billion.”

And he also stated that this has had a negative impact on President Medvedev’s “modernization” effort, and is holding back economic growth. “We will see in the coming years a stable growth of around 4% and above. However for Russia this – the level of a mid-ranking economy – is insufficient,” he said. “We need a significantly higher growth rate of 6-7%.”

For Democratist’s perspective, what is most interesting about these figures is that they cover the period before last December’s release of embarrassing Wikileaks cables which described Russia as “a virtual mafia state.”

Given the near-continuous (and frankly mostly warranted) bad press the Russians have been suffering over the past several months, it seems very unlikely that the much hoped-for Western FDI flows into Russia will recover any time soon.

So, what are the most likely effects of  continually declining FDI on Russian politics? Will Russia, as Kudrin (rather unexpectedly) suggested, decide to hold free and fair elections later this year, and in 2012 as part of a strategy for future liberalization?

Alas, this is unlikely. The nomenklatura has an intrenched fear of “instability.” Giving power away in any meaningful sense is largely anathema for Putin and his former KGB pals, regardless of the lessons that recent developments in Tunisia and Egypt may imply. Their main medium-term hope remains a (continued) rise in raw materials prices.

So while there may be some measured liberalization in the parliamentary polls set to take place in December, Democratist continues to maintain that the regime will probably try to leverage the Presidential elections due in 2012 as method for winning increased international legitimacy by enhancing the (not so far especially successful) illusion of Russia’s “democratic development” through a poll that apparently offers more political competition than was the case in recent years, but in reality whose parameters have been carefully determined in advance.

While the exact form this contest will take may be beyond even our predictive powers, Democratist continues to feel that the obvious choice will be a superficial competition between an emphasis on ”stability” or “modernization”; between Putin or Medvedev.

Posted in Democratization, Elections, FDI, Hydrocarbons, Jasmine Revolution, Russia 2012 Elections, Russian Economy, Russian Politics | 3 Comments »

Autocracy and Innovation: Lessons from Egypt.

Posted by democratist on February 11, 2011

11th February 2011,

Regular readers of Democratist will be aware of our interest in the interrelationship between democracy and innovation, and our belief that autocratic rule in Russia (and its attendant corruption) have had a devastating (and continuing) impact on Russian science and technology (S&T), despite President Medvedev’s so-called “modernization” programme.

This weakness has in turn seriously damaged Russia’s status as an international economic and military player. However, rather than implementing the political reform required for the development of an innovative scientific community, the response of the Putin regime has been to place a renewed emphasis on espionage (for a concrete indication of the SVR’s interest in US tech, check out who Anna Chapman was following on Twitter before she abandoned her page last July; almost all of these are S&T-related journalists or magazines).

But regardless of the efforts of the SVR and FAPSI (Russia’s well-staffed SIGINT outfit) and the very real danger they present to Western firms, an indication of the continuing fate of the wider Russian scientific community under the nomenklatura might be gauged to a considerable extent by comparison with a similar example which has been brought to our attention thanks to BBC Radio Four’s excellent Material World science series; that of Egypt.

In this week’s programme, Material World interviews Hassan Azzazy (a Professor of chemistry at the American University in Cairo) about the way the Mubarak regime has effected Egyptian scientific research over the last 30 years. 

Azzazy’s main points were that while officially the Egyptian government was a keen promoter of S&T, in reality they had a limited understanding of the importance of research, which eventually had the effect of leaving the country lagging several decades behind other developing nations: Government interference and corruption were the key problem, with the ruling NDP party appointing university staff on the basis of loyalty rather than ability, and any kind of anti-government political activity resulting in banishment from almost any position in academia, research or government. This meant that many of Egypt’s best and brightest were forced to work abroad. 

The implications of what Azzazy says are that almost all of Egypt’s problems in relation to innovation have stemmed from a lack of democracy, openness, and accountability under Mubarak, which has in turn led to a significant inability to appoint the best staff, a huge misallocation of resources, and a lack of effective planning. Democratic openness, as well as resources, are required to cultivate research, and restore competitiveness.

And, as Azzazy says, “In the 21st Century, if you do not use science and technology, and innovation to build a strong economy, and address national needs, you are essentially outdated, and this is exactly the correct term for the current regime.”

We couldn’t have put it better ourselves.

Posted in Russian Economy, Russian Espionage, Russian Science | 3 Comments »

 
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