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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 – 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 »

 
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