MT: A Formula for Improving Competitiveness

By Mikhail Delyagin, director of the Institute for the Study of Globalization.

It is true that Russia lacks global competitiveness and suffers low labor productivity. This subject is often presented, however, from a one-sided perspective, and little attention is paid to the contributing factors behind the problem..

The problem is that official statistics rely exclusively on output that is officially declared. For obvious reasons, unofficial output from the underground economy is not considered. Some sectors of the shadow economy, such as alcoholic beverages production, represent a significant percentage of all output. This means that the real level of labor productivity is much higher than the official published rate.

That said, there is still a huge gap in labor productivity between Russia and many developed countries, especially China, but the disparity is not as great as what is commonly believed. Much of this is due to the inaccurate data used in compiling the figures, which are calculated by simply dividing the gross national product by the number of the nation’s workers.

That might be standard practice for any economist who has mastered basic arithmetic, but this method of deriving labor productivity does not account for the fact that Russia’s gross national product and the volume of industrial production is largely tied to world prices on raw material exports, especially hydrocarbons.

A wide range of factors determine world oil prices — from a change in climate to the actions of international and regional terrorists. None of these factors has anything to do with labor productivity in Russia. Therefore, we should not delude ourselves when the labor productivity figure rises along with world oil prices, nor be upset by its decrease when prices fall on “the life blood of Russia’s economy.” Real labor productivity has no relationship to either.

Macroeconomists typically bemoan the fact that growth in salaries is rising faster than the growth in labor productivity. What is lost in this argument is the large role that corruption plays in weakening Russia’s global competitiveness. Corruption has considerably worsened over the past seven years; it has truly become the foundation of the entire state system. Before money was extorted under the pretext of providing some kind of assistance to business, such as security. Now, businesses are victims of extortion for the simple reason that they exist as businesses. Corruption, which exceeds even the rampant levels of the 1990s, does more to limit the development of business than perhaps any other factor. As a result, business cannot significantly expand production despite the enormous inflow of oil income to the country.

What makes matters worse is that there is an extreme shortage of even minimally qualified professionals in all fields. This is due largely to the fact that reforms destroyed Russia’s educational system — including trade schools and universities.

Another important factor is that, although officially reported salaries have, on paper, sharply increased, real salaries have increased at a much slower rate. More companies are starting to legalize salaries by paying workers officially on the books instead of evading payroll taxes by paying under the table. As a result, this creates the false impression that official salaries are growing by leaps and bounds; in reality, however, take-home pay has increased at a much lower rate.

It should not be forgotten that salaries still remain woefully low. According to the Levada Center, which corresponds closely to official statistics, 12 percent of the population has difficulty paying for food, another 31 percent cannot afford adequate clothing, and 41 percent more has trouble purchasing items for long-term use. Thus, 12 percent of the population live in poverty, while a combined total of 85 percent are considered poor. Although the “middle class” has, by most accounts, doubled in size during the past five years, it accounts for only 15 percent of the population.

Alexander Baranov, the head pediatric specialist for the Health and Social Development Ministry, highlighted other social consequences of the so-called reforms carried out in the 1990s. Baranov declared that the average Russian’s height has decreased by 1.5 centimeters since the Soviet collapse. In addition, 80 percent of children are underweight, with one in five children having excessively low weight. Physical strength is also down 21 percent in girls and 18 percent in boys. Social factors have also given rise to a demographic crisis. Families desire to have 2.5 children on average but can afford to have only 1.5.

Unlike in most other parts of the world, where the poor consists of mostly the unemployed and uneducated, in Russia the poor is largely made of up of educated, working people.

Only significantly higher real salaries can put an end to this crisis, described by many as genocidal. And only higher real salaries can restore the motivation to work, which is now at a lower level than during the worst Soviet periods of stagnation.

Salaries should not be raised by dipping into government reserves. A real increase in salaries and standard of living can be accomplished only through the creation of new jobs and an increase in the amount of goods produced domestically. And for this to happen, Russia must increase its global competitiveness. It must either begin producing goods that are currently made by foreign companies or come up with qualitatively new goods that nobody else is making.

Clearly, this requires resolving an enormous number of systemic, fundamental economic problems such as restoring property rights, curbing abuses of power by monopolies, modernizing infrastructure, setting rational limits to protectionism, re-establishing the technological progress halted in 1989, renovating the educational system and so on.

Restoring Russia’s competitiveness means diversifying its industrial base and producing more goods domestically to replace the large quantity of imports. This would mean that more capital and profit stay in Russia and less flow to multinational corporations abroad.

This would obviously cause objections from foreign companies that would lose income if they were replaced in large numbers by Russian manufacturers. Their discontent could take on an even more destructive character than during the late 1980s and the mid-1990s, and could lead to the worsening of Russia’s relations with the West.

This does not mean, of course, that either Russia or the international community should forego its goal of seeing this country diversify, modernize and raise the competitiveness of its domestic manufacturers. It means only that, in putting forward these requirements, we should understand their potential implications.

Only in this way can we endure the inevitable worsening of relations with the West with minimal negative consequences.

Moscow Times

August 14, 2007.

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