WILL RUSSIA BECOME A SOUTH KOREA?
Roundtable discussion “Prospects of Russian modernization: will Russia become a South Korea?” was held at the Moscow House of Economist. It was the seventh in the series of roundtables initiated by Victor Biryukov, member of the Board of the Russian Union of Industrialists and Entrepreneurs and supported by the Free Economic Society of Russia and magazine “Our Power: Deeds and Persons.” The keynote report was delivered by Sergei Guriyev, rector of the New Economic School. Numerous participants and journalists treated each other with a lot of bright, straightforward and even exotic remarks.
Wages to outpace labor productivity
Guriyev opened his report with a remark that Russia of the 2000s strikingly resembles South Korea of the 1990s. In various macroeconomic parameters (deflated GDP per capita, GDP at purchasing power parity (PPP), national income per capita, etc) Russia lags behind such a high-tech rich country as South Korea by 11 to 14 years.
This poses some complex questions. If the starting conditions are identical with a lag of 10 to 15 years, does it mean that in 2020 or 2025 Russia’s situation will be similar with that of today’s South Korea? Is the modernization experience of South Korea applicable to Russia? Could South Korea serve as a role model for Russia’s development till 2020?
“It’s often said that before the crisis Russia lagged behind China and India in growth rates. But it is necessary to remember about the so-called ‘law of conditional convergence’: poorer countries grow faster. Therefore, it makes no sense to compare Russia with today’s China or India. Russia is rather comparable with countries which are at the same level of development. So, South Korean experience could well serve as a standard of reference. Apparently, over the past decade Russian and South Korean economies have been growing almost at the same pace, 7 percent on the average, which is a good sign,” the key speaker said.
Even South Korean and Russian GDP fell by almost the same amount when the countries went out from the crisis in 1998 and 2009 – by 7.5% and 8% respectively. However, in spite of formal resemblance there are essential differences. What are the key factors of a long-term economic growth? Primarily, they are the human capital, the quality of economic institutions, the level of inequality, the level of social capital and the level of political institutions.
Only from the point of view of human capital Russia ranks high enough compared to South Korea ten or 15 years ago, when it had 85–90% of literate population. The percentage of literate population in Russia long ago amounted to 99-100%. But with regard to other indicators Russia is radically inferior to South Korea as it was ten or 15 years ago.
As to the quality of state governance, Russia lags behind three-fourths of the countries of the world. South Korea, late in the 1990s, had political and legal institutions better than in three-fourths of the countries of the world. In combating corruption Russia is far behind the developed economies and is comparable with countries with three-to-five fold smaller GDP per capita. Therefore, Russia short- and long-term prospects differ substantially.
“In the short term everything looks good, but in the long term we would be hardly able to follow South Korea’s path adding from 6 to 7 percent to GDP annually,” Guriyev said. “Because Russia today has no such institutions of law enforcement and private property rights protection as South Korea had ten years ago. In 1998-1999, Russia had several factors of growth which secured achievements for a decade. But those factors have been practically exhausted.”
The growing prices of Russian raw materials accounted for about half of the GDP growth before the global crisis hit this country late in 2008. Another important factor of growth in the end of 1990s was the availability of spare capacity and manpower. The key reporter expressed confidence that already in 2012, when Russia returns to the pre-crisis level of production, infrastructure will be overloaded and there will be a shortage of capacities and manpower. As a result real wages will go up faster than labor productivity.
Conclusion: a new economic growth is only possible with additional investments. However, investments might not come because of the bad investment climate as a result of improper state governance: the circle has been closed.
“Incredible as it may seem, we are in the situation of a political balance where the political elite is not really interested in the economic growth,” he said. “It would seem that any ruling regime must be interested in the economic growth: the bigger the pie the bigger the slice that goes to the political elite. But if in order to make the pie bigger, i.e. to boost the rate of economic growth, it is necessary to make changes that might threaten positions of the ruling elite, the latter might not be interested in all those reforms, institutions and the improvement of the investment climate.”
There is nothing specifically Russian about this situation: “many resource economies with underdeveloped democratic and legal institutions fail to avoid similar traps.” Nevertheless, “prospects of Russian modernization in the next decade look rather dismal.” And over the past ten years not much has changed. Maybe the only difference is that in the presidential state-of-the-nation addresses calls for boosting competitiveness gave way to calls for modernization.
Thus, the country is in stagnation again: levels of economy diversification, dependence on raw materials, state governance, quality of institutions and social disparity practically are not changing. Moreover, over the past ten years the quality of human capital has worsened and the share of the state in the economy has grown. Russia is increasingly lagging behind South Korea in science: as to the index of citation in international journals Russia ranks 19th while South Korea is already the world’s 15th.
Maybe only “the radical growth of the financial system” could be mentioned as a truly serious achievement. It is now “far more competitive” than it was just five years ago. Of course, raw material producers may always receive financial services in the global market, but not small and medium businesses or companies not engaged in raw materials production. Therefore, the development of the national financial sector is a key factor of the future diversification of the economy.
Alas! The Russian financial sector “is still inefficient, still dominated by state owned banks often taking decisions which are politically rather than business motivated.” A conclusion made by Guriyev is none too reassuring: “We need a miracle to become a South Korea in the general sense of this word.”
If it weren't for bad luck have no luck at all: “In spite of high oil prices, Russia’s budget is in deficit. So, we are facing an inevitable privatization and an inevitable loosening of control over foreign investments. Russian and foreign private investors one way or another will demand reforms. Another element of success will be Russia’s joining international organizations (WTO, OECD – Ed.), which is to create external stimuli to enhance accountability.”
Another important component of a successful modernization is democratization. “There is only one rich country that is not democratic. It is Singapore, but even this country is democratizing rapidly enough... Democracy is useful for economic growth.” Moreover, “while poor countries sometimes shift from democracy to dictatorship and vice versa, rich countries establishing democracy never slide back to dictatorship.”
“The richest country that shifted from democracy to dictatorship was Argentina in 1976. In prices of 2000, its then level corresponds to approximately annual $10,000-$12,000 per capita. Russia surpassed this level three or five years ago. It turns out that … if democracy firmly establishes in this country it will be stable enough because Russia is sufficiently rich and developed.”
The more Russians, the better
The author of the best-selling book, “The Russian Management Model,” economist Alexander Prokhorov from the Yaroslavl State University noted that rates of growth in the Baltic states of Latvia, Lithuania and Estonia in the 2000s have been directly depending on the percentage of Russian-speaking population.
“Russians in the Baltic states work better and generate more value than Russians in the Russian Federation itself,” the expert said. “The different institutional environment makes Russians in the Baltic states more economically efficient than Russians working in Russia. This means that institutional reforms in Russia are simply inevitable.”
However, Prokhorov is not under illusion that “institutional reforms will automatically improve the core factors of economic growth.” For instance, even if we establish a competitive political system, secure the separation of powers and independence of the courts and the mass media, there are still little chances to curb corruption.
On the contrary, every new shift to a new political and economic system in Russia boosts corruption to a new higher level. The modern history saw corruption surging four times: under the developed socialism (Brezhnev), during the shift to the wild market capitalism (Gorbachev), under the oligarchic capitalism (Yeltsin) and under the state capitalism (Putin).
Freeze today and get up in the future
Calling Russia a traditional “supplier of discomfort to the comfortable world,” Anatoly Korolyov, author and professor at the Literature Institute, stated that “we have to exist in the situation of a permanent civil war,” where all ideas of reconciliation and building a civil society are inadmissible. This active and continuous split of the society into the reds and the whites, liberals and conservatives, is a consequence of Russia’s inability to develop its enormous territory due to the constant shortage of funds. “It will be impossible for us to get rid of corruption, it’s like severing both legs,” Korolyov admitted. “Therefore corruption should be somehow civilized, obtain a human face and must be built into the structure of our society like once serfdom was.”
Expert’s ideas of the invariability of Russia’s export potential were no less fatalistic: “We have been always supplying raw materials: hemp and honey, now oil and gas… Similarly we have been always supplying social ideas… We have been offering phenomena of the Russian revolution, of abstractionism and constructivism in culture… And today, oddly enough, we are the source of a new revolution, which so far goes unnoticed. The concept of transhumanism emerged exactly in this country through the development of Fyodorov’s ideas of collecting and synthesizing remains of dead based on ‘knowledge and control over all atoms’.”
While the audience in the overcrowded Fireplace Hall of the House of Economist suddenly became silent trying to bring to memory that transhumanism is a hypothesis that people can be free one day of all pain, aging and even death, the expert switched to the possibility of sending people “from the ugly present to the good future” deep-freezing their bodies. Korolyov lamented, “While in the United States there are several thousands of such frozen patients Russia has a far more modest number of them.”
Compliment to Sakartvelo
Next, Kakha Kakhiani, editor-in-chief of PolitEconomics magazine, took up the floor to crack down on grafters. “Corruption could be vanquished, it is not necessary to live with it,” he insists.
He said Georgia provides a fresh example of this: “Look how their road police work! You know, they do not take bribes. Saakashvili, with all his shortcomings, simply removed all road police stations and installed video cameras to monitor the traffic and warn the drivers that a patrol car is ahead, so they should slow down and be more attentive. Thus the problem (of graft) vanished... It is what people say, not the authorities.”
Kakhiani then returned to the comparison of Russia and South Korea made in the key report and spoke ardently of democracy: “I would not like to live under generals even if we have two-digit economic growth. You know when we were building Belomorkanal rates of growth were very high. I don’t want this again. I’d better live with a 4%-5% growth (of GDP) but under a democratic system.”
Long live generals!
“I don’t have the honor to belong to economists and, Lord forbid, I have never shared liberal views,” he conceded and noted, “If it was not for those generals (who made the South Korean economic miracle using authoritarian methods – Ed.) Communists would have still been ruling the whole Korea with Kim Jong-Il presiding from Seoul… The generals managed to cope with the awful unemployment that reached 40% of the working-age population. Therefore I would not reject methods which are non-liberal but very efficient.”
Kurtov pointed to the fact that South Korea’s prosperity rests on the financial assistance from the United States that pay 70 percent of military expenses of the country which has been in the state of war over the past more than six decades. Moreover, “50% of the (South) Korean state budget was secured also by the United States,” and this also lasted for decades.
“Did we have such assistance in the 1990s? Nothing of the kind! How can we take out of context a period of Korean truly successful development and argue that we are short of democracy,” the expert fumed.
An honest Mubarak
Ilya Yashin, member of the federal bureau of the Solidarnost (Solidarity) movement, holds diametrically opposite views. He believes that Russia’s modernization is impossible without a broad democratization.
“Frankly speaking, I thought that there were no people in this country who are ready to discuss modernization seriously. To my great surprise I have found enthusiasts who still believe in this,” Yashin said.
“The real masters of Russia, ‘big sharks’ from Putin’s entourage are not interested in any modernization. They received and are receiving big slices of the federal pie and all this modernization looks rather like a promotional project, he said.
Apart from exorbitant corruption, Yashin accused the authorities of widening the social gap: over the past decade social differentiation grew by 20%. Meanwhile, Russia’s total dependence on oil is strengthening.
“Therefore Russia, in my opinion, is following the path of Egypt rather than of South Korea: the same massive poverty, political monopoly and uncontrollable growth of corruption,” he said. “However, an outcome could be even worse because with regard to scales of corruption Mubarak, compared with Putin, is simply an honest man. Nevertheless, if the trend does not change, the result will most likely be the same as in Egypt, not in South Korea, and not after 30 years of Putin’s tenure but far sooner.”
West will not help. Will it?
Maxim Minayev, an expert with the Center for Current Politics, drew attention of the assembly to the “foreign policy aspect of modernization.” It turns out that all Asian countries with the experience of modernization paid the West for their economic achievements with political loyalty: Japan, Hong Kong as well as South Korea. Meanwhile, such loyalty is not innocuous.
“An idea of recognizing foreign-policy loyalty might be a source of serious costs affecting home policies,” the expert believes. “First of all, it is associated with non-development of some branches of economy, particularly the defense sector. The Korean example shows that the country started a relatively independent development only in the 1990s. Before that, the majority of weapons and military hardware for the South Korean army were supplied by the United States. One could say the same about Japan…”
Russia today is facing a difficult choice. On the one hand modernization is impossible without an inflow of investments and technologies from the West. On the other hand, to get them Russia will have to cede part of its sovereignty, i.e. to reshape its foreign policies. Russia is not prepared to do thus because it did not start its modern history with a devastating defeat in a war like Japan, or with the obtaining of independence like South Korea.
“As long as we cannot overcome this challenge, there will be no full-fledged modernization,” Minayev concluded. “Now we see Medvedev administration’s attempts of orientation towards Europe and the United States, but we see no response from them. The United States is not interested in a serious increase of trade and economic partnership. As to the EU, what we see so far is just imitation of such contacts.”
Amid desperate lack of will
According to Andrei Melville, the dean of the Department of applied political sciences at the Higher School of Economics, the comparison of Russia and South Korea is not quite correct. Whereas the latter modernized from agrarian to industrial economy, Russia is facing modernization from an industrial to post-industrial economy.
Moreover, the expert stressed that a considerable economic growth is possible even in the absence of democracy: “Democracy in no way is a guarantee of economic growth, which might start under various conditions. Democracy has a different effect: it prevents backslide as well as the economic growth prevents a political backslide.”
The main condition for modernization is the will to carry it out. But the current masters of Russian economy lack such will because they are not interested in any further reforms playing the role of “built-in brakes.”
Fundamental ribbon bow
Valentina Fedotova, head of the Social Philosophy section at the Institute of Philosophy under the Russian Academy of Sciences, also was not inclined to overestimate the role of democracy in economic modernization. For example, in South Korea “a drive for democracy was exhausted” by the middle of the 1960s, and democratic movements revived “only after a student was killed at a demonstration in 1983” i.e. when modernization was de facto completed.
However, it is more important that South Korea “has found its place in the international division of labor,” which is a true source of the Korean economic development. According to Fedotova, “America creates a design or a model of a product, Asian countries are engaged in its production, while India provides services performing up to 90 percent of accounting and other transactions for the West. Russia could serve as a source of intellectual product.”
However, so far, lacking necessary conditions Russian scientists have to emigrate to become Nobel Prize winners. Next, the expert criticized the Education and Science Minister: “(Andrei) Fursenko calls on us to assemble equipment ‘on the kitchen table,’ to develop applied sciences and postpone the development of fundamental sciences indefinitely. Are fundamental sciences something exotic, something decorative like a ribbon bow on our dress? Meanwhile, technological application of fundamental sciences is underway in South Korea and in America.”
A particular interest of the audience was attracted by Fedotova’s remarks on the latest scientific reassessment of the role played by the middle class. Until recently it was perceived as “creative and progressive” but now the academic world downgraded it to a “consumer class.”
Window for reforms to go out
Alexander Rubtsov, board chairman of National Institute of Technical Regulation and Fedotova’s colleague at the Institute of Philosophy, believes that Russia has fallen into a “historical trap.” For ages the raw-material-intensive economy has been automatically reproducing the “raw materials-dependant society.” “The raw materials-dependent society will reproduce itself till the final collapse of the raw-material-intensive economy,” he said. After that it will be too late to modernize anything.
In order to get out of the trap, Russia needs “some extraordinary efforts” that Guriyev’s report called “a miracle” and “a political will.” Referring to his “profound” experience of administrative work, Rubtsov noted: “When there is a stubborn political will, which is properly broadcasted, the interested part of the society might close ranks and support the modernization initiatives, but only as long as this will exists. As soon as it expires reforms turn into counter-reforms and, excuse me, all this goes out from the window.”
But such a strong will can appear only when a part of expert community “stops selling to the authorities an idea that the current oil prices could secure 40 years of normal life.” On the contrary, experts must shout from the housetops that Russia is passing the point of no return and there is no time left for preparations. This will create “at least one of the conditions necessary to start modernization.”
Low controllability is another serious obstacle on the path of modernization: “We can always see how the tail wags the dog and how low- and medium-level bureaucrats either reduce to zero or entirely distort even the best initiatives of the authorities.”
Not by science town alone
Elina Kirichenko, Head of the Center for North American Studies at the Institute of World Economy and International Relations under the Russian Academy of Sciences, noted that modernization cannot be viewed as just one leap or even a series of leaps. It is a notion of “constant development,” otherwise “when we reach a certain level, other countries will be at a higher one – from industrial to postindustrial and from postindustrial to post-postindustrial.”
Similarly, a single science town will not be of great help to the country, she said in an apparent hint to the Skolkovo project. Instead, a whole innovative system should be created and with considerable state involvement: “For example, in the United States from 18% to 20% from R&D expenses go to fundamental studies of which 40% are covered by the state because the private sector may not be interested in many things.”
The theme of fundamental science’s forlornness and its absolute necessity for modernization was taken up by Alexander Novikov, the traditional moderator of the series of roundtable discussions held in the House of Economist, member of the Board of the Free Economic Society of Russia and editor-in-chief of magazine “Our Power: Deeds and Persons.”
He reminded that these days Russia marks the 100th birthday of Academician Mstislav Keldysh, the chief theoretician of the USSR space program. Novikov narrates: “when in a very serious office – without naming names, it was in the Federation Council – I mentioned Keldysh’s centenary, they asked me: ‘Who was that Keldysh? Was he the general who was killed by cold water in a Nazi camp during the war?’I would not name names but truly it was so.”
Obviously, only a person who is extremely distant from understanding the essence and needs of the fundamental science could mistake President of the USSR Academy of Sciences Mstislav Keldysh (1911–1978) for heroic Lieut. General Dmitry Karbyshev (1880–1945).
An aide to the speaker of the Federation Council and Vice-president of the Free Economic Society of Russia Mikhail Korobeynikov stressed that over the past two decades Russia’s economy has became raw materials-intensive but even as such it did not develop: “Not a single new deposit has been discovered, not a single oil processing complex has been built, while the operational complexes produce bad gasoline sold at skyrocketing prices.”
The expert reminded that Catherine the Great set up the Free Economic Society particularly to “rationalize agriculture.” “For 246 years we have been rationalizing it to a zero effect,” he admitted. According to Korobeynikov, over the past twenty years Russia’s lands have reached the situation of “chaotic disorder” and “perhaps we need nationalization” to improve the situation.
Money at our feet
Envoy of the Republic of Bashkortostan to the Russian President Shamil Tikeyev told the assembly about a source of funds for modernization that he discovered as of late: “Paradoxically enough in Russia today the accrual of depreciation is regulated by laws and instructions and controlled by tax authorities, but the expenditure of these amounts is free from any regulations.”
“There is not a single law that obliges company heads to invest depreciation amounts into the company development. I was shocked to learn this! Calculations show that only in our republic these sums amount to scores of billions of rubles. In Russia, hundreds of billions are lying at our feet. We are waiting for investors to come and don’t want to use what is within easy reach. Just pick up the money and start to work!”
Tikeyev believes that the country needs a federal law on the expenditure of depreciation allocations that would envision serious responsibility for a misuse of these funds. It is also necessary “to set up a centralized fund for economy modernization and oblige company heads to remit there a part of depreciation allocations.”
No objectives in Constitution
Boris Raizberg, senior associate with the Institute of Macroeconomic Studies at the Ministry for Economic Development, was extremely categorical: “No modernization will be possible without raising quality of macroeconomic governance. I mean the governance at the level of the government, key ministries, their interaction, lawmaking and what is the most important - target setting machinery.”
It is ridiculous but Russia lacks a system of strategic target setting. “Even our Constitution does not define our strategic objectives,” the expert lamented. “I don’t know a single document stipulating these objectives. Hence, we are guided primarily by tactical goals.”
Therefore, strategic objectives should be specified and thoroughly defined. In addition, there is another complicated task – to reach the wholeness of the power vertical, which today has “internal disruptions” as “the administrative reform has yielded no result.”
In other words, Russia is to modernize the macroeconomic governance and lift it to the level needed in the current situation. This alone will produce a colossal economic effect. Otherwise, modernization is doomed to failure, Raizberg warned.
Business on 1bln eaters
Victor Biryukov, board member of the Russian Union of Industrialists and Entrepreneurs, warned that modernization is not something that starts in the whole economy all at once as if at the sound of the starting gun. It is an illusion to believe that modernization in Russia is characterized by more heat than light. In the agro-industrial complex it is underway and rather successfully. For instance, previously 150-200 people were involved in the development of 10,000 hectares of soil. Today, 15 people are quite enough for that. Piglets’ daily weight gains (DWG) under commercial fattening reached 800-900 grams, like in Denmark, while in peasants’ backyards they remain three-fold lower.
Biryukov reminded of chaebols, which played a decisive role in South Korea’s modernization. In Russia, the key role in the modernization of agriculture belongs to powerful vertically integrated agro-holdings which by some their features resemble chaebols. However, they cannot be called “Russian chaebols” because the level of dirigisme in this country is immeasurably lower than it was in South Korea 15 years ago.
However, Korean chaebols and Russian agro-holdings have a certain similarity. As a result of the Asian crisis in the end of the 1990s, chaebols’ specialization deepened. Originally they were multi-industry and too cumbersome. Today in Russia we also see the deepening of agro-holdings’ specialization. A pig breeding holding gets rid of milking herd and flour milling which go to a diary holding and a grain holding respectively.
“From the very beginning, South Korean giants tried to force their way to external markets,” the expert said. “Our agro-holdings are nearing the saturation of the home market. According to some estimates, by 2020 our country would export annually 1.5–2.0 billion dollars worth of meat. Altogether it would be able to feed 1 billion people, a 10-fold increase from today’s capacity.”
Competitive advantage: with 9 percent of the global farmland Russia so far contributes less than 2 percent of the global farming production. The demand will be secured by the food crisis caused by the growth of consumption in Southeastern Asia and climate changes. “The hunger threat and hence global food prices will inevitably continue to grow,” Biryukov said.
Care and guidance of the Communist Party
Bui Dinh Dinh, Ambassador Extraordinary and Plenipotentiary of the Socialist Republic of Vietnam to the Russian Federation, shared the experience of modernization in his country where “the average GDP growth for the past 20 years was 7.5 % per year. Even in 2009, in spite of the ruinous effect of the global financial crisis, Vietnam managed to add 5.32% to its GDP.”
In 2010, Vietnam’s GDP growth increased to 6.78%. Traditionally agricultural, the country industrializes, develops tourism and science, and attracts foreign investors. All this is done under care and guidance of the Communist Party, using China as a role model.
“The core of administrative staff, managers and scientists working in Vietnam’s economy consists of 52,000 people trained in Russia and the USSR,” the ambassador stressed. “Today more than 60,000 Vietnamese students study abroad including 5,000 students and post graduate students trained at Russian universities and colleges.”
With the purpose of training specialists for carrying out modernization in the country where the youth accounts for 42% of the 87 million people, an education reform has been launched. Besides, governments of Vietnam and Russia have decided to establish in Hanoi a modern Technological University named after Le Quy Don, a prominent Vietnamese historian, author and public figure. It is planned that the project will involve the Lomonosov Moscow State University, the Bauman Moscow State Technical University and the St. Petersburg State University.
The Roundtable was the 7th in the series of discussions launched a year ago upon the initiative from Victor Biryukov, member of the Board of the Russian Union of Industrialists and Entrepreneurs, and with support of magazine “Our Power: Deeds and Persons.”
– on November 30, 2010, the keynote address “Five Centuries of Modernizations” was delivered by Georgi Derluguian, Professor of Macro-sociology at Northwestern University (Chicago, the USA);
– on September 22, 2010, the keynote address “Mentality and Economy: National Formula of Modernization” was delivered by Alexander Auzan, PhD (Economics), president of the National Project Institute Social Contract, member of the Council for the Development of Institutions of Civil Society and Human Rights under the President of the Russian Federation and member of the Board of the Institute of Contemporary Development;
– on June 23, 2010, the keynote address “Diversification: socio-cultural aspects” was delivered by Professor Sergei Kara-Murza, PhD (Chemistry), chief associate with the Institute for Social and Political Studies of the Russian Academy of Sciences;
– on April 13, 2010, the keynote address “Diversification for the viewpoint of labor market” was made by Yevgeny Gontmakher, PhD (Economics), board member of the Institute of Contemporary Development and deputy director of the Institute of World Economy and International Relations of the Russian Academy of Sciences;
– on February 10, 2010, the keynote address “Diversification: myth or reality” was delivered by Ruslan Grinberg, PhD (Economics), corresponding member of the Russian Academy of Sciences and director of the Institute of Economics of the Russian Academy of Sciences;
– on December 9, 2009, the keynote address “Diversification of Russia’s economy” was delivered by Academician Viktor Ivanter, PhD (Economics), director of the Institute of National Economic Forecasts at the Russian Academy of Sciences.