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OECD Russia report 2013

by on October 15, 2016 in Russian Economy, Russian Federation

The OECD (Organisation for Economic Cooperation and Development) is a 35 member organisation with its headquarters in Paris. Its members are mostly Western European countries who follow a model of ‘market economy’ and ‘liberal democracy’. The US is also a member, along with its ally South Korea. Russia is a candidate member. [1] However talks on Russia’s accession have been halted amidst the fall-out from the Western backed coup in Kiev.

The OECD issues reports on the economic status of countries – both member countries and non-member countries. This report is for Russia in 2013. [2] It was produced before the current flare-up between the West and Russia. This makes it all the more interesting as it is free of the hatred that currently colours the Western discourse on Russia. The report examines trends in the Russian economy from the viewpoint of the accepted Western model;  a competitive economy, minimal direct state ownership in the economy, a flexible labour market, an emphasis on labour productivity, high taxation with spending on projects which support productivity such as training and infrastructure, a strong ‘civil society’ (such as a ‘free press’), Trade Unions who play a role supporting productivity and labour discipline, few barriers to entry for foreign investment, equal treatment of bidders for government contracts from any country, monetary policy controlled by an independent central bank, and government regulation to ensure it all runs smoothly. That is; the authors have a recipe and Russia is evaluated from the point of view of this recipe. There are commendations for adopting the approved measures and suggestions for improvement where they still have further to go. With those qualifications the overall tone of the report is both respectful and sensitive and quite positive. The current Russian government is commended for several initiatives and efforts which are in-line with those which the authors wish to see. In particular the report authors praise the authorities for a drive against business corruption which is seen as a major obstacle to development. The following is a brief summary of the report under headings of ‘positive developments’ and ‘obstacles to growth’.

Positive developments in the Russian Economy

The report authors identify a range of improvements in the business climate. They acknowledge that the Russian government is battling corruption though they believe that problems remain, particularly in relations between politics, business and law enforcement. These ongoing problems may deter potential investors.

Federal initiatives to tackle administrative barriers to doing business have been successfully introduced. For example a streamlining of licensing procedures.

The banking sector is solid. The central bank is acting responsibly.

Overall a picture is given of a central government launching the necessary initiatives to modernise the economy and support its development along a free-market, private capital model, integrated into the global economy. However there are some areas where progress is not so rapid. In some cases this may be due to inherited structural inefficiencies. There is an unvoiced suggestion that the state is too unwilling to give up its own direct stake in the economy. In some areas, notably education and training, including ‘lifelong learning’, the government should adopt more Western-style meritocratic policies.

Obstacles to growth

The main problem for the Russian economy is its dependence on volatile energy resources. Resources which will eventually run out. There is a growing awareness amongst policy makers that this problem must be addressed.

The report authors criticise the level of state ownership in Russia. State ownership is high in the banking, transport and energy sectors. The state bank is the  largest shareholder in Sherbank – Russia’s largest bank. The report authors note that there is an existing privatisation programme but that it has suffered delays. According to the report’s authors the original plan for 2014-16 envisaged the state withdrawing from all sectors except natural monopolies, oil and defence. However, this plan has now been scaled down. The high level of state ownership is given as a reason for a lack of competitiveness in the economy. The state sector preserves ‘pockets of inefficiency’.  For context; a separate 2008 OECD sponsored document – a presentation at conference on state ownership in Russia – gives a figure of 11% of companies and organisations being wholly or partly owned by the state. The same presentation reports that 45% of total banking assets are held by state banks. [3] Overall the Russian state controls around 50% of the economy compared to a world average of 30%. [4] The report authors criticise the links between government policy and the major state owned enterprises with the latter still to some extent operating as an extension of the state rather than as competitive corporations albeit owned by the state. The report authors call for a separation of the concerns of government and commerce in line with OECD principals.

One of the major problems identified in the report is a weak transport infrastructure. The authors (who, again, are committed free-marketeers), identify the very limited amount of competition in the freight railway sector as a problem. The road system is poor. Substantial investment is required. The government has a national plan.

Employment levels in Russia are stable and have not changed significantly since 1992. The reason for this is that firms react to an adverse climate by cutting wages. (Something it might not be so easy to do in the West). While this is praised as reflecting a “flexible labour market” the report authors note that there is a negative associated with this; high turn-over of staff and little willingness on the part of firms to invest in training and development of their staff.  (14% of Russian workers earn less than the subsistence wage). This also leads to labour transferring to the informal sector. The report authors recommend an increase in spending on ‘lifelong learning’. They recommend a transfer away from ‘wage subsidies’ and towards the kind of active labour market manipulations (training programmes, support into work etc.) characteristic of advanced economies. They note that levels of basic social security are also low and argue that this encourages the informal economy. Thus opportunities are missed to draw the unemployed into training programmes.

The authors acknowledge that education levels in Russia are high. They reference a study which has shown that while levels of literacy and numeracy are high Russians do not score so well at transferring skills to new situations. In connection with this the report authors note that technical (vocational) education in Russia has tended to focus on training people for particular jobs rather than giving them transferable skills. (This is an inheritance from the Soviet Union). The report authors also note imbalances in the education system related to wealth. For example; in schools there is a culture of parents having to pay for extra options. University places are increasingly fee-charged. Free places exist but tend to go to those with high academic scores, which, argue the authors, tends to favour students from higher socio-economic backgrounds. Primary and secondary education is handled at a regional and local level and this creates significant regional inequalities. The authors recommend increasing funding on education and balancing out the regional differences. The authors also mention the well-known right-wing idea of education vouchers. This idea is floated from time to time by free-market ideologues in the UK and has not yet gained traction. Another right-wing market idea – of remunerating teachers by performance (i.e. based on statistics of the grades of their students) is also mooted. Again; this is an idea which free-market ideologues have tried to promote in the UK but with little success. This attempt to foster slightly cranky extreme ‘free-market’ ideas on Russia detracts from the overall impact of the report.

The report authors note that despite Russia’s rich heritage of achievement in science and engineering this does not translate into innovation. One reason for this may be that research funding is consumed by the outdated (Soviet era) Academy of Sciences. The report authors recommend transferring state R&D funding to universities. The authors note that there have been government initiatives to encourage business R&D but that these have focused on high-tech innovation whereas what is needed is more innovation in low-technology and service sector areas. The report authors call for more systematic planning of government innovation policies.

The report identifies a major weakness in the Russian economy as being a very inefficient domestic use of energy. Were Russia to be able to make savings in this area the energy could then be exported or saved for future generations. (In the area of domestic utility charges this probably reflects a Soviet socialist legacy of subsidised and set-level energy pricing to households). The report authors recommend an increase in domestic energy prices to consumers with pricing more accurately tied to consumption. The report authors highlight a lack of overall planning in the area of improving energy efficiency in other areas including transport.

Russia has a level of inward foreign investment which is comparable with the OECD average. However on closer analysis much of this is ’round-trip’ investment linked to ‘resource-rich’ regions and corruption. The Russian law which limits and controls inward investment in strategic sectors of the economy [5] is called out as an area which could be addressed in order to improve inward investment. There are a number of government initiatives in place to support inward investment including the Russian Direct Investment Fund which acts as an anchor investor in key projects. Overall, there are initiatives in place but these should be taken further.

Comment

While the report makes no attempt to evaluate the success of Russia’s transition to market capitalism we can notice in passing a couple of data tables. From an index of 100 in 1992 real GDP now stands at 140. From the same index real wages now stand at 200 – i.e. a two-fold increase. (Figure 18). However; GDP per capita relative to the top 17 OECD countries is now (2013) slightly less than it was in 1992 (Figure 6). Real wages have increased but the gap between Russia and the West has not altered.

The report is positive and respectful. It is not possible to gauge whether this is genuine or not. (Are the report authors adopting a tone intended to cajole and ‘mentor’ the Russian government in the right direction?). The recipe for success prescribed for Russia is the one which is successful in Western European countries, such as Germany. (Innovation, a limited amount of direct involvement of the state in the economy [6], strong but not confrontational labour unions, a high degree of state commitment to education and training, a robust regulatory framework which gives business the confidence to invest, regional parity – and so on). The question which the authors do not assess is whether or not this model is appropriate for Russia.

One unexamined problematic in the report is that a number of the recommendations will require more funds. The proposals on improving transport infrastructure, education, ‘lifelong learning’, and improved unemployment benefits would all cost a substantial amount of money. If investment in these areas is the prerequisite for improving productivity and generating economic growth then we can ask how is the government to raise the taxes necessary for this investment without the economic growth and productivity gains in the first place? The report’s authors (correctly) identify that over-reliance of the state budget on energy revenues is a problematic. But  – the money for development has to come from somewhere. The funding gap implicit in the report’s calls for more investment in education and transport is not considered in the report. Given this reality – (a lack of resources to fully modernise to the level of Western European countries at the present time) – it would seem inevitable that Russia has to follow a somewhat different course. (This course will inevitably be described as ‘protectionist’ by those in the West anxious to get access to Russia’s resources at a favourable price). At the present time it is not entirely clear what that course might be. To the extent that this course is not clear it can be said that Russia is stagnant. (Though some positive developments are occurring such as an emphasis on developing food production). This stagnation of the Russian situation is not acknowledged in the report. Finally; given the lack of funds to implement all the OECD’s recommendations the question as to whether this model (that of a European market economy) is fully suitable for Russia doesn’t even really arise in practice at this point.

 

Notes

1. WikiPedia: OECD

2. OECD Russia report 2013

3. OECD report on State Ownership in Russia. 2008

4. RT.com 2012. Reporting on report by French bank BNP Paribas

5. European Commission Report on Foreign Investment in Russia. 2008. page 5.

6. Centre for Economic Policy Research. 2013. News article by mainly OECD staff economists

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