Russian Economic Reform

www.jeffschubert.com

called "Dictatorial CEOs &
their Lieutenants: Inside the Executive Suites of Napoleon, Stalin, Ataturk, Mussolini, Hitler and Mao."

1992 Article: “Russian Reformers and the IMF Get It Wrong.”

I first visited Russia in October 1991, after also visiting Hungary, Poland and Czechoslovakia. I again visited Poland and Russia in April/May 1992, and wrote the text below. In 1992 I met with Richard Layard, the British economist, who was then an adviser to the Russian Government. He told me how he and a fellow economist (who was Polish) boarded a Moscow-based plane in London with the idea that reform needed to be carried out gradually and with care. However, by the time they arrived in Moscow they had decided that it would be best to implement reform as quickly as possible, including the use of “shock therapy”. Layard told me that they thought there was a “less than 50% chance of this working, but it was worth a try”. Such—“worth a try”—was the low standard of economic advice being offered to Russia at that time.

Text of my May 1992 article:

“The economy of the Russian Federation will almost certainly deteriorate over 1992 and 1993. In particular, industrial production is likely to decline significantly in the state enterprise sector and both unemployment and underemployment will rise. Given the breakdown of much of the system of relationships that made the centrally planned economy, there is probably little that can be done to prevent this fall.

What economic policy makers can do, however, is influence the extent of the fall. Unfortunately, the Government’s pronounced economic policies (as outlined in the ‘Memorandum on the Economic Policy of the Russian Federation’ which was agreed with the IMF in March) are likely to exacerbate the difficulties. If implemented, they may even carry some risk of pushing the economy into an abyss.

The essential flaw in the stated economic policy is that it is one that is designed to appeal to the West in the pursuit of international financial help. Moreover, this appeal to the West is really to that side of Western opinion that believes that markets can solve all problems if only governments would get out of the way. Thankfully, for the West at least, not all Western opinion makers and governments have such an extreme view, let alone act on it.

The Russian Government’s program would be tough and ambitious even by Western standards. In particular, a program of the Government’s type might impede structural reform in a Western country by putting too much emphasis on fighting inflation and not enough on keeping the level of demand and production high enough to ensure that both existing and new enterprises have an incentive and an ability to invest to produce market goods and services.

This is precisely what happened in New Zealand in the late 1980s and the early 1990s. In the early 1980s New Zealand had a reputation as one of the most government controlled economies in the OECD. A comprehensive and effective program of privatization and micro-economic reform (eg by reduction of subsidies) was undertaken and there has been little criticism of this. Unfortunately the heavy emphasis on fighting inflation (which included the use of a very tight monetary policy) led production to stagnate and the level of employment in 1992 to be lower than in 1986.

Yet, for all of its government controls in the early 1980s, New Zealand was a long way from being a Russia. It already had a very large and experienced market sector. But even here, the lessons were clear. Structural reform takes a lot of time and effort and the macro-economic policies must be appropriate.

Closer to home, for Russia, is Poland. After much bravado about the success of its economic policies in 1990, the Polish economy has deteriorated significantly.

A number of experts on the Polish economy now point to three main lessons that should be learnt from the Polish experience. Firstly, too much emphasis should not be placed on reducing inflation and achieving currency convertibility. (The inflation issue lesson is the same as for New Zealand.) Secondly, a very great degree of focus needs to be given to basic issues such as the taxation system, banking system, legal system etc. which allow market economies to function effectively. Thirdly, there needs to be greater recognition that privatization is necessarily a slow and complex process.

If the Government’s ‘Memorandum on the Economic Policy of the Russian Federation’ is to be taken literally, Russia is to repeat many of the Polish (and New Zealand) mistakes.

Firstly, the ‘Memorandum’ says that it is intended to reduce the average monthly level of inflation to between 1% and 3 % in the last quarter of 1992. This is a fairly low and precise target and might be possible given the reversal of excessive price rises in the first part of 1992.

Evaluating the stance of monetary policy is difficult in any country. Monetary policy was not tight enough in 1991 and this is one of the factors contributing to very high inflation. However, there has been a significant risk that the tighter monetary policies in early 1992 in the pursuit of very low inflation would combine with attempts to tighten fiscal policy to crush the economy. This would impede the process of reform and recovery. Not only do existing enterprises need bank credits to restructure, and new enterprises need credits to begin, but budget deficit reduction inspired large decreases in government expenditure may launch a vicious circle of lower expenditure, weaker economic activity, lower tax revenue, increased budget deficit, lower expenditure etc.

There are some signs, however, that the ‘Memorandum’ will not be taken literally in this area. After a very tight monetary stance in the first two months of 1992, there has been as easing of monetary policy and an increase in central bank credits to commercial banks (and thus industry and agriculture). While this has probably increased the risks of higher inflation, it was probably necessary to avoid an almost complete industrial collapse in late 1992.

Secondly, while the ‘Memorandum’ discusses structural changes there is too little emphasis on the need for rapid and vital reforms in the accounting, banking and legal spheres, including anti-monopoly legislation. It is almost as if this very important component of an effective market economic system will rise by itself.

This criticism also applies to an aspect of macroeconomic policy. It would be acceptable to all but the most ideological anti-government Westerners that a larger than suggested Budget deficit (in the memorandum it is suggested that the deficit should be 1% of GDP in the first quarter of 1992, down from over 20% in 1991) would be acceptable if it could be financed by selling ruble denominated government securities into the domestic market. Even recognizing the difficulties, an insufficient amount of attention is being given to developing a market for such securities.

Thirdly, the mooted rapid pace of privatization in the ‘Memorandum’ is unachievable and dangerous. According to the memorandum, the ‘programme for 1992 envisages the privatization of 50 % of enterprises (organizations) in the building materials industry, wholesale trade and public catering, of 60 % of enterprises in the food industry, agriculture and retail trade, as well as 70% of enterprises in the light industry, construction, automobile transport and repair.

The pace of privatization is unachievable because of the lack of an existing market and institutional framework to support it. This pace is dangerous because of the massively disruptive effect that ownership changes and reorganization will have on the already mangled process of production in medium and large enterprises. Small enterprises and some service sectors, of course, may be privatized rapidly with less disruption. The other danger with rapid privatization of larger enterprises is that its lack of control may deliver many state assets into the hands of only a few groups who will then exercise monopoly powers and control over the economy. This appears to be a particular danger in Russia.

Having made these points, it should be emphasized that the Russian Government should not change its basics policy direction.

Rather than changing the direction of reform, the Government should slow the overall pace of policy change and re-orientate towards the building of mechanisms and institutions that will allow a market economy to function. This would reflect a recognition that one economic system (irrespective of how badly it is functioning) cannot be replaced by another “overnight”. In practical terms, this means that the Government would need to continue to play a significant role in determining both production and prices in parts of the economy. Some State plans would still be needed not only to ensure the continued production of many useful goods and services, but to ensure that as massive defense production is wound down the freed resources (both man and material) are put to some productive use. The market itself, will not be able to handle this huge task.

Finally, it is worth putting the view that Russia needs to find its own way of reforming. It may be that countries such as Hungary or those of East Asia provide more appropriate examples of what to do than the very “free-market” approach. It is more likely, however, that they will only provide bits and pieces. A very thoughtful and pragmatic approach is needed, for the risk remains that economic reform policies orientated excessively toward acquiring international financial help may end up doing more harm than good.

Past Articles on the work of each of the 21 Expert Groups can be accessed here:

Speech to Baikal Global Start-up Forum 1 November, 2018

 “Innovation has no rules except a desire to create, and a willingness to accept the risk of failure”

Historical Context

Many people say that today we are in the midst of a fourth “industrial revolution” – the so-called “Industry 4”

Life before the Industrial Revolution (s): People mainly worked growing crops and caring for animals, or lived in towns where the manufacturing that did occur was generally small in scale. Energy came from animals (mainly horses), water and wind mills, and small furnaces (producing heat and sometimes steam).

The First “Industrial Revolution” — second half of the 18th century to the early 19th century: Mechanization allowed “industry” to began to replace agriculture as the main economic structure of society. Advances in steam engine technology (which in its basic form had been around for a very long time), along with advances in metallurgy, led to railways.  

The Second Industrial revolution – beginning in last part of 19th century: Emergence of a new source of energy (electricity, gas and oil), advances in basic materials (steel, chemical etc), and the internal combustion engine brought forth the motor car and the airplane, the telegraph and the telephone. The world’s most influential business writer, Peter F. Drucker, wrote that:

“In the late nineteenth century … a new major invention leading almost immediately to the emergence of a new major industry, surfaced every few months on average. This period began in 1856, the year that saw both Siemens’s dynamo and Perkins’s aniline dye. It ended with the development of the modern electronic tube in 1911. In between came typewriter and automobile, electric light bulb, man-made fibers, tractors, streetcars, synthetic drugs, telephone, radio, and airplane—to mention only a few. In between, in other words, came the modern world.”[2]

Third industrial revolution – second half of 20th century: Mankind discovered the ability to control nuclear energy in the mid-1940s, but the knowledge behind the atomic-bomb “invention” was limited in its application for some time. Drucker wrote that “no truly new major industry was started after 1914 until the late 1950s, when computers first became operational”.[3] This was the era of great advances in electronics, miniaturized material which allowed space research and biotechnology, and increased automation in production, with programmable machines and robots.

Fourth Industrial revolution (Industry 4) is now: Merging technology that blurs the lines between the physical, digital and biological spheres leading to transformations to entire production, management and governance systems. Its most important enabler is the emergence of the Internet.

But what exactly is “Industry 4”?

The Boston Consulting Group has identified some important technologies: autonomous robots, simulation, horizontal and vertical system integration, the Industrial Internet of Things, cyber security, additive manufacturing, augmented reality.[4]

What is Innovation?

The priority areas for the Baikal Global Startup Forum (BGSF) are the National Technology Initiative’s SafeNet, FoodNet, and HealthNet “market group” areas. On the National Technology Initiative (NTI) internet site[5], these are described in the following ways: 

SafeNet –new personal security systems;

FoodNet — system of personal production and food and water delivery;

HealthNet — personal medicine.

Using a similar approach to the Boston Consulting Group, the leaders of the National Technology Initiative (NTI) have also identified the following “technologies”: digital design and simulation; new materials; additive technologies; quantum communications; sensory; mechabiotronics; bionics; genomics and synthetic biology; eurotechnologies; big data; artificial intelligence and control systems; new sources of energy; unit base (including processors)[6]

When I first wrote about the NTI two years ago (after participating in the 2016 “Foresight Fleet” journey down the Volga River)[7] the NTI internet site only identified the “market groups” – with the identified “technologies” more recently added.

The “markets” approach always seemed rather vague, and I assume that the “technologies” have been more recently identified to give a clearer technical direction to the program.

Yet, 30 years ago (in the time before the “Internet age”) Drucker, wrote:

“Innovation is not a technical term. It is an economic and social term. Its criterion is not science or technology, but a change in the economic or social environment, a change in the behavior of people as consumers or producers, as citizens, as students or as teachers, and so on. Innovation creates new wealth or new potential of action rather than new knowledge.”[8] An innovation has to be “new and different”.

He wrote that “innovation is not science nor technology, but value” and that “innovation in a business enterprise must therefore always be market-focused”. “Innovation that is product-focused is likely to produce ‘miracles of technology’ but disappointing rewards.”[9]

So, I think that Drucker would favour the NTI’s “market grouping”, even if many people find it easier to think in terms of “technologies”.

I have always had the feeling that the collapse of the USSR was not only due to the sheer cost of the arms-race with the USA, which many commentators seem to think is the case. The lack of “market” mechanisms for determining allocation of resources (to produce Drucker’s “value”) probably played a large part in the USSR (including Russia) not taking advantage of the advances in electronics which was a major part of the 3rd industrial revolution.[10]

A much more recent (2017) book by Eric Schmidt (a former CEO of Google) and Jonathan Rosenberg, “How Google Works”, focusses on the “Internet age” and also emphasises the importance of the market and usefulness (ie “value”).[11] They wrote:

“To us, innovation entails both the production and implementation of novel and useful ideas”. Novel is defined as not only “radically new functionality”, but also “surprising”. “If your customers are asking for it, you aren’t being innovative when you give them what they want; you are just being responsive”.[12] 

They also offer a “more inclusive definition”, saying “innovation isn’t just about the really new, really big things”: Google “releases over 500 improvements to its search engine each year. Is that innovative? Or incremental?” While they are “new and surprising” and “useful”, each one is not “radically useful” – but “put them all together, though, and they are.” Thus, “Google’s search team, working on a product that is 15 years old, is just as much in the innovation business as Google(x), the team working on the self-driving car.”[13] 

So, in their view “innovation” does not necessarily need to be a product, but may be a new way of making better use of an existing product. In 2010, a Tencent senior official dismissed cloud computing as “old wine in a new bottle, nothing new”. However, Alibaba’s Jack Ma said: “[If] we don’t do it, we will die in the future.” Alibaba is now the biggest player in China’s cloud sector.[14]

Drucker and the authors of “How Google Works” are in agreement that aspiring technology start-up founders need to consider much more than their technical skills if they want to succeed.  

The term National Technology Initiative clearly puta an emphasis on technology. But how much technology does a “start-up” need?  

Kyle Young, in a recent Harvard Business Review (HBR) article entitled, “The Simple Question That Can Make or Break a Start-up”, describes the “Chop House Burger” restaurant in Texas which sells “six innovative burgers”.[15] I have not been to this restaurant, but I am almost certain that there is a limit to how much technology can be fitted into a hamburger! 

But, there was serious intent behind this burger example. It was the “value of establishing demand before you launch” a business. Young refers to an early 2018 “extensive review” of business failure by CB Insights: “After analysing 101 start-up post-mortems, the reviewers found that 42% suffered from a lack of demand for the product or service being offered.” “This one flaw harmed significantly more companies than well-known start-up challenges such as cash flow (29%), competition (19%), and poor timing (13%), to name a few.” 

This leads to the obvious question of how to measure the possible demand before you start-up (as a verb) your start-up (as a noun)! Quite a bit has been written about this issue,[16] and I will not delve in to this issue here in any depth.  

However, the authors of “How Google Works” had this to say:  

“Before innovation, there needs to be the proper context for innovation. This is usually found in markets that are growing quickly and full of competition (eg self-driving cars). Don’t look for empty space and then be lonely; it is much better to use an innovative approach to become a player in a space that is or will be large. This may seem counterintuitive, since many entrepreneurs dream of entering ‘greenfield’ markets that are brand new and hence have no competition. But usually there is a reason the market is empty. It’s not big enough to sustain a growing venture. It still may be a good business opportunity …. but if you want to create an innovation, it is better to look for big markets with huge growth potential. Remember, Google was late to the search-engine party, not early.”[17] 

Yet, the same authors also write that “giving the customer what he wants is less important than giving him what he doesn’t yet know he wants”.[18] 

Presumably there was plenty of “empty space” for the light bulb and the airplane? So, does the product meet market demand, or does the product create the market?  

The same authors also say that “if you focus on your competition, you will never deliver anything truly innovative”[19]. Yet they say that Google “focussed on search because it was something we felt we were better at than anyone else”,[20] and, indeed, they relate how the 2009 Microsoft launch of Bing “intensified our efforts on search”.[21] 

The authors of “How Google Works” wrote that account needs to be taken of evolving technology, and that would be innovators need to realistically consider their ability (talent) to take advantage of it.[22] Having said this, Jack Ma of Alibaba “stands out as a tech company founder with no background in technology”. In 2013 he said: “Even today, I still don’t understand what coding is all about, I still don’t understand the technology behind the Internet.”[23] 

Innovation has no rules …

Drucker wrote about the “dynamics of innovation”, and that “there are so many factors in whatever causal patterns may exist that no one can possibly unravel them”. But he disagreed with what he described as the “common belief that innovation is haphazard and incapable of being predicted or foreseen.”[24]

He wrote that “an innovation does not proceed in a nice linear progression. For a good long time, sometimes for years, there is only effort and no results. The first results are then usually meager.”[25]

He added that “timing is of the essence”. “For every successful innovation that has results faster than anyone anticipates, there are five or six others—in the end perhaps, equally successful ones—which for long years seem to make only frustratingly slow headway. The outstanding example may be the steam-driven ship. By 1835 its superiority was clearly established; but it did not replace the sailing ship until fifty years later. Indeed, the “golden age of sail” in which the great clippers reached perfection began only after the steamship had been fully developed. For almost half a century, in other words, the steamship continued to be ‘tomorrow’ and never seemed to become ‘today’.”

“But then, after a long, frustrating period of gestation, the successful innovation rises meteorically. It becomes within a few short years a new major industry or a new major product line and market. But until it has reached that point it cannot be predicted when it will take off, nor indeed whether it ever will.”

Timing can be lucky or unlucky. There is often a need for “complementary innovations” – that is innovations in related areas. For example, the first steam trains depended on advances on metallurgy to enable railway lines that were strong enough to support their great weight.

When has an innovative product been innovated enough?

The authors of “How Google Works” wrote that “new ideas are never perfect right out of the chute, and you don’t have time to wait until they get there. Create a product, ship it, and see how it does, design and implement improvements, and push it back out. The companies that are fastest at this process will win.”[26] “In the Internet age, “product development has become a faster, more flexible process … (with) lots of iterations. The basis for success then, and for continual product excellence, is speed.”[27] “The products should be great at what they do, but it’s OK to limit functionality at launch.” “Figure out some way to let people experience the product, and use the data to make the product better.”[28][29]

The advice on “How Google Works” is very focussed on the “Internet age”, and its advice is not practical on many other areas.

Steve Jobs delayed the planned roll-out of the first Apple Store by 3-4 months after being persuaded that the layout should reflect “what people might want to do” with its products (in other words, their “usefulness”) rather than being organized by the “type of products” (ie “technology”) being sold. Jobs said: “We’ve only got one chance to get it right.”[30] The same applies to other physical products such Tesla and General Motors automobiles cars (which of needed, are very expensive to recall for modification)!

… Willingness to fail

If you are afraid of failure, do not attempt to innovate.

Drucker wrote: “The majority of innovative efforts will not succeed. Nine out of every ten “brilliant ideas” turn out to be nonsense. And nine out of every ten ideas which, after thorough analysis, seem to be worthwhile and feasible turn out to be failures or, at best, puny weaklings. Innovative strategy therefore aims at creating a new business rather than a new product within an already established line. It aims at creating new performance capacity rather than improvement.”[31]

However, the authors of “How Google Works” might disagree with Drucker when it come to Google’s 500 “improvements” each year to its search engine!

Nevertheless, Drucker continued, writing that innovation “aims at creating new concepts of what is value rather than satisfying existing value expectations a little better”. “The aim of innovating efforts is to make a significant difference. What is significantly different is not a technical decision. It is not the quality of science that makes the difference. It is not how expensive an undertaking it is or how hard it is to bring it about. The significant difference lies in the impact on the environment.”[32]

Drucker wrote that “the first products” of innovation efforts “are rarely what the customer will eventually buy”. “The first markets are rarely the major markets. The first applications are rarely the applications that, in the end, will turn out to be the really important ones.”[33] 

According to the authors of “How Google Works”: “To innovate you must learn to fail. Learn from your mistakes. Any failed project will yield valuable technical, user, and market insights that can help inform the next effort.”[34] “Most of the world’s great innovations started out with entirely different applications, so when you end a project, look carefully at its components to see how they may be reapplied elsewhere.” They give the example of radio which was initially sold only as a means of ship-to-shore communication, and the steam engine as a water pump.[35] 

The authors of “How Google Works” wrote:

“We have long felt that the start-up model, with small, autonomous teams located in one office led by passionate founders, is the most effective way to achieve remarkable new things (or fail quickly in the effort).” So they devised a way to “think big (solving big problems by taking advantage of big-company assets such as talent, resources and technology) while simultaneously acting small (growing ‘start-ups’ built through bottom-up insights and with the autonomy to move fast)”.  

Based on the idea that Google employees are “allowed and encouraged to work on projects of their own choosing” for 20 percent of their time, Google developed a new program called Area 120. A “select group” of Google employees are given “the opportunity to spend 100 per cent of their time on 20 per cent projects (100+20=120!)”. “Teams are given the money, space, and autonomy to pursue their ideas”. “We attempt to re-create the Darwinian world of start-ups by establishing aggressive milestones and timelines. For example, of the inaugural class of 14 teams at Area 120 in September 2016 (selected from more than 300 applicants), we expect half to fail within 6 months.”[36] 

Drucker wrote that “it is as important to decide when to abandon an innovative effort as it is to know which one to start”. It is important to be able to “admit that what seemed like a good idea has turned into a waste of men, time, and money”. “And near-success can be more dangerous than failure. There is, again and again, the product or the process that was innovated with the expectation that it would ‘revolutionize’ the industry only to have it become a minor addition to the product line, neither enough of a failure to be abandoned nor enough of a success to make a difference. There is the innovation which looks so ‘exciting’ when work on it is begun, only to be overtaken, during its gestation period, by a more innovative process, product, or service. There is the innovation which was meant to become a ‘household word’ that ends up as another ‘specialty’ which a few customers are willing to buy but not willing to pay for.”[37] The Segway is sometimes given as an example of this.[38]

The authors of “How Google Works” agree that “the timing of failure is perhaps the trickiest element to get right”,[39] and argue that a “good failure is a fast one” so as to “avoid further wasting of resources”.  If the innovative product idea is not working out, do not be afraid to abandon it. And, it should not be forgotten that some of the information and ideas from the failed product, might be very useful for a new product.

What Can Governments Do?

You may have noticed that my 2016 article on the National Technology was quite dismissive of the NTI – at least in the way that it was being promoted at that time![40]

Apart from the flawed “Foresight Procedure”[41], one of my criticisms was the NTI envisaged designation of high-tech “national champions” – whether it be companies or products – means that someone must make a decision on which high-tech issues are to be pursued. The rapid changes in technology make this selection process very difficult – and mistakes can be very costly.

I asked: “Who will be the final arbiter here? Would the arbiter of only a few years ago have designated Nokia and Research in Motion (manufacturer of the BlackBerry) as national champions if they had been Russian companies? “National champions” can quickly become “national failures”.

An excellent 2015 McKinsey report says that “digitization seems to intensify competitive churn. Today’s market leaders are vulnerable to being knocked off by the next wave of innovation.”[42] And this probably remains true today.[43]

The last thing that Russia needs is some government officials, no matter what their good intentions may be – making such decisions about which innovation projects to spend money and other resources on.[44]

My main criticism of the NTI was on the emphasis on developing new technology and the lack of emphasis on “using” available technologies.

Australia, with a similarly “resource cursed” economy to Russia, has developed few new technologies or been particularly innovative, but has been good at taking advantage of existing technologies and innovations and using these to create additional value.

Russian President, Vladimir Putin, speaking at the Valdai Discussion Club, in October 2018 said: “Of course, the American economy is high-tech and introduces contemporary innovative technologies quickly, so both Russia and China have something to work on and to learn from our American colleagues.”[45]

So, maybe the Russian government is moving a little closer to my point of view.[46]

Chinese bureaucracy, and the desire for government control, does impeded the adoption of innovative technologies in many areas. But, China has had the advantage of a rapidly increasing consumer market – and competition for it can be an enormous driver of innovation. The Chinese consumer has been allowed to receive many innovative products, particularly those associated with the Internet.

In Russia, lower income growth and a more comprehensive bureaucracy – generally based on the period of the 3rd industrial revolution – seems to impede the adoption of contemporary technologies.[47]

The authors of “How Google Works” argue that the “defining characteristic” of innovation is its “lack of process”. It cannot be forced; instead it must be “allowed”[48] by those in power.

One of the best ways for the Russian government to improve Russia as a high-tech “producer” is to push structural economic reform because increasing competitive pressures encourage organizations to become better “users” of high-tech.

In general, apart from limited areas associated with national defense issues, the best approach of government to innovation is to get out of the way as much as possible – that is, do not try to pick winners! Governments should not try to stop use of new innovations just to protect some existing interest group! But Government does have a role to protect IP and to ensure that innovations are not abused for dishonest and anti-competition purposes.  

Conclusion

For innovative people thinking about starting a technology orientated “start-up”, there are no rules except a desire to create, and a willingness to accept the risk of failure (and some would say, even embrace it).

For governments, the rules for an innovative society are two-fold:

Firstly, get out of the way. Russia (and China) need to reduce the extent (including number of forms and people involved) in controlling what happens in society. This is the case at any official level.

Secondly, getting “out of the way” does not mean abandoning the responsibility for ensuring that honesty is the basis of society relations and business dealings.

 


[1]Jeff Schubert is Professor of International Business, Baikal School of BRICS, Irkutsk National Research Technical University, Russia

[2]Peter F. Drucker, “MANAGEMENT Tasks, Responsibilities, Practices”, Truman Talley Books • E.P. Dutton, 1986, page 531 

http://markethinkzone.com/wp-content/uploads/2013/06/Management-Tasks-Responsibilities-Practices-by-Peter-Drucker.pdf

[3] Peter F. Drucker, “MANAGEMENT Tasks, Responsibilities, Practices”, Truman Talley Books • E.P. Dutton, 1986, page 531

[4] Oliver Scalabre, “Embracing Industry 4.0 – and Rediscovering Growth”, The Boston Consulting Group, 2018

[8] Peter F. Drucker, “MANAGEMENT Tasks, Responsibilities, Practices”, Truman Talley Books • E.P. Dutton, 1986, page 532

[9] Peter F. Drucker, “MANAGEMENT Tasks, Responsibilities, Practices”, Truman Talley Books • E.P. Dutton, 1986, page 534

[10]In 2001 I gave a speech on “Missile Defence” to the Australian Institute of International Affairs in which I stated: “In my view, the industrially centrally managed economy was struggling to cope with the move toward advanced electronics, services (and “information”) activities. The gigantic factory approach of Russian central planners, workable for an earlier simpler age, was incapable of taking the Russian economy further.” See: Jeff Schubert, http://www.jeffschubert.com/index.php?id=57

[11]The book is less disciplined in its analysis of issues than the writings of Drucker and the ideas sometimes seem inconsistent. However, it contains plenty of examples of innovation from the “internet age” and the thinking and process behind them.

[12] Eric Schmidt and Jonathan Rosenberg, “How Google Works”, John Murray, 2017, page 206

[13] Eric Schmidt and Jonathan Rosenberg, “How Google Works”, John Murray, 2017, page 206

[14]Louise Lucas, “Tencent’s management reboot shines light on fragmented culture”, Financial Times, 18 October 2018    https://www.ft.com/content/3e363f84-d0f8-11e8-a9f2-7574db66bcd5  

[15] Kyle Young, “The Simple Question That Can Make of Break a Start-up”, Harvard Business Review, 13 August 2018

[16] For example, Joshua Gans, Erin L. Scott and Scott Stern, “Strategy for Start-ups”.

[17]Eric Schmidt and Jonathan Rosenberg, “How Google Works”, John Murray, 2017, page 207

[18]Eric Schmidt and Jonathan Rosenberg, “How Google Works”, John Murray, 2017, page 73

[19]Eric Schmidt and Jonathan Rosenberg, “How Google Works”, John Murray, 2017, page 91

[20]Eric Schmidt and Jonathan Rosenberg, “How Google Works”, John Murray, 2017, page 84

[21]Eric Schmidt and Jonathan Rosenberg, “How Google Works”, John Murray, 2017, page 91

[22]Eric Schmidt and Jonathan Rosenberg, “How Google Works”, John Murray, 2017, page 208

[23]Duncan Clark, “Alibaba: The House that Jack Ma built”, Harper Collins, 2016 (page 24)

[24]Peter F. Drucker, “MANAGEMENT Tasks, Responsibilities, Practices”, Truman Talley Books • E.P. Dutton, 1986, page 534

[25]Peter F. Drucker, “MANAGEMENT Tasks, Responsibilities, Practices”, Truman Talley Books • E.P. Dutton, 1986, page 537

[26]Eric Schmidt and Jonathan Rosenberg, “How Google Works”, John Murray, 2017, page 233

[27] Eric Schmidt and Jonathan Rosenberg, “How Google Works”, John Murray, 2017, page 15

[28] Eric Schmidt and Jonathan Rosenberg, “How Google Works”, John Murray, 2017, page 237

[29]In my report on the NTI, I wrote: “Boris Nuraliev, founder of 1С, says its “1С enterprise” software program can be “customized much quicker than well-known western systems”. “For a holding company, it is important that a system quickly ‘roll-out’ when, for example, a decision is made to replicate in other factories the results of testing in one factory.”

[30] Dave Smith, “The Steve Jobs guide to manipulating people and getting what you want”, SMH, 24 October 2018 https://www.smh.com.au/business/workplace/the-steve-jobs-guide-to-manipulating-people-and-getting-what-you-want-20181024-p50bkc.html

[31]Peter F. Drucker, “MANAGEMENT Tasks, Responsibilities, Practices”, Truman Talley Books • E.P. Dutton, 1986, page 536

[32] Peter F. Drucker, “MANAGEMENT Tasks, Responsibilities, Practices”, Truman Talley Books • E.P. Dutton, 1986, page 536

[33][33]Peter F. Drucker, “MANAGEMENT Tasks, Responsibilities, Practices”, Truman Talley Books • E.P. Dutton, 1986, page 537

[34]Eric Schmidt and Jonathan Rosenberg, “How Google Works”, John Murray, 2017, page 238

[35]Eric Schmidt and Jonathan Rosenberg, “How Google Works”, John Murray, 2017, page 75

[36]Eric Schmidt and Jonathan Rosenberg, “How Google Works”, John Murray, 2017, page xxv

[37]Peter F. Drucker, “MANAGEMENT Tasks, Responsibilities, Practices”, Truman Talley Books • E.P. Dutton, 1986, page 539

[38]I must admit that I think that many expectations for driverless cars are overdone. While they are likely to be successful in many areas, many reasonably aggressive drivers (although not a “road ragers”) would be happy to take advantage of any other cars on the road which would automatically take give-way if there was any chance of a collision. Many people will not easily surrender the right to drive, so driver and driverless cars may be doomed to co-exist. Moreover, for many people cars are a very personal thing which they clutter with various objects (eg the various needs of young children) and the idea that people will surrender ownership in return for cheaper on-call driverless cars seems far-fetched.

[39]Eric Schmidt and Jonathan Rosenberg, “How Google Works”, John Murray, 2017, page 239

[41]I wrote: “The Rapid Foresight methodology being used to identify trends and new markets is a very simplified version of more “classical” foresight methods – based on the Delphi approach — which themselves are of dubious utility in that they tend toward exposing the obvious. Even if a form of foresight methodology is to be used, the Foresight Fleet would seem to be an unnecessary expense that produces banality, repetitiveness and vagueness.”

[42]  McKinsey, “Digital America: a Tale of the Haves and Have-Mores” McKinsey.com Insights & Publications, December 2015, Available at http://www.mckinsey.com/industries/high-tech/ourinsights/digital-america-a-tale-of-the-haves-and-have-mores

[43]However, it is always possible that there may be a hiatus in innovation of the sort that Drucker noted between 1914 and the late 1950s.

[44]According to a press-release of 30 May: “Results of joint work of the people participating in Foresight Fleet 2016 will be submitted for consideration to the President of the Russian Federation Vladimir Putin in July 2016.”  But “what will happen if the President does not approve”? According to the NTI internet site: “This would mean that we have badly done our job.”

[45]Vladimir Putin took part in the plenary session of the 15th anniversary meeting of the Valdai International Discussion Club”, 18 October 2018  http://en.kremlin.ru/events/president/news/58848

[46]Unfortunately, according to its internet site at the time of my writing in September 2016, the NTI had “no task” of “modernization of existing sectors” or, it would seem, any desire to assist Russia to become a better user of high-tech.

See: Jeff Schubert, “National Technology Initiative – ‘Waiting for High-Tech Tooth-Fairy’!”, 30 June 2016

 http://russianeconomicreform.ru/2016/06/russian-national-technology-initiative-failure-or-success/

[47]It also may be that the USA is not as advanced in introducing contemporary innovative technologies as is often thought. McKinsey, in its 2015 report, say that “most sectors across the (US) economy are less than 15% as digitized as the leading sectors. We see this pattern at the company level as well as the sector level.”

[48]Eric Schmidt and Jonathan Rosenberg, “How Google Works”, John Murray, 2017, page 209

Published on November 11 2018

Russia’s Approach to India & China (within Eurasia)

Introduction

Two themes dominate Russian foreign policy.

One is the almost pathological need to assert the importance of Russia as a powerful player in world affairs, and this is the main reason for Russia’s actions in Syria where it now has secure military bases and has demonstrated to the world its willingness to use force.

The other theme is the more rational desire to secure its border areas by maximizing influence over its neighbors, and in particular countries of the former Soviet Union. In the face of actual and mooted NATO expansion, this was the prime motivator for the annexation of Crimea and the support of separatists in eastern Ukraine.

These two themes jointly account for Russia’s enthusiasm for the Eurasian Economic Union (EAEU), which – despite its name – is seen by Russia more in political than economic terms. The EAEU is really an attempt by Russian to exert political influence in what might be called Eurasia. In Russian foreign policy eyes, Eurasia can in practical terms best be defined as encompassing the countries which are presently members of the Shanghai Cooperation Organization (SCO) – Russia, China, Kazakhstan, Uzbekistan, Tajikistan, Kyrgyzstan, India and Pakistan – plus Turkmenistan, Afghanistan, Mongolia and possibly Iran. Sometimes the term “Greater Eurasia” is used, often for a wider grouping of countries that even includes ASEAN.

Russia regards China as being far more important than India when thinking about issues in the EAEU, Eurasia and the World.

China’s economic power, Russia’s long border with China, their energy-trade based economic relationship, and their shared interest in restraining US influence and power, mean that Russia and China look to assist each other in ensuring that Eurasia is a place of relative stability while they face what each sees as a generally hostile wider World.

India has little to offer Russia, apart from being a second-rank participant in its ideas about Eurasia (or Greater Eurasia) and as a buyer of Russian military and nuclear power equipment. Because Russia’s Eurasia concept has an anti-US bias, it has largely tossed aside historical warmth towards India and now warily sees it as a possible US ally in containing both Russia and China.

Conclusion 

Russia clearly, and logically, puts more emphasis on its relationship with China than with India. India, in recent years, has mainly been seen as a market for Russian military equipment and civilian nuclear technology. This has led Russia to be sometimes very casual when considering India’s broader interests. As a s result, some very influential analysts to believe that “Russia is losing India”. However, there are also signs that India growing ambitions, as evidenced in Russian eyes by the Quad, are leading to some refocus on India. According to Karaganov, Russia’s “relations with India are clear and there are unused opportunities that have been missed in the last 30 years”.

The entire 8,000 word paper can be read here:

http://russianeconomicreform.ru/wp-content/uploads/2018/08/Russias-Approach-to-India-and-China-in-Eurasia.pdf

 

Published on August 05 2018

New Eurasian Age: China’s Silk Road and the EAEU in SCO Space.
20

Both Russia and China have at various time spoken about coordinating the activities of the Shanghai Cooperation Organization (SCO), the Eurasian Economic Union (EAEU) and the Silk Road Economic Belt (SREB) part of One Belt, One Road (OBOR). What does this mean? And, what are the prospects and possible implications? Is there to be a new age of Eurasian economic – and power – primacy? Or, is it really simply “Noodles and Meatballs in a Breaking Bowl”? ©

This book was initially prepared for publication by RANEPA (Russian Academy of National Economy and Public Administration) when I was Head/Director of the “International Center for Eurasian Research”.  Instead, because it is at times very critical of many Russian policies, it is being published here on (on 14 August) as an open source book.

TABLE of CONTENTS

INTRODUCTION

At their 3-4 July 2017 meeting in Moscow, Vladimir Putin and Xi Jinping respectively spoke about the formation of a “broad Eurasian partnership” and “coordination of the Belt and Road initiative with the Eurasian Economic Union”.

Putin also referred to this issue several times at the 14-15 May 2017 Belt and Road Summit in Beijing. After a meeting with Xi, Putin said that “the integration” of the Eurasian Economic Union (EAEU) and the Silk Road (SREB) “actually implies a common economic space on the continent”, and in his formal speech at the Summit he said that “by adding together the potential of all the integration formats like the EAEU, the ‘One Belt, One Road’ (OBOR), the Shanghai Cooperation Organization (SCO) and the ASEAN, we can build the foundation for a larger Eurasian partnership”.

At the same summit, Kazakhstan’s president Nursultan Nazarbayev said “the idea of creating a single economic space of Greater Eurasia acquired a new meaning. The SREB can advantageously link the platforms of the SCO, the EAEU and the European Union into a single regional prosperity area”.

What does all this mean? And, what are the prospects and possible implications?

Is there to be a new age of Eurasian economic and power primacy? Or, is it really “Noodles and Meatballs in a Breaking Bowl”? ©

The Silk Road Economic Belt (SREB) part of the Chinese “One Belt, One Road” (OBOR) or “Belt and Road” initiative announced in 2013 has focused increased attention on central Eurasia.

The central Eurasian geographical area is not easy to define, but its importance to the world is immense. Central Eurasia undoubtedly includes the former USSR countries of Central Asia (Kazakhstan, Uzbekistan, Turkmenistan, Tajikistan and Kyrgyzstan) and Afghanistan, but more crucially it also includes parts of – or is of great importance to – their much bigger neighbors Russia, China, India and Pakistan. Central Eurasia is thus a mix of countries and parts of countries, ranging from very small to very large, whose relationships with each other do not always have a happy history.

All these countries have both economic and security issue at stake in central Eurasian developments, and it is not always easy or even possible to disentangle these. This book mainly concentrates on the economic issues and does so by way of examining the most important international institutional arrangements and integration ideas impacting on the central Eurasian geographical space. These are presently dominated by Russia and China, but some changes are underway.

The main institutional arrangements are the Russian-led Eurasian Economic Union (EAEU) and the Shanghai Cooperation Organization (SCO). The main idea is China’s Silk Road Economic Belt (SREB).

The EAEU consists of Armenia, Belarus, Russia, Kazakhstan and Kyrgyzstan. The first two countries are not considered part of central Eurasia, and only make a brief appearance in this book. The present members of the SCO are China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, and (since June 2017) India and Pakistan.

But, exactly how should the SREB and the EAEU be “coordinated” to create a “Eurasian partnership”? Or, how should SREB, the EAEU and the SCO be “linked” to create “Greater Eurasia”?

In December 2015, Chinese Premier Li Keqiang and Russian Prime Minister Dmitry Medvedev signed a “Joint Communique on the results of the 20th regular meeting between the heads of the Russian and Chinese governments” that clearly states “the parties hold that the SCO is the most effective forum for aligning the construction of the SREB with the building of the EAEU”.

In November 2016, Li Xin of the Shanghai Institutes for International Studies (SIIS) wrote a report suggesting that “Chinese scholars” believe that “the SCO should play a central role as a platform for aligning the SREB and the EAEU”.

However, in reality there are many actual and potential issues that stand in the ways of a successful linking of the EAEU and the SREB – and particularly with the involvement of the SCO.

These include the actual uncertain futures of the EAEU and SCO themselves. While Russia would like to see the EAEU expand, particularly with the addition of Tajikistan, the EAEU is having trouble developing a positive internal integration strategy. New SCO members Pakistan and India will undoubtedly bring their own views about what the SCO should and should not be doing.

An Russian International Affairs Council (RIAC) report says thatRussia has not ruled out the possibility that the future of regional security in the area of the SCO’s responsibility could be determined by a strategic balance of the ‘division of roles’ between Russia and China within this organization, with Russia primarily being in charge of security and China being in charge of economic development, trade and mutual investment.”  

Such a division of labor would seem to ultimately put China at the mercy of Russian security interests, and so it would be less keen than Russia on such an allocation of roles. Moreover, not all other members of the EAEU or the SCO are likely to be enamored with such an arrangement.

Apart from the very Chinese Silk Road Fund (SRF), the nominally international Asian Infrastructure Investment Bank (AIIB) is relevant because of its Chinese foundations and focus on issues that will aim to facilitate successful implementation of SREB pronouncements.

This book starts by looking at the general Russia-China relationship because this will largely determine how all other events unfold. Secondly, Central Asia itself is considered with an emphasis on those internal issues which may ultimately impact on the EAEU, the SREB and the SCO. Thirdly, the relationship between Russia and the countries of Central Asia is examined, with a particular focus on the EAEU. Fourthly, the relationship between China and Central Asia is considered. Fifthly, the SCO is considered. The book then moves on to describe and consider the SREB, the SRF and the AIIB as they are ultimately Chinese creatures.

Finally, it considers the ways in which the EAEU, the SCO and the parts of the SREB associated with these countries can work together, and the actual prospects for this. It also concludes with a view about future developments in this part of the world.

Part A:   RUSSIA & CHINA

1.    Political Relationship

2.    Economic Relationship

3.    Influence of Domestic Policies on the Relationship

Part B:   CENTRAL ASIA

1.    Introduction

2.    Domestic and International Economic Data

3.    Relationship between Central Asian Countries

4.    Astana International Financial Center

Part C:  RUSSIA, CENTRAL ASIA & the EAEU

1.    Introduction

2.    Eurasian Economic Union (EAEU)

3.    Russia and Individual Countries of Central Asia

4.    The Way Forward?

Part D:   CHINA & CENTRAL ASIA

1.    Introduction and Security Issues

2.    Economic Issues

3.    Individual Countries

Part E:  SHANGHAI COOPERATION ORGANIZATION (SCO)

1.    What is the SCO?

2.    The Way Forward?

3.  The Effect of New Members (India and Pakistan)

Part F:  “BELT & ROAD” INITIATIVE.

1.    What is the Silk Road Economic Belt (SREB)?

(a)   Reasons for the “Initiative”

(b)   Official Chinese view of the “Initiative”

(c)    Role of Russia, EAEU, CA countries and SCO in official view

(d)   The special case of the China-Pakistan Economic Corridor (CPEC)

2.   Implementation of the SREB

(a)   Practical implementation of SREB

(b)  Financing the SREB (including Silk Road Fund)

3.    Belt and Road “Associates”

(a)   Asian Infrastructure Investment Bank (AIIB)

(a)   BRICS bank

Part G:  PULLING TOGETHER IN THE FUTURE?

1.  Introduction

2.   The Russian View

3.    The Chinese View

4.    Central Asian View

5.    Some Other Issues

(a)  The Thucydides Trap

(b)  EAEU and AIIB: “hard power” and “soft power”!

CONCLUSION

There have been, and will continue to be, various attempts to link the SREB, the EAEU, and the SCO. The analysis laid out in this book suggests that such attempts will have little success. There are a number of reasons.

The first is that the SREB, the EAEU, and the SCO are very different things in any institutional or organization sense. Moreover, the EAEU and the SCO are each close to the peak of their influence and relevance.

The joint report by analysts from the Chongyang Institute for Financial Studies, Valdai Discussion Club, and the Kazakhstan Council of International Relations released in early July 2017 might have been expected to result in a clearer understanding of many of the issues that have already been discussed in this text – but it does not!

Paradoxically, the failure of such a recent report with such multi-lateral input to finally bring some clarity to the SREB and related issues is the report’s strength because it highlights the confused nature of much of the intellectual debate and of many official policies. On the positive side, the report is not afraid to point the finger at some very specific problems and at those who are responsible for them.

The report contains a very forthright statement which indicates the probable reason that it is so weak on coherent analysis: “The current study was accompanied by a heated debate between Russian, Chinese, and Kazakhstani experts, which is reflected in the report.” As discussed throughout this text, the countries of Russia, China and Kazakhstan share little commonality in thinking on many important issues.

The report correctly says that “the ‘Belt and Road’ initiative in itself remains very abstract and subject to ambiguous interpretation: even Chinese experts often hold to opposite views on its essence.”

The report then goes on to say that the Silk Road Fund “is almost the only institutional embodiment of the initiative.” While partly true, this very statement in itself tells us something about the confused nature of discussion about the SREB because, as already discussed in this text, most of the activities of the Silk Road Fund have little to do with the professed “connectivity” objectives of the Belt and Road.

Despite various “philosophical” aspects in the minds of some people, this author regards the SREB as little more than an all-encompassing umbrella-type slogan to give credence and force to central Eurasian projects aimed at increasing China’s economic and political power and security.

Domestic aspects of this include boosting the economic prospects of Xinjiang and other western provinces of China and possibly contributing to reducing over-capacity in various heavy industry sectors. Externally, China wants a secure western rear to its eastern flank which borders on various international contested seas and exposed trade routes. The SREB, whether through Central Asian countries or Pakistan, gives China alternative routes for imports of energy and, to a lesser extent, exports of manufactured goods and industrial capacity.

China now prefers that the original “One Belt, One Road” terminology be replaced with “Belt and Road” because of its widening geographical and political ambitions. The SREB terminology may last longer because of the historical connections that it implies, but at some stage its individual projects will be seen simply as those that any country in China’s position would pursue. To put it another way, there is nothing particularly surprising about the SREB for a country in China’s geographical, economic and political position.

The EAEU is being held together by Russian will-power and may well survive in its present imperfect form for some time. Even if it can attract one or two new members (such as Tajikistan) during the next few years, it will eventually fade because of its own internal contradictions and because its Central Asian country members will increasingly see their future connected to closer relations with China.

The SCO at one stage could have possibly been the basis of greater economic cooperation in central Eurasia, but Russia has been against this – preferring to try to develop the EAEU as the main Eurasian supranational organization working as a “partner” with China. In the view of this author, the indications are that China’s growing confidence in its Belt and Road “initiative” is reducing its interest in the SCO as a vehicle for economic issues.

The succession of India and Pakistan to the SCO will greatly increase its diversity of thinking and interests and this means that it is likely to struggle to avoid becoming little more than a leader’s discussion club.

Given all of the above, it is extremely difficult to see a process in which the SREB and the EAEU are linked in any substantial way. Moreover – in the view of this author – it would be almost impossible for this to occur with the involvement of the SCO.

Yet, in another indication of confused thinking on such issues, the joint report of the Chongyang Institute for Financial Studies, Valdai Discussion Club, and the Kazakhstan Council of International Relations pushes the idea of an EAEU SCO free trade area!

In essence, the SREB and EAEU in the SCO geographical area appear similar to a breaking bowl (the SCO) containing noodles (the strung-out communication routes of the SREB) and a meatball (the flung-together countries of the EAEU which are not a solid mass). All this makes for a very messy meal!

But even a messy meal is a meal, and in the absence of anything else might be consumed if there is sufficient hunger to do so. Which brings us to the second reason why attempts to link the SREB, the EAEU, and the SCO will not be successful. There is simply no agreed appetite among the counties of central Eurasia to change the above trends.

Russia and China are the main players in the context of this book, and will remain so for many years because the other possible main player, India, has neither the Russian historical involvement nor the Chinese financial power to force any significant change in the outlook.

However, the Russia-China relationship is not deep for a variety of reasons, and shows little sign of becoming so. Both countries have a natural inclination – despite a temporary mutual interest in “communism” in the middle of the last century – to look in opposite directions: Russia to the “West” in a westerly direction; China to the “West” in an easterly direction. Over the last two decades or so, the attractions and advantages of the English language and largely “Western” promoted international economic system have benefited both countries, although China has been much more adept than Russia at taking advantage of this.

This author has previously argued that a free trade agreement between China and Russia (or the EAEU) is fundamentally difficult to reach because Russia views any agreement in “quite narrow political and security terms, and its economic agenda is orientated toward new industrial development rather than trade development”. China, on the other hand, “at the current stage, is most interested in enhancing economic development and trade across the Central Asian and wider Eurasian regions”.

As for Greater Eurasia, the above mentioned joint report by the Chongyang Institute for Financial Studies, Valdai Discussion Club, and The Kazakhstan Council of International Relations, describes it as “nothing else than an attempt to grope for new sources of economic growth. Russia sees them in its potential entry to Asian markets and building up trade with EAEU nations, in luring investments in infrastructure projects in Siberia and Far East. China prefers large-scale investments in external infrastructure and gaining access to new natural resources.”

Once again this report is paradoxically useful because this statement is at least partly wrong!

It suggests that after so much discussion there is a broad limited understanding about the Greater Eurasia idea within Eurasia itself. In reality, Vladimir Putin and many influential Russian analysts mainly regard Greater Eurasia as a geo-political concept to reduce the power of the US and build a multi-polar world. The economic growth aspects are secondary.

Putting these trade, security and geo-political factors together allows us to see that the basic reasons for the EAEU and the Belt and Road are different. The EAEU is based on Russia’s conviction that globalization would gradually outlive its usefulness and the perceived opportunity for it to form a center of economic and political power in central Eurasia. China, however, launched its Belt and Road as a way of taking further advantage of globalization and in the process boosting its own security.

The 3-4 July 2017 meeting between Presidents Putin and Xi in Moscow seems to have resulted in little more than motherhood-type statements. Putin said: “We held an in-depth exchange of opinions on joining the activity of the EAEU with the Chinese initiative of the SREB. This is a highly promising direction, putting collective effort in line with our idea to form a broad Eurasian partnership.” Xi Jinping said: “We are developing our coordination of the One Belt, One Road initiative and the EAEU” and work to “promote development and prosperity on the Eurasian continent.”

The Russia-China relationship as it now exists is mainly the creature of the relationship between Presidents Vladimir Putin and Xi Jinping and whatever difficulties both countries are having in their external security environments.

Baring health issues, it would seem that Putin and Xi will remain the most powerful figures in their countries into the early 2020s. Both see themselves as historical figures leading the rejuvenation of their countries. Both want to use international economic relations to boost the power and prestige of their countries, although the way that they go about this is not the same.

For a variety of reasons Xi is likely to be more successful in the international arena than Putin. If nothing else, demographics and the catch-up aspect of economic development that benefits China make this almost inevitable. But, it is also clearly the case that China is showing a much defter hand on the international public relations (PR) front and acts to avoid unnecessary conflict, whereas Russia seems to bask in such conflict.

While domestic policies have been little more than touched upon in this book, it is not clear that either Xi or Putin will ultimately put economic effectiveness ahead of domestic political goals. This will spill-over into international relations and will slow the development of closer economic ties between Russia and China because non-political business decision makers will much prefer to deal with countries where business is less political.

While much of the future of the central Eurasian area will be determined by the relationship between Putin and Xi, there is also ultimately a third player, in the form of the child-like Donald Trump and the self-important policies of the USA. If Putin and Xi are attracted to each other, it is the US that has pushed them into their embrace.

While Crimea and the South China Sea remain significant issues for US policy makers, Putin and Xi will find solace in each other. If the US removed such pressure, the present leader-centric Russia-China relationship would quickly show sign of fatigue due to the absence of support from more fundamental deep ties between the two countries and due to their competition in the central Eurasian region. The so-called “Thucydides Trap” might then show prominence as Russia clings to the idea that it should be the main security provider in the region and China begins to get nervous about this.

In the meantime, China seems in no hurry to change present circumstances and trends in central Eurasia because it has the upper hand, and will continue to pay lip-service to ideas of greater cooperation with Russia in order to prevent it playing a SREB spoiling role. Russia will continue to try to figure out what it can do to hold its position in central Eurasia and – unrealistically – engage in EAEU and Greater Eurasia dreams about how it can enhance it!

In the view of this author, significant cooperation between the EAEU, the SREB and the SCO – or even between any two of these – is highly unlikely. The idea of Greater Eurasia is a fantasy!

READ THE WHOLE BOOK HERE:

http://russianeconomicreform.ru/wp-content/uploads/2017/08/New-Eurasian-Age-with-Chinese-Silk-Road-and-EAEU-in-SCO-Space-Update.pdf

Published on April 05 2017

National Technology Initiative – “Waiting for High-Tech Tooth-Fairy” !
5

Overview (of full paper)

This paper argues that Russia’s National Technology Initiative (NTI), which aims to boost the country’s future high-tech production and exports, is likely to achieve little and should be severely modified or even abolished. The NTI concept of focusing on selected “new markets” that are expected to exist in 2035 is misguided. Its execution process, particularly the use of the Rapid Foresight methodology, results in recommendations that are banal or vague.

If Russia wants to make serious advances in future high-tech “production”, it needs a technology policy that puts more emphasis on promoting Russian “usage” of presently available technologies. Much technological progress actually flows from the initiatives of “users” of present technologies and the feed-back they give to “producers”.

The threats to Russia from increased multi-country economic/trading blocs/alliances and inaccessible “global value added chains”, used to provide justification for the NTI, are overstated.

Apart from education – which is the only redeeming feature of the NTI – one of the best ways for the Russian government to improve Russia as a high-tech “producer” is to push structural economic reform because increasing competitive pressures encourage organizations to become better “users” of high-tech.

If Russia does not become a better “user” of high-tech, there is a risk that other countries will get greater benefits than Russia from any Russian developed high-tech products. If such Russian high-tech products were actually to be developed using government budgetary funds under the NTI (or any other government program), this would also mean that Russian tax-payers were subsidizing high-tech “users” in other countries.

Irrespective of government policy actions (including the NTI), the rapid pace of technology change and falling technology prices (relative to other prices) means that, at the country level, “users” can easily receive greater economic benefits than “producers” because of improvements in their “terms of trade”.

Reasons for this paper

This paper had its genesis during the author’s participation in the 2016 “Foresight Fleet” (four boats) journey down the Volga River in May. Jointly organized by the “Agency for Strategic Initiatives” (ASI) and the “Russian Venture Company” (RVC), it aimed to consider various aspects of the “National Technology Initiative” (NTI) which is billed as “a program for creation of fundamentally new markets and the creation of conditions for global technological leadership of Russia by 2035”. I found it to be (at least on my boat, the “Global Markets / World”) an intellectually stifling event. The discussion groups on pre-designated topics supposedly produced considered group recommendations. But, they in fact, operated to produce forced recommendations as the generation of output quantity was prioritized over output quality. Talking to the few other foreigners (and quite a few Russians) on my boat, I found considerable agreement with my views. On 21 July, I attended a NTI forum at VDNH.

Conclusion (of full paper)

While the NTI might at first seem an attractive idea, it quickly losses its luster when it is considered in detail. The suggested measures to allow Russia to escape the “resources curse” and diversify its output of goods and services basically come down to using a dubious forecasting methodology to identify future “new technology order” or high-tech “national champions” despite the lack of evidence of advantages, and despite the risks of failure in an era of rapid technological change.

Import-substitution (even if limited to “part of key technologies”) may boost some industries for a time, but the great risk is that lack of ongoing competitive pressure will impede broader “digitization” in the economy and the use of high-tech.

The Rapid Foresight methodology being used to identify trends and new markets is a very simplified version of more “classical” foresight methods – based on the Delphi approach — which themselves are of dubious utility in that they tend toward exposing the obvious. Even if a form of foresight methodology is to be used, the Foresight Fleet would seem to be an unnecessary expense that produces banality, repetitiveness and vagueness.

The “national security” justification for the NTI cannot and should not be easily dismissed. In the view of this author, there is little doubt that proposed groupings such as the Trans-Pacific Partnership (TPP) and the Transatlantic Investment Partnership (TIIP) are motivated by a combination of economic and political aims.US Secretary of State, John Kerry, makes no secret of this: “I have worked from day one to emphasize that foreign policy is economic policy and economic policy is foreign policy. Without a doubt, these trade agreements are at the center of defending our strategic interests, deepening our diplomatic relationships, strengthening our national security, and reinforcing our leadership across the globe. And the importance, my friends, cannot be overstated.” “Even as we seek to complete TTIP and strengthen our bonds across one ocean, we know that our future prosperity and security will also rest on America’s role as a Pacific power. Central to that effort is the adoption of TPP.” (Kerry even related the TPP to events in the South China Sea.) While the TIIP and the TPP may not proceed given the election of Donald Trump as the next US president, the basic motivations described by Kerry will not go away.

However, the election of Trump and the recent Brexit vote in the UK occurred against the great majority of domestic and international corporate opinion, and suggest that some of the NTI arguments about economic/political blocs/alliances with closed “global chains creating additional value” are significantly overstated. Moreover, there is little evidence that China has a particular wish to form or participate in such closed blocs/alliances. China’s “One Belt One Road” (OBOR) initiative is virtually the anti-thesis of this.

The one redeeming feature of the NTI is the newfound emphasis on education. This should assist Russia to become a better “user” of existing and future technologies. This would also help achieve some of the NTI “new technology order” aims by allowing Russian producers to more readily take advantage of the feedback that “users” give to “producers. Better “usage” would also allow greater advantage to be taken of existing possible network effects.

Apart from education, one of the best ways for the Russian government to improve Russia as a high-tech “producer” is to push structural economic reform – because rising competitive pressures encourage organizations to become better “users” of existing technology. The “resources curse” is not always such a bad thing, as Australia has demonstrated by becoming a good high-tech “user” rather than a “producer”.

The rapid pace of technology change and falling technology prices means that “users” can easily receive greater economic benefits than “producers” because of improvements in their “terms of trade”. This is a particular possibility when the “producers” are a very small part of the economy in one country, but the “users” are a very large segment of an economy in another country.

If Russian high-tech products were actually to be developed using government budgetary funds under the NTI (or any other government program), this would also mean that Russian tax-payers were subsidizing high-tech “users” in other countries.

Russia should radically change the NTI or abandon it. At the very least, it should not proceed with any future Foresight Fleets and abandon Rapid Foresight as a policy tool.


English language pdf version of full document can be accessed here: http://russianeconomicreform.ru/wp-content/uploads/2017/01/NTI-ENGLISH-VERSION.pdf

Russian language pdf version of full document can be accessed here: http://russianeconomicreform.ru/wp-content/uploads/2017/01/NTI-RUSSIAN-VERSION.pdf

Published on June 30 2016

John Besemeres’ reckless ignorance of Russia

John Besemeres’ article “Ukraine conflict exposes Western weakness on Russia” published on the Lowy Institute for International Policy” internet site (10 April) shows a fundamental and reckless ignorance about Russia.

See: http://www.lowyinterpreter.org

Besemeres writes that Russia “claims to be afraid of being encircled by hostile states, and to have been humiliated by the West’s supposedly triumphalist expansion into its backyard (its ‘sphere of privileged interests’). This is largely a propaganda myth; the Western expansion was a bit reluctant and apologetic, caused above all by the desperation of former Soviet vassals for protection from any Russian recidivism. Russia’s volatile opinion polls suggest, however, that after years of intense propaganda most of Putin’s subjects have come to believe the hostile encirclement narrative. Some who spend a lot of time talking to Russian officials and propagandists start to repeat these claims of encirclement and humiliation, and present them as their own superior insight into the Russian mind. They would do better to reflect on them more critically.”

Besemeres is right that “propaganda” has played a role in the “hostile encirclement narrative”, however that does not mean that there is not some basis for it nor that the “some” that he mentions have no insight into “the Russian mind”.

During the 7 years or so that I have spent in Russia since I first visited Moscow in 1991, I have often been reminded by quite ordinary people (not “Russian officials and propagandists”) about the Nazi invasion and, even occasionally about Napoleon.

The “Russian mind” clearly has this feeling of “never again” etched into it.

For example, on 25 February 2008, I wrote that that about 6 months earlier I was in a park in Pushkin on the outskirts of St. Petersburg when a 10-year old girl pointed out to me that “this is where the Germans were beaten”. Several days later, in the evening, I hailed down a private car to take me to Pushkin. The driver, a lawyer looking for a little extra money by acting as a taxi for me, volunteered the same point about the Germans.

See: http://www.jeffschubert.com/index.php?id=55

I also covered some such issues in a 5 March 2001 (ie 14 years ago, Besemeres should note!) presentation to the Australian Institute of International Affairs (Sydney Branch) on the subject of “Missile Defence”.

See: http://www.jeffschubert.com/index.php?id=57

It should be remembered that as a real event which affected a nation, the Nazi invasion is much more significant than Gallipoli in 1915 or the 9/11 attacks in the US; but look at how the ANZAC story has come to have meaning in Australia and the US has responded around the world to the terrorist attacks. The mind is not always totally logical and devoid of feelings.

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Published on April 12 2015

Boris Nemtsov, the Russian economy, and “Western” hypocrisy

Today, I will attended (as an observer because as a foreigner, who does not have to live in this country, I feel that I can comment on Russia but I must let Russians run their own affairs) the mourning procession for Boris Nemtsov in Moscow. In some ways the murder of Nemtsov is the most significant event in Moscow since Boris Yeltsin used tanks to blast the White House in October 1993 (I was also in Moscow at that time).

Of course, the murder of one man (even a man of Nemstov’s stature) does not compare to the hundreds of people killed in 1993.

What makes the Nemtsov murder so significant is that it has occurred against the present back-ground of the events in the Ukraine and strong anti-Putin sentiment in most “Western” countries, and is the latest in a series of such killings of Putin critics — including Anna Politkovskaya (an investigative journalist, was shot dead outside her Moscow apartment on Putin’s birthday in 2006) and Alexander Litvinenko (by radiation poisoning in London, also in 2006).

Putin has already totally lost the trust of “Western” political leaders. The additional negative feelings resulting from the Nemtsov murder will mean that even if the situation in the Ukraine improves it will be very difficult for “Western” sanctions to be eased. Positive sentiment toward Russia will be zero; indeed, any sentiment will be negative!

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Published on March 01 2015

Litvinenko, Borodin and Pugachev in London, and the Yukos $US50bn

In the week beginning 1 February, I emailed a survey to 1,750 of my Russian connections on LinkedIn (about 1,500 are “finance executives”). It should be borne-in-mind that these people will be much more “Western”-orientated than the general Russian population – a fact attested to by the extensive use of English in their profiles. You can see the profiles of the 1,750 here:

https://www.linkedin.com/profile/view?id=330346389

I also emailed the same survey to about 200 academics and journalists living outside Russia, but whom I knew had an interest in Russian issues.

The questions covered the Alexander Litvinenko murder Inquiry, the situations of ex-Russian bankers Andrei Borodin and Sergei Pugachev, and the Hague-based Permanent Court of Arbitration award of $US50bn to former Yukos shareholders.

Most of the questions asked could be answered within a “yes”, “no” or “don’t know” format. Not surprisingly, given the politically-charged nature of the issues, both Russians and those living outside Russia gave a hefty dose of “don’t know” to many of the questions. So, I will focus first on those questions where there were the fewest of such answers – and, I will provide some of my own views!

I asked whether former Russian bankers Andrei Borodin (formerly Bank of Moscow) and Sergei Pugachev (formerly of Mezhprombank), who now live in the UK, were criminals guilty of fraud. In Borodin’s case, 46% of Russian respondents said he was guilty, 11% said no, and 37% answered “don’t know”. In Pugachev’s case the corresponding numbers were 46%, 8% and 38%.

I do not claim to know a great deal about the Pugachev case, but in my view Borodin in clearly a crook – so, I was surprised that the “yes” vote was not much higher. But then, to my additional surprise, not one of the non-Russian respondent answered “yes”!

I drew two conclusions from the Borodin results. Firstly, financially savvy Russians themselves often do not know whom to believe – thus the high proportion of “don’t know” answers – because of a considerable distrust of the government, and that this can more generally distort good thinking. Secondly, many non-Russians either know very little about Russian financial issues, or they have a bias against the Russian authorities – indeed, how else could I explain the fact that Borodin has been granted political asylum in the UK!!

Ever since I first visited Russia in 1991, I have felt that the British (including most of its mass media) are generally quite unsophisticated when considering Russian issues – and the same goes for British economists (see left hand column entitled 1992 Article: “Russian Reformers and the IMF Get It Wrong.”).

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Published on February 08 2015

Moscow as an International Financial Center (IFC)
10

This article initially appeared in the December 2014 issue of “Baltic Rim Economies” published by Pan-European Institute.

In 2010 the Russian government launched the Moscow International Financial Centre (MIFC) project and sought international assistance, including from TheCityUK (the self-described “representative voice of Financial Services in the UK”). A Memorandum of Understanding between the MIFC Taskforce, TheCityUK and Vnesheconombank was signed in Moscow in 2011 in the presence of President Dmitri Medvedev and Prime Minister David Cameron.

Subsequently a number of reports were produced, mainly by TheCityUK and the IBRD.

Right from the beginning there were fundamental delusions. An early 2011 survey of “260 participants from leading Russian and foreign entities active in the Russian financial market” reported such views as Moscow as a “regional financial centre for CIS”, and “Moscow is where East meets West. It is a blend of different cultures and nationalities. It will be easy for everyone to come to do business”.

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Published on December 25 2014

Ukraine’s Poroshenko is going to Australia: WHY?
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Ukraine President Petro Poroshenko will speak in Sydney on 12 December at a Lowy Institute function:

http://www.lowyinstitute.org/events/event-address-his-excellency-mr-petro-poroshenko-president-ukraine

Why is he doing this?  And why it is a bad idea!

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Published on December 09 2014

What do Chinese trade/investment people think about Russia (and vice-versa)?
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During the first few weeks of November, I conducted two surveys regarding the attitudes of Chinese and Russians to closer economic and financial relations between their two countries. The surveys were conducted in Shanghai and Moscow, and showed an overwhelming desire — over 90% of respondents in both cases – for closer relations between China and Russia.

The Moscow and Shanghai responses to other questions in the surveys showed more divergence, and in particular seemed to point to the effect of the events in the Ukraine and of US led sanctions on Moscow attitudes.

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Published on November 25 2014