Russian Economic Reform

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BRIC Jim O’Neill’s simplistic “thick-brick” thinking on Russia!

Published on December 03 2011
Posted by: jeff

Jim O’Neill of Goldman Sachs who originated the BRICs slogan has published a book, “The Growth Map”, which suggests his knowledge of Russia is quite shallow and unsophisticated (sometimes “thick as a brick” economiсs, with too little feeling for psychology or sociology).

Good analysis of a country’s economic prospects requires more than anecdotes and an ability to handle data. Demographics, the presence of technology, education levels etc – mentioned by Jim in his prognosis for Russia – are not particularly difficult issues to deal with, or even measure.

The really difficult issue to assess is how effectively a society will bring these, and other, things together to maximize productivity increases. The optimal way to do this will vary between countries, and over time for any one country. There are few general hard-fast rules, and a lot of judgment must be applied.

According to Stefan Wagstyl, in articles in the Financial Times, Jim argues that “that political ‘antipathy’ blinds western critics to Russia’s advantages, such as its strong position in technology and education. He concedes Russia does badly on corruption and the rule of law, but claims that Italy’s economy has ‘rolled along for years’, despite having weak rule of law for a long time.”

There is some truth in each of the points, but Wagstyl also wrote that Jim “has little time for western criticism of Russian authoritarianism or one-party rule in China. He quotes an American businessman recounting a line from a Chinese person, who had said: ‘What’s the big deal about voting? In the US everyone can do it and only half the people do. If voting were that great a thing, like sex for example, everyone would do it.’” According to Wagstyl, Jim argues that “a lack of democratic development does not seem to concern most Russians”.

This is childish simplicity – at least in regards to Russia!

Even if “most” Russians are not concerned, the great majority of young educated Russians have little faith in the government – and consequently little faith in Russia’s future – because they believe that officials are only interested in power and enriching themselves (and their relatives who get preferential treatment in public sector  employment, contracts etc). These younger people want a say in how their society is run; and if not, they want to leave Russia.

It is impossible to quantify these things; but because economic analysis seems to require numbers — and because I used to make a living as a macroeconomic forecaster — I will take a stab at this and offer my judgment that a less “authoritarian” government in Russia could boost GDP growth by an average of 2 percentage points per year over the next decade.

In coming to my view, I use Australia – and not BRICs – as a reference point. This is not to claim that Australia is a perfect example, but as I have pointed out on this site Australia has in many ways a similar economic structure to Russia — and has done a much better job in taking advantage of its opportunities!   

In addition to the attitudes of the educated young, Russia’s “authoritarianism” and corrupt government processes hinder the more effective exploitation of its educational and technological advantages – and to use these to maximize the advantages of having natural resources. What Russia needs – particularly over the next few years – is a more honest and responsive government which would bring increased flexibility, speed and accuracy in responding to the needs of the Russian economy.

It may be easier to think about some of the issues in terms of individual companies (countries, after all, are just very big organizations).

The management needs of individual business organizations can vary between different types of industries (management skills useful for the CEO of a mining company may be next to useless in the high-tech industries or health services) and vary over time (a CEO who is good at much needed corporate restructuring after a crisis may lack the skills for longer term market development), and competent analysis of this requires more than analysis of financial statements, technical capacity, and the educational qualifications of employees. The same applies to countries: Russia now is not the same Russia of the very early Putin years and a different approach to running it is needed.

Other questions need to be asked about both companies and countries. Are employees optimistic about their future, or are the most competent employees leaving? Do graduate recruits stay very long? Is the corporate culture supportive or toxic about individual initiative? Is there free discussion of new ideas? Is there merit based promotion or is cronyism more prevailant? Is there a general atmosphere of fear and uncertainty? How much time do employees spend navigating a bureaucratic system that almost everyone thinks stifling except those at the very top and those further down who are good at manipulating it to their own advantage? How are these factors affecting employee productivity?

In a country, the employees are also shareholders. They thus have twice the reason to be concerned about management fraud and waste of resources, or the launching of investment projects at the whim of the CEO and a few of his mates without proper analysis of possible returns? They may complain about this, but if — despite promises — little is done to improve the situation and the rate of return on capital remains low, this will feed back into even lower employee morale and hinder productivity growth. Those who can sever their links with the company (country) will take their money and talents elsewhere.  

Thus, in the same way as companies, each country must be examined individually taking into account historical, sociological and political factors in addition to simple economic data. 

All of the above negative influences on productivity are in Australia to some degree, but governments know that they must respond to issues of concern to the population otherwise they may soon find themselves without power. Russia could learn a lot from Australia.

I have covered some of these issues in various commentaries on this site. The most relevant articles can be read by going to the right-hand side column and clicking in “Expert Group 1: New model of economic growth. Securing macro-economic and social stability.”

The thinking of Jim O’Neill (who is a very decent and intelligent man) on some of these issues is too much “thick as a brick” economics. Apart from too little feeling for psychology or sociology, his quote about China and voting suggests that he has almost no understanding of how “authoritarian” (or dictatorial and one-party) systems work — perhaps he should read my book on this: http://www.jeffschubert.com/