Russian Economic Reform


“Modernization” and “Innovation” become cliches. “Efficiency” and “Principles” are better words.

Published on September 11 2011
Posted by: jeff

The 21 Working Groups have presented an Interim Report (apparently about 400 pages) to that part of the government headed by Putin. It has not been published on the official Strategy2020 internet site, but media reports of its content suggest that it contains few surprises to anyone who has been following the work of the individual groups. A Final Report is due to be completed by December. I expect that further work by the 21 Working Groups published on the Strategy2020 website will essentially be refinements of that which has already been published. Thus, commentary on this site (ie the one you are now reading) will move more to what is actually happening now in the economic reform process in the areas being worked on by most of these groups. I will aim to post a new commentary every Monday.

Last week saw many reports and much commentary in the Russian media related to the necessity of promoting “modernization” and “innovation”.

An article, by Igor Yurgens and others from the Institute of Contemporary Development, was published in Russian language Vedomosti and the next day an edited version appeared in the English language Moscow Times under the heading “Medvedev Should Become Russia’s Lee Kuan Yew”.

The article included the following paragraph: “The distinctive feature of President Dmitry Medvedev’s leadership style is that he forces government officials to comply with his instructions, whether it be reconsideration of the social insurance contribution or fulfilling state defense orders. This approach is urgently needed, but it will only work when in addition to ‘pressure from above’ government officials feel ‘pressure from the side’ from a parliament with real and capable political parties.”

Many foreigners and Russians will be surprised to read about this forceful aspect to Medvedev’s style -– but it is largely true, and I have made this same point in some previous posts on this internet site. Contrary to what many think, Vladimir Putin does not call all the shots in Russia. I also agree with the second sentence in the paragraph about ‘pressure from the side’.

Where I differ from the authors of the article is the comparisons they make with Turkey’s Kemal Ataturk and Singapore’s Lee Kuan Yew, and the suggestion that such a style is needed for “modernization” in Russia. Both were dictatorial leaders and the leadership style of both had as many similarities with the Putin presidency as the Medvedev presidency.

In my view, Russian has moved way past the situation where such leadership style can be beneficial. What Russia needs is a good dose of liberal, and “efficient”, government that is based on “principles” (another hallmark of the Medvedev style) rather than “hands-on” management (a hallmark of the Putin style). And, “efficiency” and “principles” include the fact that unelected officials obey orders from elected officials.  

When I look around during my daily activities, read the daily media and reflect on the published reports of the 21 Working Groups I perceive an economy that is essentially already modern and innovative.

These comments even apply to the state provided institutional framework of the economy: the central bank, the tax system, the anti-monopoly service, financial relations between the central government and lower levels, the budgetary system – and even the legal system. A modern institutional framework already exists; and it does not require an extensive “modernization” push. But, this framework needs to be made much more “efficient” and more effectively utilized in supporting a market-based economy. Reducing the inefficiences generated by corruption would help a lot.

In response to the recent World Economic Forum report which reduced Russia’s competitive position to 66th place, Andrei Yakovlev, who is one of the leaders of Working Group number 4 covering “Strengthening of market institutions”, suggested that Russian business has been pursing “management innovation” rather than “technological innovation” because this is the quickest way to increase profits.

The government should take a similar approach to the institutional framework it provides. This is the quickest way for the government to boost economy wide productivity and living standards.

If sufficient pressure to increase economic efficiency is maintained, much of the “low hanging fruit” of “managerial innovation” will become depleted and business will move toward “technological innovation” in order to boost profits. Government assistance can play a role here, but government should not aim to make “innovation” an end in itself. Rather it should be seen as a means to an end – namely, increased economic efficiency.

Last week I read in Vedomosti that Russian Technologies is seeking to become a leader in “high-technology machine construction” and that, amongst other things, it will “create a fund for innovation and investment development”. This is described as “in essence, a venture fund which will invest in start-ups”. Of course, this could all be very nice, but I wonder how much of this is really only words jumping on the “modernization/innovation” cliché band wagon.

Also, of considerable concern, is the potential for “venture capital” investments to become a way of siphoning-off state funds (this is a tried and proven method of private-sector fraud in countries such as Australia). From what I read generally, Russian Technologies is an organization more urgently in need of “management innovation” than “technological innovation”.

At almost the same time as the Russian Technologies announcement, Rosnano announced that it was abandoning six development projects that it had entered into in partnership with other organizations. It is entirely reasonable to pull-out of projects when initial possibilities are not confirmed by further work, but Anatoly Chubais admitted that the early enthusiasm to start working on projects may have led to insufficient initial examination of some of those now abandoned. At the very least, Russian Technologies risks falling into the same trap.

So, it is probably no bad thing that the Ministry of Economic Development  is organizing an “informal club” of leaders of government owned companies which must form “innovation plans” in accordance with a directive of Medvedev. It will probably be quite useful as a forum for exchanging views and experiences.  

Finally, I wish the authorities would get away from such statements as: If Russia “spends 15.7 trillion rubles between 2011 and 2020”, then it “has chance to advance to between 5th  and 7th position in the world in terms of rendering “high-technology and intellectual services” and “increase the share of the high-technology sector in GDP from 13% to 18%” (Ministry of Economic Development); and, Russia’s goal is to “command at least 2% of the global high-technology market, up from the current 0.3%” (Putin).

Admirable as these goals may be, they should not be seen as ends in themselves. The real goal should be efficiency and productivity – with high-technology and innovation in supporting roles. And, a bit more principles based political liberalism would probably be of more use than 15.7 trillion rubles!

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