Russia's declining competitiveness

Last Wednesday, the World Economic Forum released a report on Global Competitiveness.

The entire report must be purchased, but an executive summary, in PDF form, can be read here.

The report has more unsettling news for Russia's future.

(Readers may recall some of my past posts on Russia's problems, for instance here and a post linked to here.)

The Growth Competitiveness Index (GCI) involves "three pillars":

the quality of the macroeconomic environment, the state of the country’s public institutions, and, given the importance of technology and innovation, the level of its technological readiness.

Russia's overall GCI rank in this report was 75, down five slots from last year. It ranked 73 in the Technology Index, 58 in the Macroeconomic Environment Index, but ranked only 91 in the Public Institutions Index. Clearly, the report was troubled by such factors that can include:

such concepts as judicial independence, the prevalence of institutionalized corruption, or the extent of inefficient government intervention in an economy

In the Business Competitiveness Index, which focuses on microeconomic factors, Russia ranked 74.

The summary addresses reasons for Russia's decline in competitiveness rank.

In "Russia: Competitiveness, Growth, and the Next Stage of Development," Augusto Lopez-Claros examines the factors that are likely to play a key role in enhancing the productivity of the Russian economy, and improving its levels of competitiveness. He argues that there is no intrinsic reason why the Russian economy could not enter a period of high, sustained growth in coming years, and points to a number of structural features which create the conditions for rapid growth: gains in efficiency from the continued elimination of distortions, the country’s impressive natural resource endowment (likely to spur the continued interest of foreign investors), and its human capital stock, which—weaknesses in the public sector notwithstanding—can be considered a competitive advantage. While the brain drain has dealt a severe blow to Russia’s ability to return to the outer limits of the technology frontier, her impressive tradition of world-class research in the basic sciences, especially mathematics and physics, provide the foundation for a comeback.

Tight conditions in the global oil markets suggest that the external environment is likely to remain favorable to Russia, creating an ideal opportunity to push ahead with structural and institutional reforms. Particular attention will have to be paid to reforms to improve Russia’s woefully inadequate public institutions, to improve the judicial and legal climate, to safeguard property rights, and reduce the prevalence of corruption and crime. He notes that Russian policymakers will have their hands full in the period ahead, dealing with large inflows from record high energy prices, which, indeed, create opportunities, but which also pose important challenges. Liquidity management has now moved to the centre of macroeconomic policy.A loosening of fiscal policy, particularly one aimed at boosting public sector wages and pensions, not investments in education, public health, and infrastructure, all of which would boost productivity, will need to be avoided. But beyond these issues, it is incumbent on the authorities to broaden their focus, and deal with a broad range of emerging stresses. Foremost among these are how to arrest the disturbing demographic trends, how to better utilize surplus public resources to enhance the economy’s capacity for innovation, and how to put the country back on a path of world-class scientific and technological achievement, so that Russia may join the ranks of the most competitive economies in the world.

(If you can read Russian, the Russian chapter (PDF) is here.)

The Russian people have a unique character, one of the odd contrasts about Russia. Some immensely gifted people, but also great poverty, and practices and customs that seem to make it very difficult for that country to get itself out of the deep hole it is in.

When Rhonda and I were in Kostroma, a lady who turned out to teach music at the orphanage invited all of us to hear her sing at this event commemorating when the Romanovs came to power.

When we got there, the mayor of Kostroma was giving some kind of lecture in a smallish room, so we waited outside, The lady, who was in nice clothes and makeup and looked quite different than when we saw her earlier, told us (through our translator) about some of the history of the Romanovs, especially about a famous icon found in a church there, and legend said saved people from several disasters or invasions. Another smiling lady there gave us a little booklet, but it is in Russian, so am not sure what it is about exactly. They were proud of their heritage, though.

Once the lecture ended, we quickly tramped into this room, must have looked funny to those already sitting in there, and the lady sang a piece from an opera by Glinka about a local hero. My oh my could she sing. Just beautiful, very Russian music. Her voice was powerful in that small room. We were glad to have the chance to have heard that.

Russia excels in the arts, literature, science, sports, yet they are constrained by corruption and a judicial system that does not protect property rights, and a law enforcement sector that does not always have a blind eye when it comes to justice.

A great deal of business in Russia is done on the bribery system. If you want something done, you need to give me something, or I either won't do it, or it will take much much longer.

Contrast that with our society, where people do their jobs because it's their job. As bad a reputation as Motor Vehicle departments have sometimes, can you imagine going in and having to slip someone some cash to get your issues dealt with.

Part of this is because of the poverty. People have little means, so they use their positions to get items they might not otherwise be able to get. All of this, though, contributes to a poor economy and the rankings the report discussed above mentions.

Things are probably going to get worse in Russia before they get better. With a declining population, declining life expectancy, particularly among men in part because of alcohol, with the government restricting freedoms, it's hard to imagine a rosy scenario.

It is Russia's nuclear weapons that keep that country's status as a player on the global scene. Russia's economy, in terms of GDP, is about equal to that of the Netherlands. So why is Russia in the G8? Because of its nukes.

(As a concluding note, don't think that fact has been lost on nations such as Iran. These nations see the attention given a faltering nation like Russia, and they seek to gain some of that respect and attention themselves.)

(linked to Mudville Gazette's Open Post)
-----
The Washington Post has an article on Russia's Fading Freedom.